Bitcoin is popular around the world, but it still has a long way to go before it can become a real currency

Blockchain technology is very popular nowadays, and its popularity is inseparable from the contribution of Bitcoin. Satoshi Nakamoto, the founder of Bitcoin, formed a "distributed ledger" model by using the compensation method of Bitcoin currency creation to achieve the results of blockchain research, which set off a climax of blockchain, distribution and decentralization.

The greatness of the Nakamoto team is mainly reflected in the cross-border thinking, which successfully solved the three major problems in entrepreneurship: technology research and development, scenario application and compensation. Bitcoin, a huge laboratory, has achieved decentralized system maintenance and upgrades through an open source model, and has attracted much attention through real asset rewards (Bitcoin) driven by the original interests.

The principle of Bitcoin is as follows: the Bitcoin system records accounts every 10 minutes and compensates those who obtain the right to record accounts (miners). The initial compensation is 50 Bitcoins, which is halved approximately every four years; the final issuance of Bitcoin will reach 21 million in 2140. In order to ensure that Bitcoin has transaction functions in the future, the minimum unit of Bitcoin is designed to be 1 Satoshi, which is one hundred millionth of a Bitcoin (1 Bitcoin = 100,000,000 Satoshi).

Can Bitcoin truly become a currency and play the role of currency in the financial system? We analyze it from four aspects: currency issuance, currency value, currency creation, and accounting content.

Currency issuance: Who gets the seigniorage?

Bitcoin issues currency in the form of bookkeeping rewards, which is why it is gradually accepted by everyone and the number of participants is increasing. To put it bluntly, "money makes the world go round", or in technical terms, "incentive compatibility".

According to the data from actual "miners", the rewards of Bitcoin have basically returned to normal, that is, after compensating for the huge electricity costs and related equipment, the income is basically normal. According to the current exchange rate between Bitcoin and various currencies, there is no room for huge profits, and it has become a mature economic market behavior.

In the era of paper money, currency issuance was based on national credit, and there was a huge price difference between printed banknotes and their face value, which was called seigniorage in the financial field and was taken away by the government.

So, the issuance of Bitcoin is not backed by the national credit, so who should get the seigniorage? If it is taken away by the system, will the government be willing? Of course, if the maintenance, accounting, or operation of the entire monetary system have little to do with the government, and the government only supervises and manages and maintains the market order, then it seems reasonable that it cannot get the seigniorage.

Currency value: How to prevent inflation

In order to ensure that Bitcoin remains attractive to participants, Satoshi Nakamoto designed a mechanism known in the industry as a mechanism to avoid inflation: a strategy to reduce compensation by half every four years, that is, to reduce the issuance rate by half every four years, and by 2140 when the currency issuance ends, the issuance amount will eventually reach 21 million bitcoins.

In practice, countries generally believe that inflation of around 2%-3% is acceptable, and that moderate inflation is conducive to encouraging companies to expand production and is beneficial to the economy. However, excessive inflation is believed to affect people's living standards. On the contrary, countries are very afraid of deflation.

Theoretically, Friedman , who founded the monetarist school , believed that inflation was a monetary phenomenon and adhered to the view of prudent monetary policy, which required a fixed growth rate of money supply in its implementation, rather than zero growth.

From this perspective, the principle of Bitcoin halving currency issuance is successful in maintaining currency value stability and maintaining Bitcoin's attractiveness, but to truly become a currency, this move still needs to be improved.

How money creation works

Avoiding inflation by reducing money issuance is misleading in a certain sense. The most important function of finance is financing, and the more common form is lending. The multiplier power of lending in money creation is far greater than that of base money. This can be seen in the statistics of the central bank. In the past two years, despite the slowdown in economic growth, China's money multiplier has not fallen but increased, and this year it has continued to maintain a high level of around 5. Therefore, whether a currency depreciates or not is not determined by the single factor of base money.

There is an upper limit on the number of bitcoins. To adapt to the needs of modern economic development, innovative breakthroughs must be made in currency creation, which Bitcoin clearly lacks.

Accounting content: Two transactions to be broken through

The content of Bitcoin blockchain accounts is payment information, that is, on a certain day of a certain month of a certain year, Zhang San paid Li Si X amount of Bitcoin, which is concise and clear. However, among the three major financial functions of "deposit, loan, and remittance", this is only the "remittance" function. To become the core of the financial field, it must complete "two transactions", that is, it can clearly record, prove and constrain the following transactions, "on a certain day of a certain month of a certain year, Zhang San paid Li Si X amount of Bitcoin, and on a certain day of a certain month of a certain year, Li Si paid Zhang San X+Y amount of Bitcoin, where Y is interest". If "two transactions" can be achieved, Bitcoin will have the possibility of replacing the current currency.

From an experimental perspective, Bitcoin is a masterpiece. Since its birth, a large number of people have participated in it and have worked hard to promote the research and trial and error of blockchain technology, encryption technology, financial applications, etc., allowing everyone to truly see the charm of self-organization and decentralization, and providing a huge space for imagining a different financial ecology. However, at present, Bitcoin still has a long way to go to become a real currency.