3. Bitcoin Difficulty Adjustment
Makes the productivity of mining in bitcoin terms:
- Part of the consensus parameters of the network
- Independent of demand
Mining of coins is more similar to a sports competition than mining. The reward is like a trophy, it is fixed regardless of how many competitors take part. Whereas in mining of natural resources, the more miners participate, the more output is produced.
Allows for the distribution of coins to happen gradually over a century. Without it, the entire mining output could be mined early if the price rises. Which would make it unlikely to spread. By slowing down the production, it allows it to remain open and competitive for a very long time.
The irresistible monetary juggernaut that’s been growing relentlessly for 11 years and consuming all that comes in its way.
1. Hardest money ever
Ensures bitcoin will have the lowest supply growth rate of any money ever used.
Highest stock-to-flow of a monetary asset ever is coming around 2025. It will keep rising from then until infinity around a century later.
2. First strictly scarce asset
First technology for capping the supply of anything.
The only money whose supply is completely irresponsive to demand.
The only thing other than human time that is strictly scarce.
3. Adapts to the correct size
As bitcoin grows, it ensures that the reward stays the same in bitcoin terms. As the value of the bitcoin token rises, the difficulty adjustment ensures that the rise results in an increase in the cost of mining, rather than in the output of mining.
If bitcoin declines in value it causes the reward to drop and decreases the investment into mining. It ensures bitcoin continues at the size it needs to survive.
If governments were to crack down on bitcoin, and all the current fiat on-rails get shut down, that could cause a significant drop in the price of bitcoin. In this situation the price drops, and the difficulty follows, and more miners stop mining. More mining goes underground and larger mines get shut down by governments. Bitcoin shrinks to a size that can hide. It could survive as a much smaller underground black market monetary system, but it would likely survive, because it no longer needs very large mining facilities. Even with a very large reduction in mining capacity, and a very large reduction in price, the difficulty adjusts downward and the blocks continue to clear every ten minutes.
No mining death spiral
4. Essential component of bitcoin security
Protects bitcoin from attack. It’s really expensive to mess with bitcoin. You can always attack bitcoin transactions, but it’s always expensive.
Decentralizes the mining of bitcoin, making it less vulnerable to attacks and centralizations.
5. Ruthless market efficiency at all times
How hard it is to run a successful operation without a market signal.
In ECO11 See lecture 7 on Prices and the Market Order, and Lecture 8 on Profit and Loss. In ECO12, see Lecture 1 on economic calculation.
You see the essential role of prices and calculation in making economic production possible.
Without it, it’s very hard to organize economic production. It is very hard to organize a bureaucracy or agency without price signals and profits and feedback from the market.
The difference in efficiency between private and public enterprise. When you are optimizing for dollars, it’s very different from optimizing for abstract nouns.
This means it’s really hard to run a hostile mining operation. At the level of scale of mining currently existing, even securing 10% of the bitcoin network is an enormous capital investment. On top of the power infrastructure needed, there is also the mining equipment needed. Producing the power and the mining equipment and deploying them is a long production process that is very capital intensive. Government central planning does not do these things well.
Power generation capacity:
Bitcoin uses around 8GW of electric capacity, which is around as much electric generation capacity as these entire countries:
That’s a very large amount of capital that requires active management. It’s very hard to manage it successfully if money is not the motivation. Without market discipline, and without the need to be responsive to prices, management lacks the means to direct resources most effectively.
A government-funded enterprise does not face the critical pressure of needing to deliver to survive. It can fail to take best advantage of an opportunity and continue to be subsidized regardless. It can commit fatal mistakes and continue to get bailed out. Managers and insiders are likely to focus their jobs on maintaining their own positions rather than achieving profitability. Politics will take over.
On the other hand, honest miners are constantly facing the brutal market test of producing blocks to survive. The least efficient are constantly being culled. The mistakes are constantly being punished. Bad managers are constantly being replaced or shutting down. Not all private miners are efficient, but all the ones that are inefficient are soon to become ex-miners. Only the strongest survive on the market.
As the mining hashrate continues to grow, and the amount of infrastructure needed to own miners becomes more roundabout and sophisticated, it becomes less and less likely that miners not motivated by profits can compete.
Follow up notes on democracy and monarch discussion:
Arab monarchies vs republics inflation
Have you read Hoppe’s follow up essay called from aristocracy-monarchy-democracy? I love all your points why it could be better, but Hoppe argues monarchy got ruined because kings sided with people against the aristocracy. I believe with social media kings would be more likely to side with people against the rich, resulting in dictators.