I couldn’t find enough questions that ask this head-on1, so consider that if:
- Bitcoins are designed to reflect the deflationary characteristics of a specie currency; and
- The distributed nature of the cryptocurrency requires a high intrinsic value (energy cost) of the coins to secure them; and
- That neither deflationary contraction nor high transactional energy costs are desirable qualities of a major currency (see Background below);
Will the energy cost and deflationary nature of Bitcoins doom the currency to obscurity?
Off-blockchain solutions are acceptable answers, but will require centralising a large portion of the Bitcoin network. Or put another way: Trust moves back to centralised banking facilities.
So my guess is these two problems will doom a decentralised Bitcoin, but I open the question to the floor. 🙂
Background (Due Diligence)
A high transactional energy cost is bad
The green line in this chart reflects the power per dollar in the
global economy; of which a tiny fraction is consumed by maintaining
the banking network.
(Source: Dr Tim Garrett, “A physics based economics
As the distributed Bitcoin cryptocurrency doesn’t use laws or other
centralised off-blockchain enforcements to protect the transaction
ledger, the energy cost per transaction can not be a fixed constant
like normal currencies. It must be a percentage of global energy
consumption2 to discourage state actors with a bevy of
power stations from subverting the global Bitcoin economy.
No society will choose a currency that requires
O(N) energy to
transfer a bank note instead of
O(1) energy to transfer a bank note
N is global energy consumption). Doing so would impoverish
A deflationary currency is bad
Long story short, a deflationary currency requires a post-growth
social model; which while probably a good thing, we don’t actually
have right now.
In a classic “growth” economy, you must expand the money supply to
reflect the size and velocity of economic activity in society. If you
do not and the level of economic activity ever contracts (and there
are variety of regular reasons this may occur such as a natural
disaster or demographic bulge), then you can enter a deflationary
death spiral as each contraction contaminates other economic activities
that assumed an ROI in the form of interest that is now worth less or
A digital specie-based currency is deflationary in that it restricts
the money supply.
Inflation and hyperinflation are problems, but
problems of unchecked greed, speculation and social inequality that
don’t disappear by sweeping the economy under a deflationary rug.
1. Although “Will deflation destroy Bitcoin?” and “How much energy will the Bitcoin network eventually consume?” come pretty close, I really want a question that collates and settles this for newcomers, without undue eager puppy optimism from early adopters. 🙂
2. Production actually, but sane organisms consume energy they produce instead of throwing it away; so global consumption and production can be considered linearly proportional, though not
1:1 due to transmission inefficiencies.
3. To put this in perspective, you could provide everyone on Earth with universal education, healthcare, social security as an
O(N) energy cost.
4. Don’t get me started on economists of the Austrian-school. They might as well be sock puppets for the entitled mega-rich for all the benefit their pseudo-science has on ordinary human beings.