The Bitcoin Standard Summary/Review

The Bitcoin Standard Quotes and Notes

Bitcoin has a huge advantage over gold in transactions: clearance does not require a specific custodian. No government can control what code you have in your head.

Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties. In other words, Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest.

Sound money allows people to think about the long-term and to save and invest more for the future. Saving and investing for the long run are the key to capital accumulation and the advance of human civilization.

The larger the market, the more the opportunities for specialization and exchange, but also the bigger the problem of coincidence of wants—what you want to acquire is produced by someone who doesn’t want what you have to sell.

The only way around this is through indirect exchange: you try to find some other good that another person would want and find someone who will exchange it with you for what you want to sell. That intermediary good is a medium of exchange, and while any good could serve as the medium of exchange, as the scope and size of the economy grows it becomes impractical for people to constantly search for different goods that their counterparty is looking for, carrying out several exchanges for each exchange they want to conduct. A far more efficient solution will naturally emerge, if only because those who chance upon it will be far more productive than those who do not: a single medium of exchange (or at most a small number of media of exchange) emerges for everyone to trade their goods for. A good that assumes the role of a widely accepted medium of exchange is called money.
Note: Money has high memetic fitness and so is likely to evolve everywhere at once.

Human life is lived with uncertainty as a given, and humans cannot know for sure when they will need what amount of money.
Note: Cash is optionality and debt is leverage. They are opposites?

the key property that leads to a good being adopted freely as money on the market, and that is salability—the ease with which a good can be sold on the market whenever its holder desires, with the least loss in its price.

The relative salability of goods can be assessed in terms of how well they address the three facets of the problem of the lack of coincidence of wants mentioned earlier: their salability across scales, across space, and across time.

money whose supply is hard to increase is known as hard money, while easy money is money whose supply is amenable to large increases.

easy money trap: anything used as a store of value will have its supply increased, and anything whose supply can be easily increased will destroy the wealth of those who used it as a store of value.
Note: As more people store value in a form of money there is an incentive to increase the flow/supply which makes it a worse store of value.

Whenever a natural, technological, or political development resulted in quickly increasing the new supply of a monetary good, the good would lose its monetary status and be replaced by other media of exchange with a more reliably high stock‐to‐flow ratio, as will be discussed in the next chapter. Seashells were used as money when they were hard to find, loose cigarettes are used as money in prisons because they are hard to procure or produce, and with national currencies, the lower the rate of increase of the supply, the more likely the currency is to be held by individuals and maintain its value over time.

Further, wide acceptance of a medium of exchange allows all prices to be expressed in its terms, which allows it to play the third function of money: unit of account.

In an economy with no recognized medium of exchange, each good will have to be priced in terms of each other good, leading to a large number of prices, making economic calculations exceedingly difficult.
Note: Even in a highly liquid cross chain world, you still need to denominate transactions in one currency for mental accounting purposes.

Only with a uniform medium of exchange acting as a unit of account does complex economic calculation become possible, and with it comes the possibility for specialization into complex tasks, capital accumulation, and large markets. The operation of a market economy is dependent on prices, and prices, to be accurate, are dependent on a common medium of exchange, which reflects the relative scarcity of different goods. If this is easy money, the ability of its issuer to constantly increase its quantity will prevent it from accurately reflecting opportunity costs.
Note: You need a single or few monies to allow specialization. This is part of memetic fitness. The people who adopt a money which facilitates greater specialization will outcompete those who don’t. See Lydia.

Each of these media of exchange served the function of money for a period during which it had one of the best stock‐to‐flow ratios available to its population, but stopped when it lost that property.
Note: The techno-economic paradigm theory of money: Under each technological regime, a different form of money thrives.

The details may differ, but the underlying dynamic of a drop in stock‐to‐flow ratio has been the same for every form of money that has lost its monetary role, up to the collapse of the Venezuelan bolivar taking place as these lines are being written.
Note: Problem is that when push come to shove central bankers will print more thus damaging the stock to flow ratio.

A one‐time collapse in the value of a monetary medium is tragic, but at least it is over quickly and its holders can begin trading, saving, and calculating with a new one. But a slow drain of its monetary value over time will slowly transfer the wealth of its holders to those who can produce the medium at a low cost. This is a lesson worth remembering when we turn to the discussion of the soundness of government money in the later parts of the book.
Note: Argument being that fed is slowly draining away individuals wealth

These historical facts are still apparent in the English language, as the word pecuniary is derived from pecus, the Latin word for cattle, while the word salary is derived from sal, the Latin word for salt.

money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard‐earned wealth for sale in exchange for something easy to produce.

differentiating between a good’s market demand (demand for consuming or holding the good for its own sake) and its monetary demand (demand for a good as a medium of exchange and store of value).

For anything to function as a good store of value, it has to beat this trap: it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down.

This explains why the silver bubble has popped before and will pop again if it ever inflates: as soon as significant monetary investment flows into silver, it is not as difficult for producers to increase the supply significantly and bring the price crashing down, taking the savers’ wealth in the process.
Note: Gold, by comparison, is harder to mine – even with price increase it is hard to mine more thus hard to inflate

Nero, who ruled from 54–68 AD, had found the formula to solve this, which was highly similar to Keynes’s solution to Britain’s and the U.S.’s problems after World War I: devaluing the currency would at once reduce the real wages of workers, reduce the burden of the government in subsidizing staples, and provide increased money for financing other government expenditure.
Note: Long feedback loop from Nero. Maybe the feedback loop started by Keynes is just coming round?

Coin clipping reduced the aureus’s real value, increasing the money supply, allowing the emperor to continue imprudent overspending, but eventually resulting in inflation and economic crises, which the misguided emperors would attempt to ameliorate via further coin clipping. Ferdinand Lips summarizes this process with a lesson to modern readers: It should be of interest to modern Keynesian economists, as well as to the present generation of investors, that although the emperors of Rome frantically tried to “manage” their economies, they only succeeded in making matters worse. Price and wage controls and legal tender laws were passed, but it was like trying to hold back the tides. Rioting, corruption, lawlessness and a mindless mania for speculation and gambling engulfed the empire like a plague. With money so unreliable and debased, speculation in commodities became far more attractive than producing them.

Unlike the Romans and the Byzantines, Arab and Muslim civilizations’ collapse was not linked to the collapse of their money as they maintained the integrity of their currencies for centuries.
Note: Argument is that money is key technology of civilization. Presumably, because it enables social scalability.

It was in the city‐states that humans could live with the freedom to work, produce, trade, and flourish, and that was to a large extent the result of these city‐states adopting a sound monetary standard.
Note: And double entry bookkeeping

the history of China and India, and their failure to catch up to the West during the twentieth century, is inextricably linked to this massive destruction of wealth and capital brought about by the demonetization of the monetary metal these countries utilized. The demonetization of silver in effect left the Chinese and Indians in a situation similar to west Africans holding aggri beads as Europeans arrived: domestic hard money was easy money for foreigners, and was being driven out by foreign hard money, which allowed foreigners to control and own increasing quantities of the capital and resources of China and India during the period. This is a historical lesson of immense significance, and should be kept in mind by anyone who thinks his refusal of Bitcoin means he doesn’t have to deal with it. History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.

Not only were the economies of the west far freer back then, the societies themselves were far freer.
Note: Also more unequal? Hence gilded age.

The fatal flaw of the gold standard at the heart of these two problems was that settlement in physical gold is cumbersome, expensive, and insecure, which meant it had to rely on centralizing physical gold reserves in a few locations—banks and central banks—leaving them vulnerable to being taken over by governments.

Although gold was supposedly demonetized fully in 1971, central banks continued to hold significant gold reserves, and only disposed of them slowly, before returning to buying gold in the last decade.
Note: If centrall banks are buying gold that should be a sgn.

Contrary to the most egregiously erroneous and central tenet of the state theory of money, it was not the government that decreed gold as money; rather, it is only by holding gold that governments could get their money to be accepted at all.

In retrospect, the major difference between World War I and the previous limited wars was neither geopolitical nor strategic, but rather, it was monetary.

With the simple suspension of gold redeemability, governments’ war efforts were no longer limited to the money that they had in their own treasuries, but extended virtually to the entire wealth of the population.
Note: Once one power did it without causing a run on the bank then they sort of all had to do it because otherwise they would be outspent and lose the war. Could appeal to nationalism to prvent bank run.

Had European nations remained on the gold standard, or had the people of Europe held their own gold in their own hands, forcing government to resort to taxation instead of inflation, history might have been different. It is likely that World War I would have been settled militarily within a few months of conflict, as one of the allied factions started running out of financing and faced difficulties in extracting wealth from a population that was not willing to part with its wealth to defend their regime’s survival. But with the suspension of the gold standard, running out of financing was not enough to end the war; a sovereign had to run out of its people’s accumulated wealth expropriated through inflation.

The U.S. Fed’s inflationary policy ended by the end of 1928, at which point the U.S. economy was ripe for the inevitable collapse that follows from the suspension of inflationism.
Note: Argument is that this monetary nationalism administered by central banks created more upside as well as more downside. In an asymmetric world, AKA Extemistan, that is not worth it.

price controls are always counterproductive, resulting in surpluses and shortages.

high time‐preference politicians and totalitarian governments:
Note: There is something to this idea that sound mlney requires low time preference

state of the economy is determined by the lever of aggregate spending, and any rise in unemployment or slowdown in production had no underlying causes in the structure of production or in the distortion of markets by central planners; rather it was all a shortage of spending, and the remedy is the debauching of the currency and the increase of government spending. Saving reduces spending and because spending is all that matters, government must do all it can to deter its citizens from saving. Imports drive workers out of work, so spending increases must go on domestic goods.
Note: Austrian explanation of keynsiasm

The war machines that the government‐directed economies built were far more advanced than any the world had ever seen, thanks to the popularity of the most dangerous and absurd of all Keynesian fallacies

Note: I think there is an argument that keynsianism is a coordination problem. If one government adopted Keynesianism and the others didnt then in the short run that gov would conquer the other bringing in more resources and roping the system up. Only after they had conquered everyone and there was nowhere else to go would they colapse? A la rome?

main difference being that the monetary discipline of the gold standard was almost entirely lost in this world where there were no effective controls on all central banks in expanding the money supply, because no citizens could redeem their government money for gold.
Note: Running a full node is the equivalent of beng abe to exchange fiat for gold?

the importance of sound money can be explained for three broad reasons: first, it protects value across time, which gives people a bigger incentive to think of their future, and lowers their time preference. The lowering of the time preference is what initiates the process of human civilization and allows for humans to cooperate, prosper, and live in peace. Second, sound money allows for trade to be based on a stable unit of measurement, facilitating ever‐larger markets, free from government control and coercion, and with free trade comes peace and prosperity. Further, a unit of account is essential for all forms of economic calculation and planning, and unsound money makes economic calculation unreliable and is the root cause of economic recessions and crises.

sound money is an essential requirement for individual freedom from despotism and repression, as the ability of a coercive state to create money can give it undue power over its subjects, the power which by its very nature will attract the least worthy, and most immoral, to take its reins.
Note: Is this true?

Human beings’ lower time preference allows us to curb our instinctive and animalistic impulses, think of what is better for our future, and act rationally rather than impulsively.
Note: Intereting thing unique to humans. Aligns with the Greek notion of freedom.

delay his gratification to engage in risky production over a longer period of time is that these longer processes will generate more output and superior goods. In other words, investment raises the productivity of the producer.

While microeconomics has focused on transactions between individuals, and macroeconomics on the role of government in the economy, the reality is that the most important economic decisions to any individual’s well‐being are the ones they conduct in their trade‐offs with their future self.

Civilization is not about more capital accumulation per se; rather, it is about what capital accumulation allows humans to achieve, the flourishing and freedom to seek higher meaning in life when their base needs are met and most pressing dangers averted.

When economic decision making is geared toward the future, it is natural that all manner of decisions are geared toward the future as well. People become more peaceful and cooperative, understanding that cooperation is a far more rewarding long‐term strategy than any short‐term gains from conflict. People develop a strong sense of morality, prioritizing the moral choices that will cause the best long‐term outcomes for them and their children. A person who thinks of the long run is less likely to cheat, lie, or steal, because the reward for such activities may be positive in the short run, but can be devastatingly negative in the long run.
Note: This is true only if you have capital.

increases in the money supply effectively mean low interest rates, the incentive to save and invest is diminished while the incentive to borrow increases.

One of the most mendacious fantasies that pervades Keynesian economic thought is the idea that the national debt “does not matter, since we owe it to ourselves.” Only a high‐time‐preference disciple of Keynes could fail to understand that this “ourselves” is not one homogeneous blob but is differentiated into several generations—namely, the current ones which consume recklessly at the expense of future ones.
Note: Did the baby boomers borrow from the millenials?

is an ironic sign of the depth of modern‐day economic ignorance fomented by Keynesian economics that capitalism—an economic system based on capital accumulation from saving—is blamed for unleashing conspicuous consumption—the exact opposite of capital accumulation. Capitalism is what happens when people drop their time preference, defer immediate gratification, and invest in the future. Debt‐fueled mass consumption is as much a normal part of capitalism as asphyxiation is a normal part of respiration.
Note: Consumerism is a result of Keynesiam not capitalism

The well‐known phenomenon of the modern breakdown of the family cannot be understood without recognizing the role of unsound money allowing the state to appropriate many of the essential roles that the family has played for millennia, and reducing the incentive of all members of a family to invest in long‐term familial relations.
Note: Seems a bit much? I think the underlying point that money has a lot of downstream effects is good though

The wonders of the twentieth century’s improvements make it easy to forget that the actual inventions—the transformative world‐changing innovations—almost all came in the golden era.
Note: You need sound money to give inventors a high time prefefrence

In times of sound money and low time preference, artists worked on perfecting their craft so they could produce valuable works in the long run.
Note: There were vehicles other than money to hold/increase value. Why was the stock market not enough to give people a high time preference?

Economic knowledge of the conditions of production, the relative availability and abundance of the factors of production, and the preferences of individuals, is not objective knowledge that can be fully known to a single entity. Rather, the knowledge of economic conditions is by its very nature distributed and situated with the people concerned by their individual decisions.

In a free market economic system, prices are knowledge, and the signals that communicate information.

The fatal flaw of socialism that Mises exposed was that without a price mechanism emerging on a free market, socialism would fail at economic calculation, most crucially in the allocation of capital goods

Asking citizens in surveys is a meaningless exercise, because people’s choices are meaningless without a price to reflect the real opportunity cost involved in trade‐offs between choices.
Note: Why mvps and pre-selling are important

Even if the central planning system succeeded in managing a static economy, it is powerless to accommodate change or to allow entrepreneurship. How can a socialist system make calculations for technologies and innovations that do not exist, and how can factors of production be allocated for them when there is yet no indication whether these products can even work? “Those who confuse entrepreneurship and management close their eyes to the economic problem…. The capitalist system is not a managerial system; it is an entrepreneurial system.” —Ludwig von Mises

Scarcity is the fundamental starting point of all economics, and its most important implication is the notion that everything has an opportunity cost. In the capital market, the opportunity cost of capital is forgone consumption, and the opportunity cost of consumption is forgone capital investment.
Note: Every dollar you spend could be invested and vice versa. You hvae to choose but printing money tries to do both?

A modern economy with a central bank is built on ignoring this fundamental trade‐off and assuming that banks can finance investment with new money without consumers having to forgo consumption.

At these artificially low interest rates, businesses take on more debt to start projects than savers put aside to finance these investments. In other words, the value of consumption deferred is less than the value of the capital borrowed. Without enough consumption deferred, there will not be enough capital, land, and labor resources diverted away from consumption goods toward higher‐order capital goods at the earliest stages of production. There is no free lunch, after all, and if consumers save less, there will have to be less capital available for investors. Creating new pieces of paper and digital entries to paper over the deficiency in savings does not magically increase society’s physical capital stock; it only devalues the existing money supply and distorts prices.
Note: The argument for inflation is that it incentivizes investment rather than hoarding which may overcome some loss aversion.

Unsound money makes such manipulation possible, but only for a short while, of course, as reality cannot be deceived forever. The artificially low interest rates and the excess printed money deceive the producers into engaging in a production process requiring more capital resources than is actually available. The excess money, backed by no actual deferred consumption, initially makes more producers borrow, operating under the delusion that the money will allow them to buy all the capital goods necessary for their production process. As more and more producers are bidding for fewer capital goods and resources than they expect there to be, the natural outcome is a rise in the price of the capital goods during the production process. This is the point at which the manipulation is exposed, leading to the simultaneous collapse of several capital investments which suddenly become unprofitable at the new capital good prices; these projects are what Mises termed malinvestments—investments that would not have been undertaken without the distortions in the capital market and whose completion is not possible once the misallocations are exposed. The central bank’s intervention in the capital market allows for more projects to be undertaken because of the distortion of prices that causes investors to miscalculate, but the central bank’s intervention cannot increase the amount of actual capital available. So these extra projects are not completed and become an unnecessary waste of capital. The suspension of these projects at the same time causes a rise in unemployment across the economy. This economy‐wide simultaneous failure of overextended businesses is what is referred to as a recession.
Note: Austrian explanation of economic cycles

“We now have a tiger by the tail: how long can this inflation continue? If the tiger (of inflation) is freed he will eat us up; yet if he runs faster and faster while we desperately hold on, we are still finished!
Note: Good metaphor

The fundamental flaw of Friedman and Schwartz’s book is typical of modern academic scholarship: it is an elaborate exercise in substituting rigor for logic.
Note: He is arguing Keynes is high modernist

The value of money, supposed to be the unit of account with which all economic activity is measured and planned, went from being the value of the least volatile good on the market to being determined through the sum of three policy tools of the government—monetary, fiscal, and trade policy—and most unpredictably, through the reactions of individuals to these policy tools. Governments deciding to dictate the measure of value makes as much sense as governments attempting to dictate the measure of length based on the heights of individuals and buildings in their territories. One can only imagine the sort of confusion that would happen to all engineering projects were the length of the meter to oscillate daily with the pronouncements of a central measurements office. Only the vanity of the insane can be affected by changing the unit with which they’re measured. Making the meter shorter might make someone whose house’s area is 200 square meters believe it is actually 400 square meters, but it would still be the same house. All that this redefinition of the meter has caused is ruin an engineer’s ability to properly build or maintain a house. Similarly, devaluing a currency may make a country richer nominally, or increase the nominal value of its exports, but it does nothing to make the country more prosperous.

The Bank of International Settlements estimates the size of the foreign exchange market to be $5.1 trillion per day for April 2016, which would come out to around $1,860 trillion per year. The World Bank estimates the GDP of all the world’s countries combined at around $75 trillion for the year 2016. This means that the foreign exchange market is around 25 times as large as all the economic production that takes place in the entire planet. It’s important to remember here that foreign exchange is not a productive process, which is why its volume isn’t counted in GDP statistics; there is no economic value being created in transferring one currency to another; it is but a cost paid to overcome the large inconvenience of having different national currencies for different nations.

In a free market for money, individuals would choose the currencies they want to use, and the result would be that they would choose the currency with the reliably lowest stock‐to‐flow ratio. This currency would oscillate the least with changes in demand and supply, and it would become a globally sought medium of exchange, allowing all economic calculation to be carried out with it, becoming a common unit of measure across time and space.

The sum total of the contribution of both these schools of thought is the consensus taught in undergraduate macroeconomics courses across the world: that the central bank should be in the business of expanding the money supply at a controlled pace, to encourage people to spend more and thus keep the unemployment level sufficiently low.
Note: Keynsian and Monetarists agree on this.

The Austrian theory of money posits that money emerges in a market as the most marketable commodity and most salable asset, the one asset whose holders can sell with the most ease, in favorable conditions.7 An asset that holds its value is preferable to an asset that loses value, and savers who want to choose a medium of exchange will gravitate toward assets that hold value over time as monetary assets. Network effects mean that eventually only one, or a few, assets can emerge as media of exchange. For Mises, the absence of control by government is a necessary condition for the soundness of money, seeing as government will have the temptation to debase its money whenever it begins to accrue wealth as savers invest in it.

an economy with an appreciating currency would witness investment only in projects that offer a positive real return over the rate of appreciation of money, meaning that only projects expected to increase society’s capital stock will tend to get funded.
Note: It could also make people risk averse and not invest enough?

Unsound money makes government power potentially unlimited
Note: it does enlarge their power

Samuelson’s textbook to find him repeatedly presenting the Soviet economic model as being more conducive to economic growth, predicting in the fourth edition in 1961 that the Soviet Union’s economy would overtake that of the United States sometime between 1984 and 1997.
Note: High modernism

In a society of sound money, there are no liquidity concerns over the failure of a bank, as all banks hold all their deposits on hand, and have investments of matched maturity. In other words, there is no distinction between illiquidity and insolvency, and there is no systemic risk that could make any bank “too big to fail.” A bank that fails is the problem of its shareholders and lenders, and nobody else.
Note: Reduces systemic risk

The only way to make maturity mismatching safe is with the presence of a lender of last resort standing ready to lend to banks in case of a bank run.
Note: Afyer you go to the IMF as the lender of last resort then there is no one else.

A major advantage in securing centralized credit is scale, as it appears quantitatively less risky to lend to large‐scale lenders. The larger the firm, the more predictable the formula for its success, the larger the collateral in case it fails, and the more secure bank bureaucrats feel when making loans according to central bank lending criteria. While many industries could benefit from economies of scale, centralized credit issuance accentuates the advantages of size above and beyond what would be the case in a free market.
Note: This is sweetbridge supply chain point

The larger the firm, the easier it is for it to secure low‐interest funding, giving it a large advantage over smaller independent producers. In a society where investment is financed from savings, a small mom‐and‐pop diner competes for customers and financing with a fast‐food giant on an equal footing: customers and investors have a free choice in allocating their money between the two industries. The benefits of economies of scale are up against the benefits of the personal attention and relationship between cook and customer of the small diner, and the market test decides. But in a world where central banks allocate credit, the larger firm has an advantage in being able to secure funding at a low rate which its smaller competitors cannot get.
Note: Credit gets allocated to least efficient middlde of supply chain rather than more productive fringes

Any industry in which people complain about their asshole boss is likely part of the bezzle, because bosses can only really afford to be assholes in the economic fake reality of the bezzle.

The security of Bitcoin lies in the asymmetry between the cost of solving the proof‐of‐work necessary to commit a transaction to the ledger and the cost of verifying its validity. It costs ever‐increasing quantities of electricity and processing power to record transactions, but the cost of verifying the validity of the transactions is close to zero and will remain at that level no matter how much Bitcoin grows. To try to commit fraudulent transactions to the Bitcoin ledger is to deliberately waste resources on solving the proof‐of‐work only to watch nodes reject it at almost no cost, thereby withholding the block reward from the miner.
Note: Costly to forge but cheap to check for forgery

Bitcoin is also the first example of absolute scarcity, the only liquid commodity (digital or physical) with a set fixed quantity that cannot conceivably be increased.

It is perhaps one of the most remarkable achievements of the Internet that an online economy that spontaneously and voluntarily emerged around a network designed by an anonymous programmer has grown, in nine years, to hold more value than is held in the money supply of most nation‐states and national currencies.

Bitcoin’s volatility derives from the fact that its supply is utterly inflexible and not responsive to demand changes, because it is programmed to grow at a predetermined rate. For any regular commodity, the variation in demand will affect the production decisions of producers of the commodity: an increase in demand causes them to increase their production, moderating the rise in the price and allowing them to increase their profitability, while a decrease in demand would cause producers to decrease their supply and allow them to minimize losses. A similar situation exists with national currencies, where central banks are expected to maintain relative stability in the purchasing power of their currencies by setting the parameters of their monetary policy to counteract market fluctuations.
Note: The volatility in BTC is expressed. There is no silent risk accumulating.

The only scarcity, as Julian Simon brilliantly demonstrated, is in the time humans have to produce these metals, and that is why the global wage continues to rise worldwide, making products and materials continuously get cheaper in terms of human labor.
Note: Unclear if this is true or if we are slowly depleting the ennvironmemt and the feedback loop is so long we just havent caught up yet.

the fundamental driver of human progress is not raw materials, but technological solutions to problems. Technology is by its nature both a non‐excludable good (meaning that once one person invents something, all others can copy it and benefit from it) and a non‐rival good (meaning that a person benefiting from an invention does not reduce the utility that accrues to others who use it).

By requiring the expenditure of electricity and processing power to produce new bitcoins, PoW is the only method so far discovered for making the production of a digital good reliably expensive, allowing it to be a hard money.

Bitcoin can thus be understood as a technology that converts electricity to truthful records through the expenditure of processing power.

Miners, too, for all of the hashing power they can marshal, also cannot control Bitcoin. No matter how much hashing power is expended on processing blocks that are invalid, they will not be validated by a majority of Bitcoin nodes. Therefore, if miners attempted to change the rules of the network, the blocks they generate would simply be ignored by the network members who operate the nodes, and they would be wasting their resources on solving proof‐of‐work problems without any reward. Miners are only Bitcoin miners to the extent that they produce blocks with valid transactions according to the current consensus rules.
Note: Argument for why the number of full nodes is the best measure of decentralization.

In conclusion, the Bitcoin coders face a strong incentive to abide by consensus rules if they are to have their code adopted. The miners have to abide by the network consensus rules to receive compensation for the resources they spend on proof‐of‐work. The network members face a strong incentive to remain on the consensus rules to ensure they can clear their transactions on the network.

This analysis may help explain why Bitcoin has resisted all attempts to change it significantly so far. The coordination problem of organizing a simultaneous shift among people with adversarial interests, many of whom are strongly vested in the notion of immutability for its own sake, is likely intractable barring any pressing reason for people to move away from current implementations.

Last Updated on April 18, 2019 by RipplePop