Bitcoin Is The ONLY Digital Scarcity That Matters — Here's Whyby@eduardoprospero
1,454 reads
1,454 reads

Bitcoin Is The ONLY Digital Scarcity That Matters — Here's Why

by Eduardo PrósperoMay 5th, 2023
Read on Terminal Reader
Read this story w/o Javascript

Too Long; Didn't Read

Scarcity is the fundamental starting point of all economics, says Saifedean Ammous. Bitcoin is the first example of a digital good that is scarce and cannot be reproduced infinitely. There will only be 21 million bitcoin and that’s that.

People Mentioned

Mention Thumbnail
Mention Thumbnail
featured image - Bitcoin Is The ONLY Digital Scarcity That Matters — Here's Why
Eduardo Próspero HackerNoon profile picture

The simple truth is that nobody can create more digital scarcity. It’s as simple as that. Your conscious self might reject the idea, but subconsciously most people understand this basic fact. And that might be the main reason why bitcoin has and will remain king. Just think about it, don’t be afraid of abstraction. Get philosophical for a second and consider this:

Once Satoshi Nakamoto discovered digital scarcity, every person that tried to replicate his ideas and create more digital scarcity, actually created less digital scarcity. Don’t look at me like that, I didn’t make the rules. That’s how scarcity works. You can’t create more of it. If you create more, it’s less scarce.

To better understand this, let’s go back to basics.

What Is Scarcity And Why Is It Important?

According to the “Economic Lowdown Podcast Series” of the St. Louis Fed, the most mainstream source I could find: “The characteristics of money are durability, portability, divisibility, uniformity, limited supply, and acceptability.” Someday, this column will discuss why bitcoin is unbeatable in all of those departments except “acceptability.” Today, though, our concern is the “limited supply” or scarcity.

Bitcoin is and will remain king

According to Saifedean Ammous’ “The Bitcoin Standard,” the most bitcoiner source I could find, “scarcity is the fundamental starting point of all economics.” The law of supply and demand rests on scarcity and opportunity cost. Prices also rest on scarcity’s back, and those magical indicators “carry in them the distillation of all market conditions and realities into one actionable variable.” That’s on ideal conditions, of course. In our wacky Keynesian economic world, the story is different:

“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.”

It’s worth clarifying that when Ammous says “easy money,” he’s referring to infinitely-printable-backed-by-nothing-but-violence fiat currencies. And before you even say it, bitcoin is backed by math. In fact, “Bitcoin is the first example of a digital good that is scarce and cannot be reproduced infinitely.” The first-ever and the only one that matters. When you understand this, your view of the multi-verse changes completely.

What Is Digital Scarcity, Then?

In bitcoiner circles, it’s common to hear that bitcoin was a discovery rather than an invention. That intriguing concept is at the heart of this article. If bitcoin was an invention, it could potentially be improved upon. And the same could be said about digital scarcity, which Satoshi Nakamoto also discovered. I will explain the implications in the next section, but, before we go there, let’s quote “The Bitcoin Standard” one last time:

“Beyond digital scarcity, 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. Until the invention of Bitcoin, scarcity was always relative, never absolute.”

That means that, for example, if the price of gold skyrockets you can be sure and bet your house that humans will go out there and find more gold. And gold is hard to come by, but, if the economic incentive is there, humans will just dig harder. On the other hand, there will only be 21 million bitcoin and that’s that. That concept, absolute digital scarcity, is hard to appreciate or even comprehend. You may have to meditate on it for a while before you come to the realization that Stack Hodler had:

People genuinely have no clue how scarce Bitcoin is.
The fair price for a coin is easily in the millions in today's money.
That sounds insane to most people.
But the same people that shrug that off will turn around and store wealth in long-term treasuries or commercial real estate.

Mark Twain famously said, “Buy land, they're not making it anymore.” Nevertheless, there’s no absolute scarcity in commercial real estate. Not even close. Bitcoin is “ the first example of absolute scarcity,” and that’s a fact.

On Bitcoin As A Discovery

It’s not easy to see bitcoin as the juggernaut that it is. Your instincts will tell you that it’s a technological invention like many before it. How could a technology be “discovered”? It doesn’t make sense at first. In the following clip, Blockstream’s Adam Back - the inventor Hashcash and one of the original cypherpunks - takes a shot at explaining the elusive concept.

In bitcoin circles, it’s common to hear that bitcoin is more “perfect money” than “a technology.” Up there, Back describes it as a “mathematical artifact,” and that should silence anyone that dares to call bitcoin “old tech.” Anyway, in most cases inventions come in a “crude first version” that quickly becomes “a footnote in history” and gets replaced by more advanced versions. That doesn’t apply to bitcoin.

What makes this “mathematical artifact” special and the main candidate for the world savior position? Adam Back has a “distributed systems background,” so at first he thought he could improve the bitcoin protocol. He worked on a number of variables for four months and discovered that it was not possible. “You could improve one aspect of it, but typically you’d make two or three other things worse.”

He’s not claiming that “these magic numbers are perfect.” The explanation is much more down to earth: “If you think about the design space of potential distributed electronic cash systems, it’s like a very narrow pocket of design surface that works, and everything else is worse.” The cypherpunks tried to create a viable electronic cash system for decades. They failed each and every time, until one fine day Satoshi Nakamoto stumbled upon the exact formula. In bitcoin, everything is in its right place. That doesn’t happen often in this world of ours.

In fact, you could argue that it NEVER happens.

That it SHOULDN’T have happened.

But it did happen. Bitcoin exists.

Protect Absolute Scarcity At All Costs

In his now classic essay “The Number Zero and Bitcoin,” Robert Breedlove claims, “a distant digital descendent of zero, the invention of Bitcoin represents the discovery of absolute scarcity for money: an idea as equally unstoppable.” As previously established, Satoshi Nakamoto discovered digital scarcity, which means it can’t be improved upon. Others will try to, but something in the back of your head will always lead you to the original one. The one that appeared in this reality and generated miracle after miracle.

Back to Breedlove’s essay:

**“The invention of Bitcoin represents the discovery of absolute scarcity, or absolute irreproducibility, which occurred due to a particular sequence of idiosyncratic events that cannot be reproduced. Any attempt to introduce an absolutely scarce or diminishing supplied money into the world would likely collapse into Bitcoin.”

Does all of this mean that bitcoin will stay as is and there will be no innovation in the space? Yes and no. Humanity will have to fight to keep bitcoin’s first layer as is. The powers that be will attack it constantly, how could they not? They need to unscrupulously print money to survive. However, if bitcoin is the digital savior we suspect it is, it will resist everything they throw at it. As for the second part of the question, innovation is happening and will continue to happen on other layers. This is a much better engineering design, but bad actors and fools will try to convince us otherwise. Be vigilant. Protect bitcoin at all costs.

This was a dispatch by Eduardo Prospero, bitcoin’s ambassador to Hackernoon.

In case you missed it, here’s the first dispatch → “Why BITCOIN ONLY? - Bitcoin is NOT “Crypto

Main image__by Yegorpetrov__.

Also published here.