Thread by @breakingthemark

I think the real scarce resource in Bitcoin isn’t created by the the 21 million coin limit, but by the 7 transactions per second limit.

The real money will be in controlling that resource.

A thought experiment...

Let’s assume Bitcoin is successful from a store value/digital gold perspective. People will use it like a savings account or investment account.

Suppose there are a billion wallets, a touch more than 10% of the global population (of course organizations will have wallets to).

Since bitcoin is for savings, imagine people only need to make a transaction once a month.

Invest new savings or pull out past savings to purchase something. Similar to what people use long term savings/investing accounts today.

So the demand for transactions with the block chain network is 1 billion transactions per month. However, BTC can only support about 18 million transactions a month.

This is a big supply and demand discrepancy (each wallet gets an average of 1 BTC transaction every 4.5 years).

Transactions on the blockchain essentially go to the highest bidder. Paying a higher transaction fee jumps you up in the line.

So if the supply and demand is deeply unbalanced, transactions will only be completed for the highest bidders. In this case, only to the top 2%.

If you want to transfer $1000 in savings each month, a fee of $100 makes this prohibitive. You are giving away 10% of your wealth. But if you want to transfer $10 million, a $100 fee isn’t a big deal.

Big transactions can afford higher fees, so they will dominate and become the only ones traded. The little player won’t be able to access the blockchain cost effectively, and therefore they wont.

In order to ensure size, transactions will need to be aggregated off the blockchain

This is part of what the lightning network tries to do. But little transactions will still never “get in”.

It would only take 1000 wallets trading in size with each other each day to crowd out everyone else and control the market in transactions entirely.

So the winning aggregation model is to form a group(s) which settles up peoples account outside BTC and then trades them from a unified wallet in size.

Individuals in this world don’t own actual bitcoin, they own shares or notes in other organizations which own bitcoin.

The “big aggregators” will charge fees to the little guys to trade their own shares or notes, and use those fees to cover their Bitcoin fees and make a profit. They will essentially sell access to the BTC blockchain, and keep everyone else out by holding the BTC fees high.

This of course goes totally against the original concept of bitcoin providing direct, democratized, access to the ledger and source of monetary value itself. But because of the scarcity in the number of transactions, it’s the only logical equilibrium point.

This structure is also nearly identical to our historical banking system.

There is some form of high powered money or base money which only banks deal in. They settle this money with each other on a routine basis,

and then give their customers credit or notes to represent their share of that high powered money, but the common people don’t ever really hold the high powered money, they just hold claims on it.

The banks though hold a monopoly on access to true money.

The next logical step is these Bitcoin Banks realize they can lend out more bitcoin credit notes than they actually have, and now they’ve just re-created fractional reserve banking.

The end point is similar to what we have today and even more so to what we had before 1971.

Back to the original assumption that bitcoin IS successful as a store of value. First, if there isn’t enough transaction capacity to allow everyone to hold the SOV personally, then its never going to be currency.

Second, at some point, the ultimate outcome will become obvious.

And when it does, doesn’t it jeopardize the entire usefulness of Bitcoin as a personally owned, no counterparty, store of value? Only a select group have large enough transaction sizes to afford the large transaction fees.

Therefore average people won’t be able to successfully own BTC, only institutions and the very rich could.

Bitcoin would cease to be a good store of value for a common person, and only provide this function for a smaller few.

I think the only way BTC works as envisioned if the transactions can’t be cornered. You need plentiful capacity in the transaction network to bring bitcoin’s vision of a free and open store of value/monetary system with no counterparty to reality at meaningful scale.