——Answers on the concepts in the article “Please Invite Satoshi Nakamoto to Welcome the New World”
4.1 Comparison of the characteristics of the fiat currency standard and the Bitcoin dollar standard
Money exists when we are born. Money is issued by the state and is legal tender. Referred to as fiat currency. Only what is issued by the state is called currency, that is, money and nothing else is money. This view is deeply ingrained and is as easy to accept as the geocentric theory. Fiat currency is a concept solidified in everyone’s mind; if you say it is wrong, others will ridicule you. Because people are animals that make judgments based on experience, especially intuitive experience, it is not easy to be overturned when opinions do not match actual feelings. The earth-centered theory has existed for thousands of years and is an intuitive feeling of human beings. It was not until 1543 that Copernicus published his masterpiece “De Revolutionibus Orbium Coelestium” and established the heliocentric theory that the concept began to waver. In 1609, Kepler followed Copernicus and published “New Astronomy” to determine the three major laws of planetary motion. In 1632, Galileo published “Dialogo Sopra i due massimi sistemi del mondo,” the pioneer of contemporary experimental physics was placed under house arrest for heliocentric theory. In 1684, Newton’s “Philosophiæ Naturalis Principia Mathematica ” used mathematical methods to prove the correctness of the heliocentric theory, and experiments verified Newton’s formula. It took more than 140 years to end a misunderstanding of human beings. It is the situation faced by the Bitcoin dollar standard. The problems I encountered were not the logic and flaws of the article but the fiat currency that cannot be challenged, and the Federal Reserve will not use it. Just like religion could not be challenged back then. It is a matter of conception, but it is still much more straightforward than the debate between the human guru. Humans have also improved a lot. Satoshi Nakamoto has 132 years of mining time; I guess he knows the difficulty of originality. Creating an original point of view and being accepted is needed time. The Bitcoin dollar standard is an improved innovation, which is not difficult to accept as the original one. Originality has no reference object and no practice; improve innovation is more of a practice summary.
My doubts about fiat currency originated from the inspiration of Satoshi Nakamoto. His greatness is not only in the invention of Bitcoin but also in making people think about the irrationality of the fiat currency standard. He opened Pandora’s box, releasing hope and the devil into the blockchain ecology. The blockchain ecology condenses human beings’ financial phenomena and innovations from tribal times to modern times and the future, including financial phenomena that have occurred and will occur. Looking back at the global financial ecology through these financial phenomena is very clear. For example, centralization must be supervised. Otherwise, it will not be able to suppress evil in humans. An unregulated system must be transparent, and users have the ultimate choice. Under conditions of transparency, regulation is redundant. An opaque system has room for rent-seeking, which may become a source of storms. The number of stablecoins issued is transparent, but the fiat currency in their hands is opaque. The opacity of any link may be an incentive for future thunderstorms. Stablecoins tell us that, as a central bank, it is impossible to issue coins without collateral. There must be sufficient collateral assets. Who determines the quality of collateral assets? It is a problem. Comparing the differences between the two systems through the practice of blockchain may be clearer.
4.1.1. The characteristics of the fiat currency standard
There are many kinds of currency, and shells, copper coins, silver, gold, and silver bills have all served as currency. The money quality is different, and there are more than 20 indicators for judging the quality. Fiat currency is issued by the country and endorsed by national credit. National credit represents national power, credit is uncertain, and the more certain the credit is, the more valuable it is. When a regime is violently overthrown, the credit of the original power of the country is zero, and the fiat currency issued is waste paper.
Fiat currency itself has no value; its value depends on the credit of the endorsement. The issuance principles and cashability of fiat currency determine credit. Fiat currency is a credit currency. Good credit is called hard currency. The U.S. dollar is issued as a mortgage tax or asset purchase. Tax is a rigid national income, predictable, highly transparent, and a realizable asset in the future. The judgment of purchasing assets is subject to the Fed’s assessment. There is no problem with the principle of U.S. dollar mortgage tax issuance, and there is no problem with the ability to cash out so far. The problem is the subjectivity and credibility of asset purchase activities. In this activity, the Federal Reserve started quantitative easing in 2008. After five rounds, quantitative easing has changed from a life-saving medicine to a vitamin. It will be discussed in detail in the next section.
The fiat currency that circulates internationally is relatively high quality and can be called currency. In contrast, the fiat currency that only circulates in one country is called fiat currency, which is not accurate and has the same meaning as the company’s ecological circulation coupons. The company is responsible for exchanging your vouchers for external circulation. A fiat currency is also partially in international circulation, between vouchers and currencies. In 2020, RMB had a total of RMB 1.27 trillion in more than 1,000 overseas RMB fund pools. Relative to the total amount of RMB, it is only a fraction. There is a long way to go to get out of coupons. Generally speaking, fiat currencies cannot be circulated globally without exchange.
Mundell’s impossible triangle constrains the fiat currency standard. It means that fiat currency can’t satisfy independent monetary policy, currency circulation control, and exchange rate marketization simultaneously. The U.S. dollar and the euro have independent monetary policies and free circulation, and the market determines the exchange rate. The Hong Kong dollar has no independent monetary policy and does not control currency flows. It is anchored to the U.S. dollar and is closest to the stablecoin in the blockchain circle. It changes as the dollar changes, and it is the shadow currency of the dollar. The renminbi is a currency issued as collateral for foreign exchange, and the exchange rate is adjusted according to a basket of currencies. The exchange rate is not market regulation, and there are foreign exchange controls. Compared with the requirements of the Mundell Triangle, the renminbi does not have an independent monetary policy. Currency is controlled, and the exchange rate is not market regulation. His adjustment is very similar to the Hong Kong dollar, but instead of “pegging,” it is “referring” to a basket of currency indices for adjustment. If the currency is not controlled, the currency price will not be stable. The renminbi does not meet the three factors. The renminbi is not even a fiat currency but a coupon.
Only when the currency is not controlled is the price real. The Hong Kong dollar anchors the U.S. dollar and does not control the money, representing confidence. It turns out that the Hong Kong dollar is the beautiful lady, and the U.S. dollar is the maid. Of course, it’s okay for the lady to lower her status. The Hong Kong dollar is still a miss; it’s just not too pretty. The Hong Kong dollar does not regulate the Hong Kong economy. The Hong Kong dollar is currently the currency closest to the asset currency standard, so the management organization is tiny.
The fiat currency standard assumes the role of regulating the economy. The biggest problem is that decision-makers have asymmetric risks. Greenspan was once known as the “Economic Czar,” representing dictatorial power. Decision-makers have more power than a country’s president but are not accountable for the consequences of their decisions. It was discussed in the previous section.
Because fiat currency itself has no value, it was born to fulfill the power to adjust the economy, but the means of adjusting the economy are too rough. It is far from being able to prescribe the right medicine. It was discussed in the previous section.
The Fiat currency standard led to the emergence of economic cycles. The emergence of the cycle makes the distribution of wealth tilted towards the top capital group, creating a financial monster, which was also discussed in the previous section.
The central bank’s books of fiat currency are not transparent enough, and adjustments are random and uncertain. Moreover, the adjustment method is too complicated. Discussed in the next section.
The fiat currency standard represents all the operating mechanisms of the fiat currency. The current unlimited quantitative easing has led to the unlimited shrinking of the balance sheet, and the principle of certainty has disappeared. When the balance sheet shrinkage fails to reach the target (it may be a problem with the no opponent), and the interest rate hike cycle is entered, the market analysts and public opinion will influence the Fed’s decisions. Analysts are not neutral. They are all from the capital interest circle. It is unnecessary to satisfy their appetite. The interest rate hike further undermines the endogenous force of the economy. In other words, the real economy, which should not take medicine, is the first to be hit. For example, the current round of economic problems is caused by the war between Russia and Ukraine. The most important thing to do is to transfer the supply chain. It is an industrial investment. Interest rates should be lowered. It is the right medicine. The government should subsidize industrial investment. The Federal Reserve cannot undertake this task. There must be a matching fiscal policy if the Fed raises interest rates. How to achieve accuracy and how to achieve moderation, this kind of matching is also impossible. The following section discusses adjustments in detail.
4.1.2. The characteristics of the Bitcoin Standard
Bitcoin is also a currency, not a currency issued by a country. Very different from fiat currency, there is no power endorsement. Once bitcoin is dug out, it will not disappear, and the ability to store value exceeds that of fiat currency. The state does not control Bitcoin, and whether it has value depends on the market. Human beings have formed the view that rare things are more expensive for thousands of years, which is still valid today, determining that Bitcoin will not become waste paper.
Bitcoin, like gold, is an asset whose value is converted from electricity consumption. The principle of Bitcoin issuance remains unchanged, and the rigidity of issuance exceeds that of fiat currency. Bitcoin is an asset currency. Asset currency is better than credit currency, and Bitcoin is the hardest currency. Fiat currency is a credit asset, and the U.S. dollar has the highest credit value and has become the currency anchor object and actual ruler in today’s society. Although Bitcoin is superior to the U.S. dollar in terms of asset quality, it is still incomparable in terms of total volume. Therefore, it is correct to anchor the U.S. dollar. It is the market choice for blockchain stablecoins. Stablecoins are the most developed currencies in the blockchain market and have a cross-sovereign nature. The debate of ideas is not as effective as the verification of practice. It is the reason why the Bitcoin standard must currently be anchored to the U.S. dollar. This peg will change when Bitcoin’s market cap is about the same as the U.S. dollar. When Bitcoin’s market cap surpasses that of the U.S. dollar, this peg may be reversed.
The blockchain stablecoin proves the truth that the value of a stablecoin depends on the assets behind it. Without strong assets, prices cannot be stabilized.
Next, when it comes to the bitcoin standard, it refers to the bitcoin dollar standard, and no distinction will be made.
The Bitcoin standard is the asset currency standard, which is the biggest difference from the fiat currency standard, which is the credit standard.
Bitcoin is a cross-sovereign currency with privacy and circulation, which exceeds the scope of circulation of any fiat currency.
The relationship between Bitcoin and the Mundell triangle. Bitcoin does not require an independent monetary policy because monetary policy is already programmed. There is no circulation control agency, and the market determines the price. So there is no Mundell triangle problem, which is the fundamental problem of fiat currency. For any issues with impossible triangles, the proposed schemes that can satisfy the impossible triangles at the same time are defective schemes and run with diseases. The Impossible triangle of Blockchain: Security, Decentralization, and Scalability are the Impossible triangle. Bitcoin denies scalability at the first level and satisfies the other two indicators, while other projects work hard on scalability, such as Ethereum 2.0 is far from decentralization.
The market pricing method of Bitcoin is the same as that of the U.S. dollar; both are M2 pricing. At the bitcoin standard, UDAI and USD are 1:1 equivalent. The pricing method of UDAI is different from that of Bitcoin, as described in Chapter 12 is done by the Federal Reserve. The method is similar to the pricing in Hong Kong dollars. It is M1 pricing. Different descriptions can be found for M1 and M2, and the concepts are confusing. M1 pricing refers to central bank pricing, while M2 pricing refers to market pricing.
The Bitcoin standard is transparent and fair and does not assume the role of regulating the economy. We regard the blockchain as an ecology. The various currencies of the ecology are the country, and the stablecoin issuer is the central bank in the ecology. They do not perform the adjustment work on the ecological economy.
Unregulated economies also have cyclical problems. For example, the four-year halving of Bitcoin has formed a cycle, which will inevitably affect the rise of Bitcoin and cause changes in the total wealth, but the change has been less than 2%, and the rise is mainly driven by demand. But there is hype inertia.
Bitcoin is not a currency that depreciates. On the contrary, according to the description of the Bitcoin growth curve in Chapter 13, under the condition of the Bitcoin standard, Bitcoin is a value-increasing currency.
Bitcoin and fiat currency standards are two systems; which is more advanced? Next, we analyze the regulation mechanism and function of fiat currency.