In the theoretical discussions at the time, it should be clear that although gold is the most accurate actual expression of this concept for centuries, it cannot be the true definition of hard currency. To this day, despite the merit of fully defining the term in theory, this precise definition seems completely unnecessary. For a long time, it has been recognized that assuming it merely means a golden system, it is sufficient to achieve all practical purposes.
However, in recent years, the term has begun to be used in emerging cryptocurrency systems, especially Bitcoin. The use of this term to describe the nascent currency system has caused significant confusion in its exact meaning, and the question of what makes currencies “hardened” is beginning to have practical significance.
The current state of affairs leaves us with many questions. First, a satisfactory definition of the "hard currency" of the monetary system is given. Secondly, is this term suitable for describing Bitcoin? Finally, can other cryptocurrencies be classified as such. Therefore, the rest of this article will attempt to address these issues. Finally, this article only discusses what is hard currency. The broader question is whether a hard currency system is desirable from the outset, which is beyond the scope of this article. Interested readers can find my answer in my previous article.
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What is hard currency?
Although there seems to be no precise and consistent definition in the discussion on this issue, as mentioned above, if we are to investigate this issue carefully, we must first provide such a definition. In the future we will use the following definitions:
"The hardness of a currency is inversely proportional to currency inflation, which dilutes the value of existing stocks, which economically can be imposed on stocks."
Now, there are a few things worth noting that need to be clarified to avoid common misunderstandings of the above definitions. First of all, we should note that, like many economic terms, the hardness of a currency is a subjective perception factor, which is constantly affected by various events (such as technological improvements in production, effective counterfeiting, etc.). In this sense, this is similar to discussing the purchasing power of money. Although it can be generally understood, it is a fairly subjective and ever-changing measure. While this consideration certainly does not invalidate its importance and usefulness, we should keep in mind the limitations and uncertainties that must accompany it when it is used.
The second point to note is about what exactly "economically imposing" means, and what it means afterwards. In short, the question is how much money can be produced before the value of money falls (or the cost of production rises, or both rises) to a point where production is no longer profitable. Here we can notice the obvious difference between "commodity currency" (supply is determined by the market) and "legal currency" (supply is determined by legislation). The supply of commodity money is determined by its market demand (price), and the cost of its production always tends to match its market price. If it becomes unprofitable, then the producer will soon be eager to produce more profits. Even stop production. On the other hand, the supply of fiat money, such as the government paper money we have today, is not regulated by demand for it, but by bureaucratic procedures that are determined arbitrarily.
Here, the main difference between the two monetary systems is that , as far as the former is concerned, the risk of wealth dilution is mainly reflected in technological progress in the production process. For the latter, for any reason, there is always the risk of large-scale dilution. Therefore, the former type of money deserves our extra effort to study its hardness, but the latter type of money makes us have no doubt about its "hardness". It is worth mentioning that this monetary easing is not accidental, but a deliberate result. Its main goal is government financing through coinage taxes. The coinage tax is a monopoly profit obtained by the issuer of currency protected by law and not affected by market competition.
(Very) brief history of hard currency
So far, we have given an accurate definition of the concept of hard currency and understood why hard currency must be a commodity currency generated through open market competition. Now, we will continue to study the principle of hard currency by studying some historical monetary systems, and gradually move from easy currency to difficult currency.
Famous examples such as salt, shells, and glass beads abound throughout the history of money. Compared with other currencies, its currency attributes (durability, separability, etc.) are poor, causing it to depreciate rapidly and eventually lose its currency role completely. Perhaps the best example of this process is Yap's famous Thunderstone Island. These stones range in size (and value) from small beads to huge 3.6-meter-high stones that locals have used for hundreds of years. Since the methods of production have not improved much in the use of money for a long time, their production has remained fairly stable for many years, establishing their place as hard currencies. However, with the arrival of the Europeans at the end of the 19th century and the advanced tools and production methods they brought, production became cheaper and cheaper, and the stones began to depreciate rapidly, until they finally lost their role in the Western monetary system. Similar situations have occurred many times and places in history, such as glass beads and shells in Africa and the Americas, salt in Europe, and so on.
Since its use as a currency around 1000 BC, precious metals are probably the most prominent currency. Mainly through Europe and Asia as the most common currency systems. Later, after the discovery of the Americas, it quickly spread to all other continents under the strong influence of European colonial efforts. gold.
The growth in the use of this metal currency system is largely due to its relatively good physical currency attributes, such as durability, portability, and severability. Compared with all other currency commodities in history, the currency hardness they show has an influence that is not diminished or even worse than that. This long-term trend towards the use of metal currencies can be said to have peaked in the mid-19th century. Gold as the standard prevailed in the Belle Epoque, but began to decline after the end of this period around World War I. Since then, there has been a strong trend of non-convertible paper money, mainly in the form of paper money, "token" coins, and later the digital currency of today.
This shift from a metal standard to a purely legal standard originated from the invention of Chinese banknotes. A banknote is a paper material (or similar material), and the holder can exchange it for coins from the reserve reserved by the banknote manufacturer as needed. The use of this kind of paper money as a medium of circulation began in the 11th century, when the currency was Jiaozi (the earliest paper money in China), and since then, it has been circulating around the world. The characteristic of this approach is certainly not the new physical form adopted by the means of payment, but the fact is that although all notes can be redeemed on demand, the reserve account for only a small part of the funds required to redeem all notes, That is today's partial reserve banking system.
Although these paper forms of money were originally issued privately and were mainly used for simple portability (such as carrying metal coins became heavy), they were quickly nationalized as a new type of government financing solution, namely the coinage tax, Through cheap production costs and the use of part of the reserve technology. A comprehensive review of the history of the banking industry is beyond the scope of this article. For our purposes, it is important to note that although the physical form of money began to shift to paper money long ago, the concept of permanent non-convertible paper money today is pure. Modern "invention". Although its form is similar, it may be due to the aforementioned ancient practice, and it lacks any historical precedent.
Indeed, the global convergence towards metal currencies, especially the subsequent transition from metal currencies to the gold standard, is largely due to the political influence of the government. However, large-scale interventions to implement this transformation are completely unprecedented. It can be said that from the beginning of the First World War to the end of the Second World War, and to the maturity of President Nixon's Executive Order 11615 in 1971, the transition from metal money to pure fiat money made the global monetary system in Any imaginable aspect has been nationalized and politicized. The result is a retrogression in the evolution of currency, from the international convergence of the most difficult currencies to the cheapest methods of production , which will bring the highest possible coinage profits for each government. Therefore, we were not surprised when we discovered that more than 50 economic collapses caused by hyperinflation have occurred in the past 100 years. This once extremely rare incident has now become an epidemic in the modern economy, and has almost become the only means to stop the government from excessive money production.
To sum up briefly, the history of currency shows us that the international convergence of currency standards tends to the hardest currency. This trend is likely to peak under the gold standard in the 19th century. Over the past 100 years, this trend has been suppressed by political forces that have forced people to use the most readily available currencies, which can be based on Their will is created infinitely. Although the trend towards hard currency seems to have completely reversed, it can be said that the huge economic difficulties and instability caused by this reversal may indicate that this trend is only temporary. Therefore, there seems to be a strong reason to believe that in the past century, there will only be a brief setback in the long-term trend towards a harder currency.
However, the last century left us with a little hope that this progressive return can be expressed as a return to the gold standard. With the transition to global online payments, the need for a centralized trusted reserve to run such a system smoothly is more evident than ever. However, it is this demand for the central reserve system that is precisely the defect that led to the political capture and eventual demise of gold. In addition, given the huge expansion of government power in the world over the past few decades, the risks inherent in this central reserve system make returning to gold seem an unrealistic option (however theoretically desirable this option is).
Despite the obstacles to closing this past option, advances in technology have opened up a new option in the form of Bitcoin- a digital transformation of hard currency. If it does provide a secure alternative, then this system has the real potential to become the next evolution of the currency standard, continuing the old trend of shifting to a harder form of currency.
Bitcoin as hard currency
In short, the ultimate supply of Bitcoin is limited, and it is through open competition to expand computing power. It is designed to be limited to a total supply of about 21 million units and will be produced on an estimated schedule. The production of new Bitcoin needs to solve a cryptographic problem, and the probability of each competitor solving this problem is directly related to the computing resources it consumes.
We see that, in theory, Bitcoin is designed as a hard currency, and the final hardness does not allow further production, in a sense, causing absolute scarcity. Although we now have a basic understanding of Bitcoin's theoretical guarantees in terms of currency hardness, we must begin to study how to verify these guarantees in practice and the threats they may face.
Bitcoin's currency hardness is guaranteed by its consensus rules- accepting or rejecting codes for transaction history (in the form of blocks) based on the validity of these rules. These rules include requirements to address cryptographic challenges (Proof of Work POW), ensure that no Bitcoin spend exceeds any sender's spend, and ensure that no Bitcoin exceeds the supply limit or issues occur before a predetermined time. So far, each machine has verified all transaction history, and maintains the current UTXO set (current Bitcoin owner set) through this verification. This machine is called a full node.
The entire "Bitcoin Network" is the sum of all complete nodes communicating using the same protocol rules and propagating new data information (mainly blocks and transactions). By following the same validation rules and passing all data between them, all nodes should reach the same view of the current state-a consensus.
Nodes may differ on the current state in two ways-with different (or partial) data, or verification based on different consensus rules. The former case is usually not a problem. It mainly includes nodes in the network connection process (in IBD), nodes that have not yet received a new block, and two conflicting blocks that are independently resolved and propagate simultaneously. Although this data dissemination is highly critical, it does not involve the currency hardness of Bitcoin itself, so we will ignore it in the current discussion. The second possible scenario-the establishment of different consensus rules-is where inflation risks lie, and this is the issue we are now studying.
Strictly speaking, Bitcoin has no "clear" rules. For example, the original rules of the first version of Bitcoin software, and the rules of the current Bitcoin core software, but since Bitcoin is a completely decentralized project, no rules must be followed. This essentially means (for convenience, in the case of the least likely but still technically feasible case), if all participants in the Bitcoin network consistently modify their rules, for example, to generate permanent inflation, these Will become the new rule. No controls can prevent users from running any version of software they want. As a man-made digital asset, this characteristic of Bitcoin is inherent, which may be its most significant difference from natural commodities such as gold, so it is necessary to pay great attention when evaluating the actual hardness of Bitcoin.
To understand what guarantees the hardness of Bitcoin's monetary policy and other consensus rules, we should start with analyzing the network, rather than the whole, we can start with the various nodes that make up the network.
As far as a complete node is concerned, its control over the rules (the "definition" of Bitcoin) is absolute, and there is no procedure for forcing a node to use a specific rule set. Similarly, no node can force another node to accept its rules. Therefore, in our case, starting from the initial consensus rules set in the first Bitcoin software, all nodes in the network either aggregated on the same set of rules or lost the ability to trade with the rest of the network.
For example, if a node decides to create a new bitcoin out of thin air, it may change its rules to allow it, but at the cost of losing the ability to conduct "bitcoin" transactions with the rest of the network. If we assume that two people modify their rules in this way, they give up the trading power of everyone except each other. The same thing will happen, if we now assume that 10% of the participants have replaced their nodes with new rules, then this network can be said to have split into two different networks, each of which is defined in a different way Bitcoin.
Although these situations described above are not meaningful, they raise the question: What happens if 50% or even 99% of people modify the rules? In other words, what happens if most people change the rules? Most people What is the definition of? Because Bitcoin is essentially a communication network, the most appropriate way to determine "majority" is to consider the extent to which participants communicate (transact) with others. Contrary to the common fallacy, the hash rate, market value, or total transaction volume of the network is not important, and more importantly how many nodes run its rules (anyone can deploy as many nodes as they wish). For deciding which rules a node connected to the network "should" run, the only relevant metric is the degree to which it deals with other nodes. Simply put, how many of the people he wants (or expects) to trade with will accept his Bitcoin as a valid currency.
The threat of not being able to trade with other nodes (running incompatible rules) is the reason that prevents participants (other nodes and participants) from modifying the rules at will. It is the need for such extensive coordination that has made Bitcoin's changes-from trivial bug fixes to the most controversial changes-so difficult to implement. Any modification means that the ability to trade with the rest (or part) of the network may be lost. Therefore, the theoretical ability to exercise this modification is rarely used.
Let us return to the topic of currency hardness. The most important thing to understand is that the hardness of Bitcoin for each participant depends on the coordination ability and possibility of a sufficiently large network part, and to successfully implement a change in consensus rules. This will increase the supply of Bitcoin. It's important to emphasize that "sufficiently large" means that this represents the consensus of most people on the Bitcoin network. This measure, like the rules of Bitcoin itself, is necessarily subjective, but it should not be difficult to reach a general agreement on what this situation will look like.
The weakness of Bitcoin
As we can now see, since every user of Bitcoin can run its own node, the influence of a participant on the implementation of consensus rules depends entirely on the transactions in which he participates. A node must verify all transactions, not to enforce the rules of others on the network, but to be able to determine whether the payment he receives is valid-this is the economic activity of the participant, and it is his influence on others to use certain rules The only way to decide. When a person accepts a Bitcoin payment, it is like determining the definition of Bitcoin by implementing agreed rules.
However, in our previous analysis, we (intentionally and implicitly) assumed that each participant actively set their own rules by running some code on their full nodes and used it to validate incoming payments The validity of this is not necessarily (actually usually not). Anyone can fully verify the transaction for themselves by passively trusting another entity, thereby entrusting it with the responsibility of proactive rule setting. By doing so, the recipient of the payment delegates his economic activity to another person in a sense, and the other person can influence the consensus rules with whatever rules he likes.
For example, suppose I am using an online block explorer to verify that I have received a transaction, and whenever I accept a transaction in this way, I delegate the impact of my economic activity on the rules to the operation of the service member. For example, if the operator will decide to use rules that allow larger blocks, new signature schemes, or (more worrying) changing inflation rates, not only will I passively accept these changes against my will, in fact, I pass Express willingness to accept transactions using these specific rules to actively support them.
In the previous section, we have concluded that in order to weaken Bitcoin's currency hardness, and in order to weaken Bitcoin's currency hardness, it is necessary to coordinate (persuade others to implement) the modification with a significant part of the active economic participants in the network Rules, which lead to this change, we can consider this to be a very impractical task (both short in time and not enough) from the perspective of both theory and practice. This coordination difficulty is not only due to the decentralized structure of the Bitcoin network, but rather due to the decentralized implementation of rules for individual economic activities, or more accurately, autonomy. When each participant is actively verifying their transactions, it is necessary to persuade a considerable part, if not almost all, of the participants to accept the new rules that modify the hardness of Bitcoin. However, the fewer participants actively verifying their transactions, the more centralized the verification of economic activity, making it easier to make such changes.
Although in theory, there is nothing to prevent each participant from using the full node, there are various practical obstacles in running and using the full node. Probably the most important of these obstacles is the technical complexity of operating such a node, which is still a very important task for many people. In addition, the size of the transaction history data will also bring some problems. When the transaction history data increases, it will affect the initial time required to connect to the network, and it will also increase the hardware requirements for active nodes, thus increasing the maintenance costs. high. Although these issues (and possibly various other issues) may be controllable, if not addressed, they may lead to such a dangerous large-scale centralized payment verification, which may offset the currency hardness guaranteed by the theoretical design of Bitcoin.
Therefore, the biggest risk to Bitcoin's hardness lies in the centralization of payment verification.
What about junk coins ?
Contrary to the constant claims of almost all "blockchain-based" junk coins, in fact, they cannot be regarded as hard currency. Although there are many different implementations of how a decentralized blockchain works (PoW / PoS, etc.), they all have to rely on the same client payment verification model discussed above.
However, unlike Bitcoin, they are either verbal or they completely ignore the importance of self-sovereignty in determining consensus rules. That is, they all tend to focus on the development and implementation of consensus rules. Some projects have some kind of central authority, with few exceptions, and most decisions about rules are delegated to it (either explicitly or implicitly). Others have neglected the need to maintain the ability to access the full node as much as possible, resulting in a centralized payment verification. Still others are trying to establish a "governance" process-turning arbitrary changes to consensus into a form.
I should emphasize that I am not talking about all "blockchain projects" or projects with decentralized governance. I object to the often heard claims of various tokens that say they should be considered hard currency, but in practice their supply can and often is arbitrarily changed.
As mentioned above, the hardness of currency is inversely proportional to currency inflation, and currency inflation can be imposed economically on currency holders. These digital assets either rely on centralized (or semi-centralized) payment verification, or there are some clear and simple processes for modifying consensus rules, so there is even no excuse for hard currency. The underlying inflation imposed on them can be infinite-once you can modify the "monetary policy" of a digital asset, in fact, there is no limit to how much currency you can create from it, nor can it be considered more legal than any Monetary systems are all about difficult currencies.
No one here claims that Bitcoin's current state is perfect, or near perfect. Of course, there are many unwelcome verification centralizations in the bitcoin field. What is more worrying is that people do not know the importance of such self-sovereign verification. However, the main difference is that Bitcoin “radicals” insist on promoting the use of full nodes. For example, core developers strive to enable nodes to be used on weak and economical machines such as Raspberry Pi, and many projects provide various options for running full nodes, from plug-and-play machines to complete DIY solutions.
The ecosystem dedicated to promoting and simplifying the use of Bitcoin's full nodes is very important and is developing rapidly, and the community's emphasis on this topic is unmatched by any other project.
In addition, it is also important that as the "first of its kind", Bitcoin is not only the basic consensus rule for a single asset, but also the basic rule for general digital value transfer. Since Bitcoin is a protocol in principle and even (in the most basic sense) an idea, "a peer-to-peer electronic cash system", due to its rules, as we have seen, this means that from some sort of In the sense, all other implementations of this system can be considered as a version of Bitcoin, but the rules have changed completely.
With that in mind, the fact that these other "Bitcoins" have such a different set of rules and a substantially different monetary policy is itself a sign of the relative plasticity of their rules-deviations in a very incompatible way The original ground rules were followed, and there were no real (monetary) reasons (such as emergency changes due to errors). We might say that these other coins are merely replicas of the Bitcoin model. At least in the currency field, they have proven their lack of hardness. They just create an arbitrary Bitcoin protocol that is different from the main Bitcoin. All of these coins may be very different from Bitcoin and various other "use cases", but as far as hard currency systems are concerned, they all start to lose money in the face of the "Bitcoin Standard".
Before closing our discussion, there are a few more words to say. First of all, although we have been discussing the hardness of Bitcoin brought about by the enforcement of encoding rules so far, we must pay attention to another warning. Bitcoin is software, and like any software, it can and has (and may still be) flawed. Although these loopholes can indeed lead to unexpected inflation, they are unlikely to have a serious impact on the hardness of Bitcoin.
To understand why, we can divide possible inflation errors into smaller errors (1, 10, or even 100,000 Bitcoins—similar to what CVE-2018-17144 might happen) and larger errors (similar to Inflation of 184 billion coins). Small mistakes may indeed bring some inflation, which may technically undermine the core principle of limited supply, but since they can be resolved quickly, their impact on aggregate supply is actually irrelevant in the long run. More generally, they may increase the stock of bitcoin to a certain extent, but it will not undermine the protection of the expected flow of new bitcoin coming.
As for the major loopholes, although it may temporarily weaken people's confidence in Bitcoin's success, retroactive measures can be taken to eliminate the effect of this apparent violation of the limited supply constitutional precedent, which will successfully safeguard Bitcoin's creed. These measures are absolutely necessary to maintain the value of currency holders and the utility of the network itself. In fact, this is exactly what happened after such a catastrophic error in 2010. As we have concluded before, the lack of malleability of network rules has led to its hardness as a monetary medium. However, it is clear here that the literal opposite is also true; it is the ability of the network to protect users, to protect their own interests through the individual actions of each of them, and to protect the hard limit of 21 million.
Throughout this article, we discussed the basics of hard currency and its relationship to Bitcoin. We see in theory that it is natural to describe Bitcoin as "the hardest currency ever", but from a practical perspective, the correctness of this statement depends largely on the exercise of its users Its self-sovereignty-that is, using full nodes to verify and accept transactions.
Author: Ben Kaufman
Compilation: Share Finance Neo