The king of money returns to $10,000, what makes it stand still?

There is a paradox in the issue of reforming things. In this case, there is a specific system or law; in the face of a fence or gate across a road, more modern reformers will say with enthusiasm: "I can't see the usefulness of it, let's get rid of it." In this regard, the smarter reformer will answer: "If you can't see the usefulness of it, of course I won't let you clear it." Leave, think about it, when you come back and tell me that you really see its purpose, I can allow you to destroy it."

– GK Chesterton, The Thing: Why I am a Catholic

The problem with Bitcoin is that it's hard to see, it's not elegant.

– Gwern Branwen, “The worse the bitcoin is, the better”


Some people sometimes say that the design of cryptocurrency does not exist for free lunch, only trade-offs. This is a point that irritated bitcoin investors often want to evade. They try to explain why popular new cryptocurrencies may not provide the same guarantees as Bitcoin when offering 10,000 TPS.

Nowadays, with the introduction and implementation of hundreds of unlicensed wealth transfer alternative systems, it is worth thinking about why Nakamoto has to build Bitcoin precisely and why its managers are in such a thoughtful way. Guide the development direction of this project?

What I want to say here is that its characteristics are not chosen at will, but are carefully chosen. The aim is to create a sustainable, resistant system that can cope with shocks. In many cases, this requires choosing an option that looks unpleasant on the surface. This is what I call the biting the bullet. In my opinion, when faced with two options, Bitcoin tends to choose one that looks less convenient.

This is confusing for those who "I just heard about Bitcoin, I am here to fix it" syndrome, but this design consideration often makes sense when considering long-term consequences.

The consequence is that Bitcoin has a variety of cumbersome features that are restrictive and weaken its ability to innovate, all in order to achieve longer-term or more comprehensive goals. In this article, I will discuss some of the trade-offs between Bitcoin for the pursuit of ambitious long-term goals and the choice of an unpopular or more challenging path:

  1. Managed and unmanaged exchange rates;
  2. No caps and capped supplies;
  3. Often forked and not often hard forked;
  4. Discretionary and nondiscretionary monetary policy;
  5. Borderless and bordered block space;

I. Management and non-management exchange rates

One of the most common criticisms of Bitcoin is that Bitcoin is not a currency because it lacks price stability, and this criticism usually comes from a central banker or economist. Often, the role of central bankers is to optimize relatively stable purchasing power (although in the US, 2% of currency depreciation per year is considered to be tolerable) and other goals, such as full employment. Because Bitcoin lacks a mechanism to manage exchange rates, it is denied money. In the traditional view of sovereign currency composition, some management ideas are implicit; when you ask Christine Lagarde, her answer is:

“At present, virtual currencies such as Bitcoin have little or no challenge to the legal currency and the current order of the central bank. Why? Because they are too unstable, too dangerous, too energy intensive, and the underlying technology has not expanded.”

Or you ask the Vice President of the Swedish Central Bank Cecilia Skingsley, his answer is:

“I don’t object to people using Bitcoin as an asset for investment, but it’s too unstable to be used as a currency.”

Of course, the volatility of Bitcoin cannot be controlled. In the context of scarce supply, its price is almost entirely related to demand. Therefore, when there is a large amount of use of bitcoin in the market, there will be annoying price fluctuations. This is in stark contrast to sovereign currencies, in which the central bank pulls various levers to ensure that the exchange rate is relatively stable.

The inherent trade-offs of monetary policy usually manifest in three aspects, that is, the monetary authority can choose two vertices, but not all three vertices. Put another way, if you want your currency to be tied to a stable currency (usually another currency, such as the US dollar), you must control both the money supply (sovereign monetary policy) and demand (capital flow). China is a good example: the renminbi is pegged to the US dollar, and the People's Bank of China implements a sovereign monetary policy, which inevitably requires capital controls.


(The "impossible triangle" of monetary economics)

In 1992, Soros and Drucken Miller realized that the connection between the Bank of England and the German mark was fragile and could not be permanently defended, which made the Bank of England reminiscent of this restriction. The Bank of England has to admit defeat and allow the pound to float freely.

A more modern example is Hong Kong's current predicament, whose currency is softly linked to the US dollar. Unfortunately, in recent years, the dollar has appreciated sharply, so the Hong Kong monetary authorities are facing the biggest challenge to meet the price target. The outflow of capital from Hong Kong to the United States has increased.

Hong Kong chose A on the chart and gave up the monetary authority in exchange for the free flow of capital and anchoring the exchange rate. If they lose their anchor, they will regain monetary sovereignty (can escape from the Fed's interest rate policy) while maintaining open capital flows.

Therefore, there is an inevitable trade-off in monetary policy. No country, no matter how powerful, cannot be exempted. If you want to link your currency to the currency of another country, you either become a currency vassal or you have a difficult task to prevent your citizens from exporting money abroad.

Therefore, for monetary economists, the fact that Bitcoin cannot control its exchange rate should be quite surprising. It is an emerging digital country that aims to make capital easy to carry (and therefore capital control is impossible), and there is no authority to manage an anchor. Due to its gradual money supply target, Bitcoin can exercise extreme supply discretion, but there is no mechanism to control capital flows. Naturally, there is no central bank to manage interest rates. Compared to Facebook's new cryptocurrency Libra (which is endorsed by a basket of currencies), it can be argued that Libra will never really become a license, as some entities must always manage a basket of securities and currencies that support the currency.


Bitcoin allowed the exchange rate to float freely, choosing a system design that had no entity responsible for managing exchange rates and sovereign monetary policy, which allowed it to bite the bullet. Volatility and future exchange rate uncertainty are the prices users pay for their ideal quality – scarcity and unlicensed transactions. The bullet bitten by Bitcoin is an unstable exchange rate, but in return, it is liberated from any third party and won an independent monetary policy. A fair deal.

Second, no cap and capped supply

One of the most heated debates in the cryptocurrency industry is whether it is possible to have a truly limited supply. This often leads people to a negative attitude about the cost or issue, whether it should be a safe buy order in the network. So far, no unlicensed cryptocurrency has found a free way to protect the network (unless you believe Ripple people will say…). Because all conditions are the same, holders benefit from fewer releases than more, and if you think transaction costs are sufficient to pay for security, you may find that a cost-driven security model is preferable.

In fact, Nakamoto believes that Bitcoin must shift from a subsidy model to a fee model in the long run:

“Rewards can also be funded by transaction fees. Once a predetermined amount of currency has entered circulation, the incentives can be fully converted into transaction costs and there is no inflation at all.”

Ultimately, in an unlicensed environment where security costs must be paid, the choice is quite harsh. You either choose to issue it permanently or admit that the system must support itself with transaction costs.


Given the popularity of perpetual distribution systems in new distribution projects, a rough consensus seems to be emerging, that is, getting enough trading volume to develop a robust expense market is a huge one for an emerging blockchain. The challenge .

However, Bitcoin still chose a tough approach, and in the choice between the two, it adopted the less pleasing way of restricting supply and costing the market. In order to get the features that users want: real, impeccable scarcity. Whether it will work or not remains to be determined, Bitcoin will have to increase its trading volume, and traders will have to continue to pay for permanent block space. The most comprehensive view of how costs can develop comes from Dan Held .

Although no one has a clear understanding of how Bitcoin's charging model will get out of trouble, Bitcoin already has a strong expense market. As of writing, its cost accounts for about 9% of total mining revenue. Encouraging.

Third, often forked and not often hard fork

The frequency of the cryptocurrency bifurcation tells us a lot about the design of them. For example, Ethereum has long been positioned as a more innovative opponent than Bitcoin because it has some functional fundamentals, such as using it to fund developers, and it has a fast-paced social commitment. In contrast, Bitcoin developers tend to develop through opt-in-soft-fork, such as quarantine witness upgrades (which I call "hard forks", which are intentionally backwards incompatible upgrades that require user collectives. Upgrade their nodes. In the case of hard forks, the old nodes may not be compatible with the new rule set.)

In my opinion, this often comes down to the basic vision conflict on how to organize development; Arjun and Yassine discuss this topic well in their article .

As mentioned earlier, some cryptocurrency developers have adopted a regular hard-forked policy to introduce upgrades into their systems. A regular hard fork strategy is actually the only way to upgrade your system often, and everyone must run compatible software. This is also risky: a hard fork that is eager to achieve, may introduce hidden defects or inflation risks, and marginalize users who do not have enough time to prepare. When dealing with crises, hard forks that are poorly organized can often lead to confusion, as is the case with Verge and Bitcoin Private. Major blockchains such as Ethereum, Zcash and Monero have adopted frequent hard-forked policies, of which Monero has a fork period of six months.

As with many of the design models in this article, the use of frequency hard forks is advantageous, but it also has disadvantages. Due to the slow management of Bitcoin Core, it is not suitable for fast action, so it tends to force decisions to be given to smaller groups and introduce attack vectors.

Developers responsible for forks can reward themselves and their internal circles at the expense of users. For example, by creating a secret or explicit tax flow to their vault, or changing the proof of work function, it only applies to the hardware they own. Just as the blockchain maintains everything in this fine art, the concentration of power comes at a price.


It is worth noting that all the decentralized blockchains have the so-called "Musician ship" problem. This refers to the ability of an unowned blockchain to balance the persistence and extensibility of a single identity over time. I discussed this topic in detail here .

In the end, there is no single manager responsible for resolving the disputed public blockchain, and must face these problems of the ship of Theseus. So the choice of the right project is painful. But again, Bitcoin is happy to make tradeoffs.

4. Discretionary and nondiscretionary monetary policy

If you are an artist or an engineer, you may have noticed that the limit is the mother of creativity . Reducing the design scope or opportunity space of a problem often forces you to discover an innovative solution. More abstractly, if you have more resources available, then you are less likely to deploy them carefully and more likely to waste resources.

Russian composer Igor Stravinsky spoke very well:

"The more constraints you impose on a person, the more he can liberate himself…"

Mehta and Zhu found in the 2016 "salience of resource scarcity versus abundance" survey:

“Scarcity significantly activates a persistent constraint mentality and enhances functionality by reducing functionality in subsequent product use environments (that is, allowing consumers to think beyond the traditional functions of a given product). The creativity of product use."

Examples of such phenomena abound. In venture financing, over-investing in a startup often leads to its failure. That's why it encourages start-ups to lean, it imposes discipline, forcing them to focus on revenue-generating opportunities, rather than aimless R&D or wasted time at meetings. In more mature companies, excessive cash often leads to wasted M&A activity.

I bet that the same phenomenon exists in the monetary policy of various countries. If it is easy to raise capital through dilution (which is essentially the inflationary approach of sovereign governments), it is easy to finance wasted venture investments, such as overseas conflicts. Similarly, in cryptocurrencies, discretionary inflation usually manifests itself as positive, often tied to governance, enabling developers to fund operations, marketing, and so on. Simply put, the discretionary power of monetary policy creates enormous wealth that project managers can use. However, this also brings with it some drawbacks: it opens the door to rent-seeking, exploitation and wealth redistribution, all of which undermine the long-term integrity of the project.

In many cases, currency discretion (the ability to increase supply arbitrarily when needed) is seen as an innovation relative to Bitcoin. But for me, it simply reproduces the model supported by the dominant monetary system: a central entity that retains discretion over money supply, periodically expanding it to fund policy initiatives. As we have seen in places like Venezuela and Argentina, governments often abuse this privilege. So why are cryptocurrency developers different?

The predetermined supply of Bitcoin is the product of its aggressive commitment to currency volatility and its solution to problems. For many opponents, this is a weird, arrogant solution, but it is critical to the design of bitcoin. By keeping this variable constant and forming a loop within the system, Bitcoin's goal is to provide lasting, true scarcity and completely eliminate human decision-making. This can be a huge price. Opponents ridicule the "high" charges of Bitcoin, although as the subsidy decreases, the steady charging pressure will eventually be a necessary condition for security. Unlike agile projects, Bitcoin cannot enrich its vault from inflationary spoils.


In the above diagram, some of the items in the left column do not actually increase the supply arbitrarily to achieve the policy objectives, but they have essentially written this possibility into the social contract, and supply is a lever if the benefits match If you can, you can pull it .

It's easy to re-interpolate currency discretion into the system to fund hired developers, get hype through marketing, and support the operation of a single corporate entity that can allocate resources. I think this is a wrong trade-off. In the long run, the mode of non-central control in the early stages of development is more resistant. If there is capital allocation, there must be a distributor who is always under pressure, distortion, coercion or compromise. Bitcoin has abandoned inflation-based financing and chose to live or die at its own value, thus bearing the burden of humiliation.

V. Borderless and bordered block space

The debate about block space can also be understood as a similar and unrestricted view. If more block space is available (interesting, data-intensive use cases, greater adoption rates, lower fees, etc.), then the debate over larger blocks tends to focus on system potential. Bitcoin's block space protectionists are resolutely resisting this, and they believe that the marginal improvement in usability will bring too much cost to verification.


Bitcoin cash (BCH) or BSV and other bitcoin forked coin agreements, the miners decide the block size limit, not the developers, they are far higher than the bitcoin effective 2 MB block limit (1 MB) It is an absurd statement). However, this is problematic because the block space has a non-priced externality. Increasing the block size limit does not cost the miners any price. In fact, larger miners may prefer larger blocks because large blocks are not good for smaller miners. However, a growing book (along with all the increased verification costs) is a very practical cost for verifiers and node operators who want to verify inbound payments and ensure that the chain is valid.

Faced with this externality, Bitcoin chose a choice that might seem unpopular: initially limiting the block size to 1 MB, now limit it to 4MB (in extreme cases, unrealistically – more Realistically, it should be about 2 MB). The orthodox view of the Bitcoin community is that bounded block space is a requirement not only to exclude uneconomic chain use, but also to maintain the permanent cost of verification.

In addition, simple observations in economics tell us the results of the unlimited block size. Since the need to store information in a replicated, highly available database is almost limitless, if the space is cheap enough, the blockchain will be used to store arbitrary data. The problem here is that the stored data has a permanent cost to the verifier because they must be included in the initial block download and permanently purchase a larger hard drive. (The Ethereine state lease proposal acknowledges this issue and proposes a solution.)

Bitcoin enthusiasts are not lamenting the “high” charges, but accepting them: this makes certain types of junk transactions costly and infeasible.

In a chain dedicated to a completely open block space (such as BSV), you will find that the chain usage is low (the BSV averages less than 10,000 active addresses per day compared to the more than 800,000 daily active addresses of Bitcoin) And the occasional inorganic peaks, because of the data injected in the chain, make long-term verification very difficult.


EOS is an interesting case. Considering that block space is quite cheap (although it is technically "priced", it has a complex network resource system) EOS has many uneconomical, or junk-type transactions. This is partly because the motives for activity illusions in the manufacturing chain are high and the cost of doing so is low.

Therefore, you have millions of ledger entries created by the weight of economic incentives (promotion chains or certain dApps), which adds to the burden of marginal junk trade. This has produced very real consequences. For example, in today's EOS, running a full archive node (a node that keeps a snapshot of the historical state) is actually impossible, and this is a very badly kept secret. Such nodes are only strictly necessary for the data provider who wants to query the chain. In this case, it is very difficult to maintain the normative history of the books due to poor management of network resources.

Finally, the block space debate boils down to sustainability issues. In order for the blockchain to be charged, the user must pay attention to the block space. However, if the block size is completely unrestricted, then the block space will be worthless. The supply of a commodity is unlimited. How much do you have to pay? By limiting block space, Bitcoin can maintain a market for ledger entries, and one day it will replace the subsidies issued to miners. Opponents believe that increasing the size of the block allows for more and more use, which will ultimately be reflected in the cost.


I call it the "one mile wide and one inch deep" fee market model. Empirically, this has not been confirmed so far. If a coalition chain like Libra erodes the payment market, the hopes of supporters of low-cost cryptocurrencies with a focus on payment are likely to be shattered .


Except for Bitcoin and Ethereum, there is even no asset registration on the chart. Only Litecoin can charge more than $1,000 per day, and BCH, BSV, Dash, Zcash, Monero, Stellar, Ripple, and Doge are all in the range of hundreds of dollars per day (chart). This does not bode well for the sustainability of currencies like Bitcoin, which are planned to reduce circulation. At present, apart from Bitcoin and Ethereum, it seems that no other blockchain has the conditions to enter the transaction fee to provide most of the verification income system. Therefore, pricing block space and allowing market development, although painful in terms of cost, is a key feature of Bitcoin.

If this article wants to pass something, it is that the design features of Bitcoin seem strange, ugly, and broken, but there are often good reasons behind it. This doesn't make them impeccable: there is of course an alternative to choose from, and thousands of projects are actively exploring the design space.

Nakamoto is not an omniscient scholar. He/she certainly does not anticipate the way the system is developed, but the compromise choices in Bitcoin settlement are usually very reasonable. Whether they are absolutely correct remains to be seen. But remind yourself: If you come across an obvious wrong feature and delve into it, you may find reasons for its existence.

Thanks to Allen Farrington and Matt Walsh for their feedback.