As it stands, Bitcoin has two problems,
1. It is not a good medium to be used as currency due to its volatility.
2. It continues to enforce the usage of fiat money (mainly the USD) through USD backed stablecoin.
The above problems are well known, but the consensus belief is that these problems would find a solution on their own as long as Bitcoin could gain a wide enough adoption and continues to increase in its fiat value.
However, there is no good explanation/example on how a potential solution might look like for these problems.
Instead, these problems are usually marked as a footnote during discussion/interviews and swept under the carpet by the Bitcoin maximalist.
One of the goals for Bitcoin is to be the ultimate store of value and to be the asset of choice for all savings.
This implies that Bitcoin should not and will never be the preferred choice of unit of accounting or payment, i.e. it cannot play the role of a currency.
This is because as the ultimate store of value asset, everything (primarily the fiat money) will be valued against it. And since the unit of Bitcoin will never change, it implies that the external value (i.e. fiat value) will need to fluctuate against it – to reflect the true economical value the fiat money represents (i.e. its total volume and velocity of the fiat money).
It implies that the value of Bitcoin when measured by any fiat money will always fluctuates.
Bitcoin is a bearer asset, it does not have liability and it does not depend on external factor to derive its value, and it has a finite quantity. Hence, the only measurement that matters is the number of unit of Bitcoin owned and not its fiat value. Its true worth is derived from the fact that it is being recognized universally as a store of value which can retain wealth across a long period of time due to its scarcity. Any object that is able to act as a stable store of value (and not subject to the manipulation of human activities), has always been treasured by humankind, including gold.
However, unless the world has completely transited to the Bitcoin standard and that there is never a need to convert Bitcoin to fiat money to pay for taxes, bills and utilities, then Bitcoin will never be suitable to play the role of currency for transactions.
It is disingenuous to ask Bitcoin supporters to bear the volatility and uses Bitcoin as the default choice of payment, when its volatility can easily wipe out its users’ profit margin in a single trading session.
It is also unjust to ask people of developing countries to use Bitcoin as the currency for payment and suffer the potential losses, when most of the Bitcoin maximalists are usually people who can endure the fluctuations of Bitcoin - as they have other means to earn and continue to use fiat money as their normal form of payment for their daily needs.
The well-to-do Bitcoin proponents are primarily using Bitcoin as their saving asset, and to their credit, has no problem enduring Bitcoin winters. But that is a luxury that the poor (whom the Bitcoin proponents has advocated to help and protect) does not have. This group of people have minimal savings and needs to live day-to-day paying their bills for food, electricity, tools and loans. Even if they are able use Bitcoin to pay through intermediary, ultimately there is a fiat transaction that must take place to complete the transactions. And Bitcoin is ultimately generating more friction as a whole for this group of people - as they are unable to hedge against the volatility of Bitcoin.
This is not to say that Bitcoin is not the future, because it is.
Bitcoin is the first working invention where it represents the hardest asset and at the same time provides the most liquidity in the transportation and division of value. The above two properties have never been able to exist in any asset in human history before Bitcoin.
But its Achilles heel is that it is not suitable to be used as currency for daily transactions.
It must find the chink in the currency system's armor in order to thrive.
This should be the first and foremost task at this stage of the development of Bitcoin, above all else.
To transform Bitcoin to the world’s ultimate base currency, we will need to create a layer of stablecoin backed solely by Bitcoin – which can used as payment currency.
Bitcoin Money is one such proposal.
It should be designed as an algorithmic stablecoin indexed against something that has far less volatility, for example a basket of G20 currency.
We can take the G20 currencies and create an index for it, much like the proverbial USD index. The chosen currencies will have weighting in the index in proportions to the currency’s usage as a percentage in the transactional value of world’s GDP.
The goal is to create an index which has as minimal fluctuation in value as possible. Given that the fluctuations in fiat currency is measured against other fiat currencies. The G20 currency index should have minimal variation over time in terms of fiat values.
And we would use a main pool of Bitcoins as reserves to back up a secondary pool of Bitcoin Money which uses the G20 as its index of fiat value.
User could onboard and buy Bitcoin Money in any fiat currency. The currency used for the onboarding would immediately be used to buy Bitcoin, which in turn would allow the custodian(s) of the system to mint a certain unit of Bitcoin Money - which equates to the fiat value of the G20 index in accordance to the value of Bitcoin at the time of purchase. The unit of Bitcoin Money is ultimately represented as fractional units of Bitcoin purchased at the time of transaction.
And this Bitcoin Money could then be used as the stablecoin for transactions.
As the value of Bitcoin fluctuates, and because Bitcoin Money is ultimately just a representation of some units of Bitcoin, its value would fluctuate too.
However, this fluctuation will be absorbed and offset by the pool of reserved Bitcoin.
For illustration, and for simplicity sake, let’s imagine that instead of a G20 index, we would use USD as the index instead.
At the time of onboarding, a user would buy an equivalent of USD $10,000 (assuming that the price of Bitcoin is valued at USD $100,000 at the time of purchase), hence the user would have 0.1 unit of Bitcoin Money at his/her disposal. This 0.1 unit of Bitcoin Money should forever represent USD $10,000 in value to the user regardless of the value of Bitcoin at the time of transaction when it needs to be converted back to fiat currency. Therefore, if the value of Bitcoin has dropped to USD $90,000 at the time of such exit transaction, the original Bitcoin bought and additional Bitcoin from the reserves will be sold to make up the shortfall in fiat value to make the user whole.
The question then becomes, why would anyone want to put up their Bitcoin as reserve to support such a system?
There are good reasons for doing this,
- It allow Bitcoin to fulfill a role which ultimately would allow the world to fix the problem of the current fiat currency system. This pool of stablecoin can be lent out to any willing borrowers at competitive interest rate without any central control. Any intermediary entity can take on the role of a bank and perform the necessary risk assessment to play the role of a lender. This will fix the problem of money creation, i.e. when our money system is no longer a debt based system, you fixed the world.
- Ultimately, we have to believe that if Bitcoin is really the ultimate base currency which we recognized it to be. Its value MUST increase over time in proportion to the amount of trade which would be conducted in Bitcoin Money and its increased recognition as storage of wealth over time. Any losses in such a system should be impermanent losses given a long enough period of time.
More importantly, the owner of Bitcoin who put up their Bitcoin as reserve, would not have to be expected to do it out of altruism.
Instead they will be rewarded in two ways.
Firstly, as and when the value of Bitcoin increases, e.g. if it increases to USD $110,00 as per earlier scenario, the unit of Bitcoin needed to represent the total fiat value of the Bitcoin Money pool will be lesser than the initial pool of Bitcoin at the time of onboarding. These excess Bitcoin units can then be distributed back to the owners of the reserve pool as reward at periodical intervals.
Secondly, the network can also charged a minimal amount of fees for each Bitcoin Money transaction which could amount to 1.5% annually taking into account of the velocity of the transaction within the Bitcoin Money pool. And these fees could also be distributed back to the owners of the reserve pool (in the form of Bitcoin) as reward at periodical intervals.
The above idea is of course not new.
And the USD in the above scenario, could easily be switched to a G20 currency index instead.
There are already similar implementations such as LUNA and Djed in the market, it is just that they do not use Bitcoin as the reserve pool, but instead has chosen to use a fiat currency or their own token.
Djed Algorithmic Stablecoin Whitepaper
At the moment the closest and easiest implementation to pivot to this idea of Bitcoin backed stablecoin would be the DEFI project – as it is already using Bitcoin as its underlying layer for security and transactions.
Once there is a standard on Bitcoin Money, it could then be minted/wrapped/distributed to all other transactional systems, such as Lightning Network, to be used as currency to conduct the day-to-day transactions.
The stablecoin could then be used as the payment layer.
Using the above system as reference, the governments of the world could easily come up with a competitive system which takes Bitcoin out of the equation.
For example, they could use gold as the base layer asset instead of Bitcoin. One could argue that gold is still subject to manipulation. But a government issued hard money comes with advantages that the Bitcoin network does not have, namely guns and political power.
One needs to be mindful that Bitcoin has its own potential issues, for examples a rogue Satoshi actor, potential bug in the system or cracking of the cryptography, interference by governments or even hard forking in the name of a greater good.
A government issued hard money is simpler to uphold as long as the said gold is being publicly audited periodically in a transparent manner. The public will have no issue trusting a currency which will retain the said value that it is worth – at least to the extent of the value of gold that is backing it.
Countries which have high public trust of governments, for example, Switzerland or Singapore could lead in this exercise.
For example, they could issue their Central Bank Digital Currency backed by gold, and could even index the CBDC currency to their own fiat currency during the initial phase to avoid any detrimental impact to their fiat currency system.
Once proven, they can then reverse the peg, i.e. their fiat currency would peg to the value of the CBDC - as the final phase of the transformation.
As long as the currency system is fixed, it will free the society from engaging in activities associated in the maintenance of a debt based system. We can instead focus on activities which truly generate value and wealth and not worry about losing the gains that we have made.
It does not matter how the final system is constructed, as long as the units of currency is minted/created with full transparency and backed by hard asset. And its value is marked to market by its community, it would be suffice to fix the issues with the current fiat systems.
Imagine a world where the currency is backed by a basket of gold, silver and oil. It does not necessarily need Bitcoin.
Bitcoin is created out of necessity to discipline the irresponsible monetary policy of governments.
In a sensible and disciplined world, Bitcoin would not have been necessary. Its goal is not to topple governments, but to provide an alternative, an alternative eloquently expressed in the Declaration of Independence of the United States:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.
Whenever any form of currency system becomes destructive to the ends of People’s life, liberty and happiness. It is the Right of the People to alter or to abolish it, and to institute new system.
Bitcoin is one such system. But it should have not been necessary in the first place and it does not necessary be the only viable system.
We shall hold this truth to be self-evident - the ultimate goal of Bitcoin is to destroy Bitcoin itself.