November2024 - BTC | Magical Store of Value Property of Bitcoin

Magical Store of Value Property of Bitcoin

Magic Behind Store of Value” in Bitcoin lies in the UTXO Model + PoW which becomes a metric system for measuring wealth in technology driven hyperdelfation.

At the “Common Knowledge Conference”, CKON 2024 (Chiangmai, Thailand), I gave a talk on “The Magic Behind [Store of Value] in Bitcoin”.

The “Magic” lies in the:

UTXO Model (Unspent Transaction Output aka wallet “change”)

• PoW (Proof of Work)

which makes Bitcoin a metric system for measuring wealth in a technologically progressed society of hyperdeflation.

Bitcoin is backed by engineering innovation with the beauty of mathematics, safety of cryptography, craft of software code, principles of thermodynamics and limitations of speed of light, energy-electricity transformed into digital energy and finally human psychology of scarcity with game theory.

3 key takeaways:

• Indivisibility, Traceability & Fixed 21 Million Supply: Each UTXO can be seen as a unique piece of digital property. This model adds a layer of traceability because each UTXO can be tracked from its creation to its spending, enhancing security and integrity. With an upper cap of 21 Million supply a predefined issuance schedule over a century plus years make it super special “scarce digital commodity”

• 10min Permissionless Audit of the Monetary Network: Every 10mins each node confirms txns (compare this to annual audit system which happens every 12 months and has a lot of human subjective discretion and interpretation of rules making it an easy target for manipulation)

• Bitcoin Security Budget & Hash Power: At today’s 723.10 exahashes/second, with a mining difficulty of 101.65 T at block height 870,438, the level of computational power dedicated to “backing” Bitcoin exceeds the combined capabilities of the world’s largest computing networks, nation state power, military energy and infact the biggest BigTech’s data center power. It is unprecedented scale of decentralised power co-ordination being projected towards mining and auditing Bitcoin Network

More detailed Explanation

The “Magic Behind Store of Value” in Bitcoin can indeed be attributed to several key components of its design, particularly the UTXO (Unspent Transaction Output) Model combined with Proof of Work (PoW). Here’s how these elements contribute to Bitcoin being perceived as a store of value:

1. UTXO Model:
   • Indivisibility and Traceability: Each UTXO can be seen as a unique piece of digital property. Unlike traditional currencies where money can be infinitely divisible, UTXOs represent discrete units of value. This model adds a layer of traceability because each UTXO can be tracked from its creation to its spending, enhancing security and integrity.
   • Ownership and Control: The UTXO model ensures that the control over funds is clear-cut, where each piece of Bitcoin is either spent or unspent. This model supports the concept of digital scarcity since there’s a finite number of UTXOs at any given time, mirroring physical assets.
   • Smart Contract Capabilities: While not as flexible as Ethereum’s smart contracts, Bitcoin’s UTXO model does allow for certain conditional spending rules through scripts. This can be used to lock up value for long periods, contributing to the perception of Bitcoin as a long-term store of value.
2. Proof of Work (PoW):
   • Security and Trust: PoW provides the security mechanism for the network. By requiring miners to expend computational power to add a block, it ensures that altering transaction history (double-spending or reverting transactions) becomes extremely difficult and costly. This security model supports Bitcoin’s reliability as a store of value, as users trust that their coins will remain theirs.
   • Cost of Production: The energy and hardware costs associated with mining new Bitcoins set a floor price for Bitcoin, often referred to as the “cost of production.” This cost acts as an economic barrier making it less likely for the value of Bitcoin to drop below this threshold for extended periods, supporting its deflationary nature.
   • Decentralization: By requiring computational work to be distributed across the network, PoW ensures that no single entity can control the creation of new Bitcoins or the validation of transactions. This decentralization adds to Bitcoin’s resistance to censorship, inflation, or devaluation by external forces, bolstering its role as a store of value.
3. Technology-Driven Hyperdeflation:
   • Fixed Supply: With a maximum supply cap of 21 million Bitcoins, the protocol inherently introduces scarcity, a key attribute of a store of value. As Bitcoin becomes more widely adopted, its relative scarcity increases, potentially driving up its value.
   • Halving Events: Approximately every four years, the reward for mining new blocks is halved, reducing the rate at which new Bitcoins are created. This mimics the extraction dynamics of precious metals like gold, where over time, less new supply enters the market, pushing existing supply to potentially increase in value if demand holds or grows.
   • Network Growth and Adoption: As the network grows, so does the hash rate (computational power), making attacks more unlikely and the network more robust. This growth, combined with the fixed supply, can lead to an increase in value as more people and institutions see Bitcoin as a viable store of value or investment.

Together, these elements create a digital asset that can be seen as a metric system for measuring wealth in a technology-driven era, where traditional measures like gold or fiat currency might falter under hyperinflation or manipulation. Bitcoin’s design promotes a deflationary currency environment, where the value tends to increase over time, especially if adoption and trust in the system continue to grow.