Bitcoin's Failure As A Monetary System

We hear a lot being made about bitcoin and how it is going to change the world. We know the maxis believe there is bitcoin and everything else is shit. Unfortunately, they make the fatal mistake that most do when discussing a topic like this.

How often have you heard someone talking about the monetary system and how it evolves? Do you hear the maxis discussing what takes place at that level? Do they compare bitcoin to the existing monetary systems while expressing how it improves things?

Of course not. This never crosses their mind. Instead, they focus upon money. This is what is common. However, it misses the major portion of the situation.

Focusing upon money is like debating electric versus ICE vehicles while ignoring the fact the roads are made of dirt, filled with potholes. Does it really matter what rides on top when the foundation is complete trash?

This is what we are dealing with here.


Source

Monetary System

So what is a monetary system?

This is the combination of accounting and communications that provide some form of settlement. These factors are always in play whether we are dealing with paper, coins, cryptocurrency, cows, or slaves. All have these components.

Here is a quick example:

You go into a store and see an item that costs $10. The first stage is accounting, i.e. knowing what you have. In your pocket is $20. Grabbing the item, you take it to the counter. The clerk tells you that will be $10. Here is the communication. You hand over the $10 bill, get a receipt, which is the settlement of the transaction.

This is a simple example of how it works. We can then extrapolate that to our currency system of commercial, central bank, and Eurodollar money.

To go a bit further, accounting can be encompassed by the term ledger. We are dealing with ledgers that keep track of all balances. As for communications, today that is handled by digital networks.

Thus a monetary system is really a ledger(s) that is tied to a digital network(s) which offers settlement.

Blockchain

Many feel that blockchain is the future of monetary systems. As we can see, by definition, they serve this purpose.

Using distributed ledger technology (DLT) all transactions are accounted for. As money moves throughout the different wallets, the system maintains all balances.

Bitcoin was revolutionary in that Satoshi Nakamoto was able to solve the double spend problem without a centralized entity. This was the major innovation that is going to change the world. The present monetary system has centralized entities controlling the digital forms of money. In this instance, it is the banks.

Anyone who looked at cryptocurrency understands there are some issues with blockchain. The biggest is scaling and here is where bitcoin runs into issues. It is also why the established system ignores this as a threat. There is no way it holds up under the strain that an expanding system of trade provides.

Bitcoin Is A Bad Network

One of the drawbacks to bitcoin is that it is basically 12 year old technology. Think about how you would feel about a business that ran on 12 year old computers. Certainly, the hardware was upgraded but the capabilities of the network are basically the same. Taproot, so we were told, was suppose to fix this. It turns out that it only created more problems.

We recently saw the fees on bitcoin jump as ordinals started to take over. This is getting people upset, starting the debate between high and low quality transactions. Obviously, the miners do not care what transactions are going through since their job, and return, is based upon processing them.

None of this is novel. The shortcomings of that network were well known. In fact, this is why the Lightning Network was created. This was framed as the solution to the problem. Many pointing out the shortcomings of this idea, only to be rebuked. Here is what would make bitcoin the true medium of exchange, taking out the US dollar.

Before we get into the recent issue with Lightning, here is a good summary of what is taking place.

Lightning Network

One of the key concepts with Lightning was that a bunch of individuals would be operating nodes all over the world. The average person would take a piece of hardware and set up a node. This would happen because either:

  • people simply wanted to help out the new system
  • they were making money off transaction fees

As noble as the first is, we know few do that. Hence, we are back to incentive. One of the issues bitcoin has is that all rewards go to the miners. There is nothing left from bitcoin inflation to offer incentives for any other infrastructure. Also, with their governance model, which seems to be screaming on Twitter, change is not in the air.

Now bear in mind, bitcoin does provide a very valuable service. When it comes to security, we might be dealing with something that is unrivaled. Thus, we have to highlight the advantage it does provide. The problem is scaling. Fort Knox might have the best security in the world buy safety deposit boxes exist because most do not need that level for the titles to their cars or family heirlooms.

Lightning is the safety deposit box. The challenge is that it is dependent upon the node operators opening and closing channels. As explained in the linked article, this is possible at 30 cents. When a transaction costs $10, it eats up all the profits.

This means that the only ones who can run the nodes are those with:

  • enough money to set up nodes that processes millions of transactions and leverage the economy of scale
  • they have other ways of monetizing

The last part, in the digital world, usually means mining of data. In other words, we are looking at centralized.

In other words, Bitcoin needs a centralized network to potentially operate as a viable medium of exchange.

In Conclusion

One can talk about money all they want. The problem is that if it is a poor monetary system, all else is immaterial.

We covered how bitcoin is a ledger like all blockchains. The security on this end is unsurpassed. So it checks the box here. Where the challenge arises is as a digital network. It is simply not efficient.

This means that additional networks have to be built to handle it. As we can see, Lightning was meant to do this yet it has it drawbacks. What happens if the Lightning nodes are run by Chase and Barclay's?

At this point, even if bitcoin is the Ferrari of money, it is running on a dirt road full of potholes. The established system is the interstate superhighway where vehicles can run at 120 or 130 mph. Yet bitcoin tops out at about 35 or 40 if the road is not muddy.

In the future, we could see a network built that solves the problem. However, the drawback to bitcoin, at this point, is that it basically fails as a real world monetary system.


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I believe that the future of crypto is both multi-chain and cross-chain. One size doesn't fit all.

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I disagree here, first about fees for transactions there was a lot of FUD these days about the fees, but if you look right now the mining difficulty adjusted and now its back to normal, the time per block, and the fee cost, even with high fees near 10$ still better than any Bank transaction for big transactions, bitcoin is not made to pay 1 dollar for a soda, that is for other networks.
Bitcoin is not a bad network, it focuses on decentralization and security, not scalability, even Hive that I see it as a good network is not as decentralized as Bitcoin simply because of PoW, it cost more but gives more security and decentralization, the cost of speed and scalability, but to end I'm not saying is going to be the MAIN network in the future, but the FUD right now makes no sense.

Thanks

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Totally agree with you but I guess the author of the post is not 😂

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(Edited)

Bitcoin was made to pay for Pizza.

As Bitcoin gets more expensive, it starts to squeeze out more and more average people from using it to pay for what they need.

Bitcoin maximalists already have the bag so the dominant strategy is to get institutions and corporate with lots of money to come in to pump their bags, while leaving more and more people and use cases behind.

Sustainable? I guess the question is why wouldn’t the institutions cooperate instead and release big boys coin and leave the former plebs holding onto their bags without further upside?

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yeah that was the initial intention maybe, but I guess lightning network now is for buying pizza, BTC now means a lot of stuff for each individual really 😂, also we now look at BTC price in USD but that is in the present, BTC is a market of itself.

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Maxis holding Bitcoin and the network are two different things. The miners are not the major bag holders. so they have different viewpoints.

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Perhaps Litecoin can fulfill the role originally seen for Bitcoin? Litecoin is essentially Bitcoin but with changes to MAX supply and hashing algorithm. Its behavior should be effectively the same as that of Bitcoin. It may not be good for soda or pizza, but it's perfect for a dinner date or a night game at an arena.

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Are you sure Hive is not as decentralized as Bitcoin? Hive has 20 consensus witnesses. They are all unrelated. This is what controls the network. How many entities control Bitcoin's network? 5 major mining pools? Now I will say that BTC is beyond a 51% attack. But the number of entities truly in control is rather small.

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I think both have good decentralization. I don't want to compare them really they are different, now from what I know the pools cant take those decisions those are the nodes themselves, I'm not sure I'm still learning this, but I'm not sure Bitcoin is a bad network that's all.

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(Edited)

How many entities control Bitcoin's network? 5 major mining pools?

Miners or miner pools do not control the network. Only theoretical threats from miners are DDOS or double spend attack (aka. 51% attack), but even with these attack they cannot change consensus rules. Nodes running Bitcoin Core control the network. At the moment there are approximately 44k nodes – these are the entities that enforce consensus according to which miners have to play. Every one of these can choose what version of Bitcoin Core they run and there's no way anyone can force an individual to run a certain version of Bitcoin Core.

Miners already pushed for a change in the block size with BCH fork, yet they failed to convince even such a simple change. Node runners as a whole are in control.

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There was a time when Bitcoin could have been used to buy something as small as a can of soda; it's just that people back then didn't care except for early adopters (including those who bought that famous pizza pie).

Since at least 2017 (if not earlier), each BTC has been treated as a stock certificate rather than as the decentralized and permissionless money it was envisioned as.

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I am not a big fan of Bitcoin from day one because it's only have first mover advantage as a number one or first cryptocurrency in the world, it's all about supply and demand not technology, I hope as time passed people will understand Bitcoin is a outdated technology and have alot of limitations

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Blockchain is NOT an "outdated technology".

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Not all blockchains in the world are same or using same technology, some are new or advance and some are old or less advance, outdated mean Bitcoin blockchain is less advance or have limitations because it's created in 2008 as compared to a any blockchain created or developed in 2023

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There are a lot of limitations which taproot was design to address. We are now going to see if they address what is taking place.

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We can't fault Bitcoin's security but scaling has been where it falls short of being a monetary system and why I see it more as a digital gold than it being adopted as your days to day form of transaction seamlessly.
Could the scaling problem be solved in the future? I'd like to see that happen.

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Given the realities of how Bitcoin is right now and how some altcoins are right now, it makes sense to hold different cryptocurrencies for different things. After all, we should all have wealth as some combination of cash, precious metals, securities, and physical assets such as land. Some people would stick to a couple of those, but then diversify within the broad categories (USD/EUR/GBP/JPY/etc.; gold/silver/platinum/palladium/etc. blue chip stocks/memestocks/etc.; ...)

Regarding cryptocurrencies, I think we would be good with Bitcoin and Hive, plus Ethereum and BNB. Throw in Litecoin and Dogecoin while we're at it, too.

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Throw in Litecoin and Dogecoin while we're at it, too.

The Dogecoin part 😃, I am HODLing a 500k bag of SHIBA wish it could hit $0.1 someday, so I can cash out into Hive.

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Setting the stage for the necessary relationships between main chains and side chains. BTC and it’s reliability will ultimately be used to record roll ups of data, While side chains will carry the ephemeral data. Cross chain will be mandatory.

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The traditional fiat system "works" only by tacit agreement (between a cadre of connected top entities in major governments). At ANY time when a majority of these connected entities decide, agreements can suddenly change and once-solid country currencies become instantly worthless.

Bitcoin/the blockchain just offers a more sophusticated alternative, but is still too new to immediately replace the old system. But in time, it will.

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What you say about fiat is a misunderstand of the system. Does a merchant in Australia pay a soybean dealer in Brazil in USD because of the US government? Not at all.

Thinking that government has anything to do with the USD is why most fail to understand what is taking place and are wrong for decades. Have you ever heard of fractional reserve banking?

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What I DO know is if the US dollar ceases to remain the global reserve currency and some other becomes the default that everything else is based on, the dollar will "go to Hell"...

And take the prestige of the US with it.

So, from MY point of view, it is BEST to financially diversify as much as one is able.

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The scalability aspect is one of the main reasons that makes bitcoin an unreliable monetary system. Achieving stability and standard fees will be hard. As an asset class, it is definitely unrivaled. Maybe it should be good at one thing and keep it that way.

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Scalability is very problem and if is not look into,it could even bring an end to use of bitcoin and aside Bitcoin is not really friendly for everyone and as time goes on and the price becomes higher than it is now, it will be hard for the average person to buy it and eventually it will be for only the rich. So in this regard it is only good as an asset.

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I think that solutions or custodial services are not a problem, most people only want fast transactions. In their cases centralized and custodial services are a big onboard platform.

People that want privacy and security always can use non-custodial wallets for Bitcoin and Lightning Network.

In a expectative that majority use LN, ordinals keep feeding the miners with his fees.

In an expectative that fees doesn't incentivize miners, people can do altruist minery even with a Raspberry Pi.

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The mempool filling is good for Bitcoin as it shows two things: Bitcoin will thrive when per-block cummulate fees rise above the block reward after a few more halvings. This is a game theoretical observation to make now.
And it shows who understand Bitcoin und who does not by their responses. Seems unfortunately you seem to be the latter :D

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In the end, Bitcoin will just be a store of value that people will use to speculate and preserve their wealth whereas fiat experience hyperinflation. I agree with you, we cannot use this system on a global scale to make everyday payments.

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The store of value will still take the form of commodities such as precious metals, certain base metals, and land. This will become painfully obvious in the event that electricity is out for more than a few days.; last time I checked, the world is moving toward greater instability and toward a great war.. No amount of BTC and altcoins will help us if the networks are fried and offline.

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