Fernando Ulrich Profile picture
Jul 30, 2018 57 tweets 11 min read Twitter logo Read on Twitter
Spending #Bitcoin today is senseless. But if we manage to make it a good store of value, then it will naturally be used as a medium of exchange in the future.

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1/ Instead of focusing on the act of "spending", we need people want to "earn BTC", to "be paid in BTC". We need more hodlers.

The economic and technical consequences of stressing one viewpoint (to spend) over the other (to earn) are profound and irreconcilable.
2/ Money's essence is being used as a medium of exchange (MoE). But for something to become money, or a universally accepted MoE, it must first follow evolutionary stages. First, comes store of value (SoV), second, MoE, and third, unit of account (UoA).
3/ In practice, there is no sharp distinction between the functions of SoV and MoE when we examine monetary phenomena. But SoV can be considered predominant in the initial stages of a commodity’s monetization. SoV takes precedence over MoE.
4/ Money’s essential function is indeed being used in exchange. But, why does money have value in the first place? Because it has purchasing power (PP). Where does its PP come from? Its PP originates from the demand to hold money, the demand to hold cash balances.
5/ As Murray Rothbard stated, “if no one is willing to keep a cash balance longer than instantaneously, there will be no money held and no use for a money stock. Money, in short, would either be useless or very nearly so in the world of certainty.”
6/ The graveyard of cryptos is full of projects conceived with rules incentivizing users to spend their coins. Freicoin attempted to introduce demurrage as a protocol specification to convince users to circulate coins by “using them” and provide “stable long-term value.”
7/ But if users were disincentivized to hold freicoins, then why would anyone accept them in the first place? BCHers insistence on using BTC as MoE now is putting the cart before the horse.
8/ Money has value because people are willing to hold it. Spending is a consequence of money's value, not its cause. BCHers may not appreciate this inconsistency, and would certainly dispute the following claim, but they have become present-day freicoiners.
9/ This is the first article of a five-part series in which the case for Bitcoin as a “store of value first, medium of exchange later” will be made. Thanks to @NickSzabo4 @nvk @crypto_voices for useful inputs. medium.com/@Ulrich_98986/…
HODLing is what gives #Bitcoin value. However, this is not meant to be a case against Bitcoin’s use in commerce nor a defense for it to be solely a SoV never to be used in exchange. Of course, and absolutely not.

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10/ But trying to use Bitcoins (or any other crypto) today in everyday commerce makes little sense due to volatility and usability (e.g., confirmation times, fees, TX throughput, available wallets, and custody).
11/ The latter will be solved through technology (better software, apps, payment protocols, and layer 2 solutions all addressing the “how”). The former, through the passage of time (the “when”), which brings increased knowledge and, thus, confidence leading to broader adoption.
12/ Bitcoin’s base layer cannot scale exponentially. Linear and incremental scaling, sure. But to onboard billions of users, exponential scaling is necessary, and blockchains are unfit for this need.
13/ Any crypto claiming otherwise is giving up essential features to accomplish this, although its creators may not disclose or even realize it. On-chain exponential scalability with paramount security and decentralization is infeasible, there are always engineering trade-offs.
14/ This is where layering protocol development comes in like #LightningNetwork . This resembles the current financial syst, but only from a functional point-of-view, and not one of security, as there will be fewer (if any) TTP that are unavoidable in the existing monetary order.
15/ Functional similarities of Bitcoin and current financial system:

1) Base layer protocol or high-powered money, base money: gold, fiat paper currencies, and Bitcoin.

2) Secondary and outer layer protocols or payment networks: banks, PayPal, ApplePay, WeChat Pay, and the LN.
16/ Distinction between a system based on fiat currency (or gold) and one based on Bitcoin is the security models of trusted interconnected parties vs. trust-minimized networks or centralized trust vs. decentralized trustless, which are valid for both the base & outer layers
17/ Most payments today are effected not with actual currency but are denominated in it and use it as the asset through which promises to pay may be settled (payments through banks). That doesn't mean the dollar isn't a MoE.
18/ The same working model applies to a Bitcoinized financial system. Bitcoin can be used as SoV, MoE, and UoA (or, at least, it is theoretically possible). But, this does not mean every and any transaction must occur on-chain.
19/ Re liquidity and the lack thereof, volatility, BTC remains unstable and unpredictable in price, which amounts to a considerable barrier for widespread adoption as a regular MoE accepted and held by businesses and individuals.
20/ Today only ppl who anticipate BTC can preserve or appreciate over time accept payments and hold it as cash balances. Ppl demand BTC today because it has appealing SoV properties and not because it is a highly liquid good.
21/ Bitcoin is accepted and held not because it is a more “general MoE,” but because it may better preserve value and become a more general MoE in the future. Therefore, SoV takes precedence today over liquidity.
22/ As its value proposition is more appreciated, as its demand as cash balances marginally increases so will its liquidity while volatility decreases. Network effects exert a positive feedback loop, enhancing BTC’s liquidity, stabilizing price, reducing overall TX costs.
23/ The answer to the question of when BTC will be used as a MoE is scantily now, but progressively later, gradually over a long period. We're not there yet. BTC needs time and, most importantly, must retain its utility as a good SoV. Second part 👇
24/ For BTC to be perceived as a good SoV, ppl must understand and trust the soundness and resiliency of its value proposition as laid by the protocol’s core properties and rules.
25/ The immutability of its monetary policy (i.e., the hard cap of 21 million or 2.1 quadrillion satoshis) is a distinctive example of a protocol rule, along with its paramount (and paranoid) security and decentralization, all of which reinforce each other.
26/ Solid protocol development means safeguarding these core properties through strict rule adherence, what requires independent,dispersed,self-validating, and rule-enforcing nodes, which can only be guaranteed over the long run if the cost of running a full node remains modest.
27/ BTC core properties, especially its supply schedule and total cap, must be regarded as a law that is unbendable and eternally immutable, analogous to the laws that govern the supply and irreproducibility of gold.
28/ For if alchemists discovered a way to replicate the yellow metal and undermine its natural scarcity, then gold’s demand as a SoV would collapse with its status as a safe haven asset fading into oblivion.
29/ Why, still to this day, is gold desired by Central Banks around the globe comprising a significant portion of reserve assets while no currency in the world is officially backed by or redeemable in gold?
30/ It's not b/c it has lower transaction costs in the narrower sense than most media of exchange neither b/c it allows for unparalleled transaction capacity. It is definitely not because it is a better medium for effecting actual exchanges.
31/ Gold is held b/c it is a widely recognized SoV due to its natural scarcity, it's no one's liability, no counterparty risk, irreproducible, cannot be defaulted on.
32/ Gold became the de facto monetary standard during various periods in history. Again, not because of lower transactions costs in the narrower sense, but because of its natural scarcity and its unforgeable costliness of production.
33/ Bitcoin can only attain and sustain the status of a good SoV if it is governed with the same rigidity nature afforded gold. This might mean the protocol eventually ossifies in terms of non-backward compatible changes; this involves avoiding HFs other than for critical issues.
When the idea of SoV as the primary utility is embraced, hardening the protocol from contentious changes is seen as an improvement in itself. Third part 👇
34/ Now, can cryptocurrencies perdure solely as payment networks?
Or, can #Bitcoin exist solely as a store of value? The conflicting views of Bitcoin as primarily a SoV or a payment mechanism have existed since the beginning.
35/ Any crypto designed with the sole purpose of functioning as a MoE — w/o regard for its programmed scarcity — is unsustainable over the long term. It will likely have an inflationary policy or a hesitant and uncertain one, neither of which is enticing for potential holders.
36/ Other factors prevent a “MoE-only crypto” from prevailing over a longer horizon. First, the idea of having one asset for storing value and another to effect payments negates the foundational concept of money.
37/ If money is an intermediate good for realizing exchanges, then why introduce a second intermediate good (i.e., the MoE-only crypto) that adds friction to a transaction?
38/ That's precisely why $XRP is essentially nonsensical. It inverts the economic rationale for why a good is desired and held as cash balances. Ripple expects its currency will be demanded exclusively because it can be used as a vehicle for international transfers...
39/ when the cause and effect relationship is effectively backward. Bitcoin can be used as a vehicle for international transfers because individuals demand it as a valuable asset to hold.
40/ If Bitcoin is to gain in relevance and adoption, it needs to stand out as a SoV and not just a payment mechanism, a vehicle currency. That said, any other cryptocurrency competing against Bitcoin will succeed if it beats it as a SoV and not as a payment network.
41/ @ChrisPacia suggests “the primary innovation of Bitcoin is P2P value transfer, not ‘limited supply.’” While there is truth to this statement, it overlooks a key element: what is the source of this value? At its core, Bitcoin is simply a P2P UTXO transfer system.
42/ Value resides not inside the protocol, but subjectively in each individual, and limited supply is an integral part of the equation. Without scarcity, there is no value to transfer and Bitcoin could not even have bootstrapped in existence. You can't separate one from the other
43/ Bitcoin is not only sound money but also uncensorable digital sound money. What is or will be $BCH? This is not a rhetorical question. Considering BCHers abhor transaction fees, they will have no option but to resort to inflation to incentivize mining.
44/ Sound money is a prerequisite and that privately produced money must be sound to be bootstrapped, which will always outcompete a less sound or inflationary contender.
Therefore, like gold today, Bitcoin can exist as a SoV. There is a case for a purely digital SoV, and Bitcoin can serve this purpose even if it is used sporadically as a MoE. Forth part 👇 medium.com/@Ulrich_98986/…
45/ Using #Bitcoin today as a common currency is nonoptimal because transaction costs are too high. Price remains erratic, liquidity is insufficient, and, in many cases, throughput, confirmation times, and fees result in significant obstacles.
46/ Technology will address usability by allowing for greater capacity and improved user experience. But, volatility can only recede with increased adoption, which requires Bitcoin to be desired, to be demanded as cash balances, and to be held. So we must make BTC a good SoV.
47/ Uncensorable digital sound money is the foundation on top of which all other apps can be built. Payment networks, expon. capacity, off-chain asset issuance, distributed markets, smart contracts, and dapps offer endless possibilities. But, they all depend on a sound currency.
48/ No other cryptocurrency has even realized that overthrowing Bitcoin means defeating it as a SoV. Since being a SoV is a confidence game of time and maintaining a pristine track-record, Bitcoin is way ahead as well as alone in the competition.
49/ The understanding of Bitcoin as the leading contender is economical and technological in nature. Monetary theory demonstrates there exists an inevitable tendency for one money to reign.
50/ From a technological perspective, there is also a coinciding tendency for one protocol to remain as a single standard. Because this is also a money protocol, then one reinforces the other. For Bitcoin, network effects are a monetary and technological phenomenon.
51/ BTC forked gold. Yet, in terms of monetary maturity, it is probably where gold was around 3,000 B.C. But it's growing exponentially. Sufficient time, solid protocol development, and socially unalterable rules can make it be appreciated as the precious metal’s replacement.
52/ We're in a marathon, not a sprint. We're designing and building a parallel monetary and financial system for the digital age. BTC wants to dethrone gold as a reserve asset and as the world’s unifying money.
It is larger than fiat currencies, and it goes beyond a mere payment network for the Internet age. Just as gold once accomplished, Bitcoin is now competing to become the ultimate asset. {fin} medium.com/@Ulrich_98986/…

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More from @fernandoulrich

Aug 16, 2018
"Sound money" thread 👇

If I understand correctly, the meaning of the word sound as "secure, reliable, solid, free from flaw or defect" may have its origins in the expression "sound money".
1/ To prove a gold or silver coin authenticity, a commonly used test in the past was throwing it against a hard surface to verify the distinctive melodious ring it produced. "Sound money carried the 'ring of truth,' while debased coinage landed with a dull, disappointing thud."
2/ In the XIX cent,"Americans with no formal education in reading, writing and arithmetic relied on the sight, sound, and feel of the only money they knew. Learning the different musical ringing sounds of those coins could easily qualify even a prairie settler as an econ expert."
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