History Repeats itself: Removal of the Gold Standard and Bitcoin Blockchain

daniel3 (40)in #bitcoin • 7 years ago

What does the Bitcoin Blockchain and the Gold Standard have in common? Financial Control & Discipline.

There's a striking similarity to the implementation of Segwit on Bitcoin and the removal of the Gold Standard.

Digital vs Reality

The Bitcoin Blockchain has a very unique function that has created wealth out of thin air. This function gives Bitcoin, digital information, the ability to behave and act like a real object.

If you held a coin in your hands and gave that coin to someone else you gave away the ownership of that coin. On the other hand, if you sent an email to someone over the internet you did not change ownership of the email but just gave a COPY of the email which you could give to as many people as possible. Digital data is not exclusive to any one person if it can be copied -- That is how digital data behaves and acts.

The Blockchain gives Bitcoin the property to behave and act as if it were a real object in the digital world through the assurance of exclusive ownership by way of cryptographic algorithms in the Blockchain.

Gold Standard

The Gold Standard was a standard used by countries in the past to limit their supply of money to the amount of Gold Reserves they stored. That is a stark contrast to how central banks and governments operate today where they can print money out of thin air. If we do that it is simply called COUNTERFEITING but when governments do it they like to use complicated terms like: "QUANTITATIVE EASING".

With a Gold Standard governments and banks were limited on what they could spend. If they wanted to go to war, for example, they would need to collect taxes for fear of going bankrupt themselves. This gave the incentive to be as efficient with money as possible. Banks would need to carefully study speculative investments or risk losing money.

On the other hand economies could grow and expand if people worked hard and earned the limited supply of money. A long time ago ordinary people could just save their money and retire early if they wanted to. And banks and governments made more efficient and effective use of the money involved simply because of the risk of losing it if they made bad decisions.

Bitcoin's Blockchain

Surprisingly Bitcoin's Blockchain is parallel to the Gold Standard. The Gold Standard acted as artificially created scarcity for the pieces of paper used as currencies. People could have mass-produced money back then but they made it limited. And Bitcoin's price behaviour reacted in the same way since Blockchain made it encoded scarcity in its computer code. The entire supply of Bitcoin is now limited to 21 Million Bitcoins and a person's Bitcoin could not be counterfeited since the Blockchain's parameters would not allow it to exist in the same cyberspace called the Internet.

Bitcoin, Gold & The Free-Market System

Bitcoin and Gold have very interesting similarities. One of them is that their value came out of the Free-market system as they were universally accepted as currencies. The power of the Free-market cannot be underestimated as can be seen with the price of gold still rising despite the removal of the Gold standard decades ago. And out of computer code came Bitcoin which gained exponential growth through the power of the Free-market of the Internet as well.

Gold Price Chart

Source: https://coinmarketcap.com/currencies/bitcoin/#charts

Nearly identical pattern...

1971 - Removal of the Gold Standard

When the Gold Standard was removed following the philosophy of Keynesian Economics everything changed.

First came Fractional-reserve banking where they could multiply the money supply based on the present Gold Reserves. Afterwards they removed the Gold Standard altogether and printed as much money as they could.

Governments and Banks would no longer be limited to what they could spend because they could just simply print more money out of thin air. The problem, of course, is that nothing comes free -- the result of the removal of the Gold Standard is massive INFLATION. Inflation of the money supply is a form of indirect taxation because it steals the buying power of everyone's money through the rising prices of goods and commodities.

2017 - Removal of the Blockchain

Now the title may be misleading since the Blockchain is still here. But something drastic is happening to Bitcoin and it started with the implementation of Segwit.

Segwit stands for Segregated Witness. It separates the Digital Signatures (Proof of ownership) from transactions and instead of broadcasting them together with the Blockchain the Digital Signatures are transferred to Sidechains.

What is the purpose of Segwit? It is a complicated and convoluted answer to a simple problem. When 2017 started the number of Bitcoin users and investors grew to the point that the 1 MB Blocksize limit was reached. This caused a congestion in the network and created artificial competition of transactions to join the scarce 1 MB Blocksize through high transaction fees.

Bitcoin's Segwit has had a disappointing debut since the transaction fees still remained high due to the 1 MB Blocksize limit congestion. Needless to say support and adoption for Segwit is dropping.

Segwit is just a stepping stone towards the removal of the Blockchain from the equation and the future implementation of the...

Lightning Network

Bitcoin's entire success rested heavily on the Blockchain and the simple thing to do in order to solve the congestion and transaction fees at the same time was to simply increase the blocksize. However, due to a certain group of Core Developers that wanted the 1MB to remain Segwit was pushed through instead.

The Lightning Network expands Segwit's concept of sidechains by transferring transactions OUTSIDE the blockchain and into channels instead.

NORMAL BITCOIN TRANSACTION

If Amy wanted to send to Bob a Bitcoin she would send it directly to him and it would be validated by the Blockchain.

LIGHTNING NETWORK TRANSACTION

With the Lightning Network, its proposal is to further use Sidechains to send transactions to a 3RD-PARTY before it reaches its destination. This supposedly would make transactions faster with an overly complex solution when compared with simply expanding the Blocksize limit.

There are several technical and legal issues and consequences with such a move such as KYC/AML complications for 3RD-PARTY involvement in money transfers which ULTIMATELY defeats the purpose and mission of Bitcoin in the first place of being PEER-TO-PEER.

The very concept of independence from middle-men through the Blockchain is essentially being removed from the equation in favor of 3rd-party involvement with high transaction fees for the ordinary users.

Fractional-Banking on Bitcoin

If Lightning network sidechains become the driver of the network instead of the Blockchain then it opens the floodgates to manipulation. Fractional-banking would be a perfect example, where in the future the Bitcoin supply could be artificially expanded diluting the value of Bitcoin through inflation through the sidechains.

Bitcoin Cash

The developers of Bitcoin Cash foresaw this future and acted to expand the Blocksize limit to 8MB. It immediately solves the underlying problems of Bitcoin: Transaction Malleability, Network Congestion and High Transaction Fees.

It stays true to financial independence through the Blockchain and continues Bitcoin's legacy before Segwit.

Conclusion

1971 - Removal of the Gold Standard

This marked the period of decline of the purchasing power of the U.S. Dollar as well as the currencies around the world which used to rely on the Gold Standard.

2017 - Removal of the Blockchain

History repeats its mistakes. Segwit and LN developers are neglecting Financial Discipline, sacrificing standards in pursuit of ambitions against the interests of the general public. Because of the focus on Segwit and the upcoming LN instead of practical solutions like increasing the Blocksize limit transaction fees remain high and Bitcoin is becoming more of an asset for the speculators instead of a peer-to-peer cash currency for the masses.

And just like the removal of the Gold Standard the removal of the Blockchain principles that made Bitcoin successful in the first place will drive down the value and purchasing power in the future.