On the Risk of Bitcoin Marginalization from Gold Losing its Gold Standard

Chapter 0 Introduction

The gold standard was such a good system, but it was destroyed by the government. Gold has incomparable advantages, but the government eventually killed the gold standard. Let's learn from history and see how gold was destroyed by the government step by step. How can Bitcoin avoid repeating the same mistakes?

Chapter 1 Gold is a natural currency

Gold is the longest-lived and most widely used currency in human history, and its own advantages have contributed greatly to this.

There are 118 elements on the periodic table, and humans chose gold, the 79th element, as a symbol of honor and wealth. Counting the elements on the periodic table, we exclude those that are gaseous or liquid at room temperature and pressure, or cannot form a stable shape, or burn easily; then exclude those that are toxic and harmful to humans; finally exclude those that are too rare in nature, too difficult to smelt, and too difficult to be discovered by ancient people, and finally only gold and silver are left. In terms of stability, gold has an advantage over silver, and silver is easily oxidized and sulfided to turn black. So gold has become the king of the last natural advantage.

Having stable chemical properties means that gold can be used as a durable medium of exchange. If it is to be used as currency, it also needs to be split, cut and easy to carry, and gold is fortunate to have these characteristics. Gold's physical properties are good in ductility and can be molded into various specifications.

Finally, gold is scarce. Gold is created in the supernova explosion process when a star dies. Humans currently do not have the ability to create gold. The gold that humans can use can only be mined from gold mines that existed on Earth billions of years ago, and cannot be created out of thin air.

These characteristics make gold the most successful currency in history, dating back to 5,000 years ago. Gold once became the most widely used currency by humans, namely the gold standard. But even with so many indelible advantages, the gold standard was still eliminated by humans in modern times. To put it bluntly, gold has been marginalized in terms of currency status.

Chapter 2 The Process of Fiat Currency Eliminating the Gold Standard

The gold standard has three forms of realization in history: gold coin standard, gold bullion standard and gold exchange standard. These three forms of realization are the process of gradually eroding the essence of the gold standard. The symbolic event of gold's currency status being marginalized was the collapse of the Bretton Woods system, and since then mankind has entered the fiat currency standard.

The gold standard is a system that uses gold coins as legal tender . It is a system where everyone uses gold directly as money. This status means that the manufacture of currency is not monopolized by the state. As long as you have the ability to mine, smelt and mint gold coins, you can make currency. The gold standard has been dominant for more than 100 years.

The gold standard is the use of banknotes instead of gold coins as a means of currency circulation, and banknotes can be exchanged for gold at an equivalent value. In China, banknotes are called silver notes, which are issued by money houses with a promise to settle with a fixed exchange rate between gold and silver. There are no restrictions on exchange. Free exchange can guarantee that banknotes correspond to real gold to a certain extent, because if you want to forge, you will bear the risk of being run. But this still destroys the scarcity of gold, because there is a non-100% reserve system, which allows the total amount of banknotes to exceed the total amount of gold. Under this monetary system, the power to issue currency has begun to appear, in addition to mining gold, a currency issuing agency has begun to issue currency by issuing banknotes. This means that the issuance of currency has begun to evolve in the direction of power.

The gold exchange standard is a virtual gold standard, where the state stipulates that gold is stored in a certain place, such as the central bank, and then the state issues its own currency and promises to maintain a fixed exchange rate with gold. The government needs to buy a corresponding amount of gold to issue currency. The government mortgages the country's credit to ensure that this monetary policy will not be abused. This further undermines the gold standard. The issuance of currency is monopolized by the government, and the exchange rate guaranteed by the government has never been fulfilled in history.

The Bretton Woods system is the pinnacle of the gold exchange standard. Under the leadership of the United States, the US government promised to peg the dollar to gold, and clearly stated that the price of one ounce of gold was fixed at 35 US dollars. Then governments around the world issued their own currencies and pegged them to the US dollar to achieve a fixed exchange rate. If the US government wants to issue dollars, it must find a way to get the corresponding gold, and when other governments want to issue their own currencies, they must find a way to get the corresponding US dollars. This institutional arrangement greatly weakened the gold standard, which theoretically allowed the right to issue currency to have gold anchors and US dollar anchors, but in fact the operation process had no anchor at all, because no one could check how much gold the Federal Reserve actually had. Governments were also not supervised to constrain the amount of currency issued.

Soon the Bretton Woods system collapsed, and the US President announced in 1971 that the dollar and gold exchange would be stopped. The gold standard was eliminated, and the credit currency standard based on government-issued currency began to appear on the historical stage. The current credit currency system has been in place for nearly half a century.

Now gold is still regarded as a kind of currency and is widely accepted internationally, but its currency status has been greatly reduced, and its only function of storing value remains.

The process of credit currency system replacing the gold standard is to first change gold from a circulating currency into a settlement currency, and then abolish even the settlement function, turning gold into a stored value currency.

Chapter 3: Bitcoin risks repeating the marginalization of gold

Bitcoin is designed to simulate the physical properties of gold, with the properties of scarcity, durability, divisibility and portability. Therefore, after more than seven years of market selection, Bitcoin has grown into an indispensable currency on the Internet, and it also has a few application scenarios in offline economic life.

Currently, the development of Bitcoin has encountered a bottleneck. The blocks are too small to accommodate enough transactions. The community is actively discussing the technical direction of expanding the transaction capacity of Bitcoin.

There are two main opinions on the current Bitcoin expansion controversy. One is to retain Bitcoin's status as a payment network and directly use online expansion to expand the block using a hard fork. The other is to turn Bitcoin into a settlement network, build a second-layer network on top of Bitcoin, and use sidechain and lightning network technology to expand Bitcoin's payment function.

There is nothing new in the world. Although Bitcoin is a cutting-edge technology, it is also a reappearance of historical events. After the gold coin standard was implemented stably for a hundred years, it was changed to the gold bullion standard by a group of smart bankers and money house owners. After the two world wars, the gold bullion standard was changed to the gold exchange standard by smart people, mainly the US government. Finally, after two world economic crises, the US government easily eliminated the gold standard and established the modern credit currency system.

Less than eight years after its development, Bitcoin is faced with the choice of maintaining the "Bitcoin standard", the "Bitcoin block standard", or the "Bitcoin exchange standard".

Directly using the Bitcoin main chain is similar to the "gold coin standard", which I call the "Bitcoin standard" here; using the Lightning Network to expand the main chain to bring payments to the second-layer protocol, while the main chain only undertakes the settlement function, is similar to the "gold nugget standard", which I call the "bitcoin block standard" here; using the side chain to build a new payment platform is similar to the "gold exchange standard", which I call the "Bitcoin exchange standard" here.

When people used banknotes instead of gold coins as circulating currency, the ease of use of banknotes was greatly improved compared to carrying a pile of gold coins, and the cost of printing banknotes was greatly reduced compared to mining, smelting and minting gold coins. People were happy to see this happen. Unfortunately, there is no free lunch in the world. While bringing convenience to people, banks and money houses have achieved the concentration of power. They have the right to issue currency and have a fractional reserve system. On the surface, the only thing that was lost was the status of the silent gold standard, which was actually the loss of people's ability to protect their private property.

When we are keen to use the Lightning Network and sidechains to design a more convenient and cost-effective payment network, we get convenience and cost savings, but we have to trust more blockchain operators, we have to trust the hub of the Lightning Network, and we have to trust the sidechain platform. Perhaps we can confidently believe that the code can guarantee that there will be no partial reserve, no cheating by the sidechain platform and the hub, but the issuers of banknotes also promised this hundreds of years ago. Once the user's right to check his own account requires expensive costs (the main chain settlement system will inevitably be expensive), this essentially means that the user partially loses the ability to verify the ledger. Bitcoin will be challenged in its ability to protect the inviolability of private property.

Transforming the Bitcoin network from a payment network to a settlement network means the loss of the "Bitcoin standard". Bitcoin's currency payment function, value storage function and settlement function have one leg broken. It is the same as the leg that gold broke hundreds of years ago. When gold broke one leg hundreds of years ago, its scarcity was also adulterated. When more and more banks and money houses are opened, more and more banknotes are printed, but the reserve ratio is getting lower and lower, gold has to give up its settlement function. When the Bitcoin main chain is full of various lightning networks and side chains, will Bitcoin's settlement function be lost? Logically speaking, it will, because the settlement cost of the main chain is too high, and the market will definitely look for cheaper settlement methods, such as hanging side chains on side chains, or bridging two different lightning networks for direct cross-chain settlement, eliminating the need to close channels on the main chain. The last step is when Bitcoin's value storage function is deprived.

Chapter 4 Gold cannot protect the gold standard by itself, and Bitcoin blocks cannot protect the Bitcoin standard by themselves

Gold has such great natural advantages, and it is a truly decentralized currency, but the gold standard was still eliminated. What can protect the gold standard is not the natural advantages of gold itself, not its physical properties, but people!!!

When Sir John Keynes challenged the gold standard, the world's governments followed suit, but no one defended the gold standard, or the power to defend it was too weak. People were happy to see the increase in the amount of their paper money and the convenience of paper money, but they didn't see the cost.

Bitcoin is decentralized and can ignore enemies such as governments, but in fact, even the physical properties of gold cannot protect the gold standard. No matter how powerful Bitcoin's decentralized properties are, they will not surpass the physical properties of gold. Ultimately, whether Bitcoin can be protected, that is, whether Bitcoin's decentralized properties can be guaranteed, is still people, talents, not a religious small block. Small blocks are precisely anti-user capacity and deny more users to enjoy the true "Bitcoin standard."

History has created more and more convenient and complex "gold bullion standards" and "gold exchange standards" by allowing fewer and fewer people to enjoy the "gold coin standard". People have experienced these benefits but have forgotten to calculate the costs, resulting in no one to protect the gold standard. Finally, the government used the credit currency system to completely destroy the "gold standard".

Will the tragedy of the gold standard be repeated in the development of Bitcoin? Probably not, because we only need to expand the block to avoid such a tragedy.

Chapter 5: It is not about rejecting new technologies, but about not letting new technologies eliminate the “Bitcoin standard”

I have to make a statement here. I am not rejecting the Lightning Network and side chains. I think these are great technologies. However, if we achieve them but reject big blocks and make us lose the "Bitcoin standard", that is absolutely unacceptable.

I support building various high-tech on the big block, so that we can choose high-tech while also using the "backward" "Bitcoin-based currency", which is the foundation for protecting our private property rights.

Chapter 6 Conclusion

The world's economic crisis has made us miss the gold standard again and again. Was Satoshi Nakamoto's writing "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" into the Genesis Block a warning to Bitcoin enthusiasts? "We can't lose the 'Bitcoin standard'."