Mining for Bitcoin: Another Japanese Triumph For Elegance Over Logic

Satoshi Nakamoto is credited with the creation of ‘Bitcoin’. Bitcoin is a digital currency designed to facilitate transactions while ensuring stable prices. It is modelled on the gold standard that permitted holders of paper money to convert into gold at a fixed price, thus ensuring that the supply of money was fixed in line with the supply of gold.

Theoretically, a successful currency requires relative certainty in supply to be generally accepted as the medium of exchange. Under the gold standard there was a clear incentive for miners to fossick for gold discoveries which they could then sell to the central authority in exchange for paper money. This meant that the money supply would grow as the cost of mining declined with technology and with the discovery of new mines. In turn, the general price level would increase as new gold was converted into new paper money. Inflation caused by expanding the currency supply is a tax on users, and discourages its acceptance. The fact that the money supply increased, and hence inflation occurred, under the gold standard was one reason for its abandonment. Mining was actually a bad thing for the gold standard.

Nakamoto-san could have designed his Bitcoin to be fixed in quantity, but he elected to allow his money supply to grow slowly with an electronic mining mechanism. This mechanism is similar in form to mining for gold.

Ironically, Nakamoto-san has elegantly created a similar incentive for computerised miners to fossick and discover new Bitcoin. Just as there is a physical limit on the supply of gold in the world, Nakamoto-san’s algorithm also places a physical limit on the total supply of it. But why would a user of Bitcoin want a currency with a built-in debasement mechanism? Just as the gold standard debased its own value with mining, Bitcoin has built-in electronic debasement!

In the interests of elegance, Nakamoto-san has sown the seeds for Bitcoin’s loss of confidence and ultimate destruction!

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