Bitcoin Monetary Policy and its Immutability
Among all the currencies currently existing in the world, we also find virtual currencies called cryptocurrencies.
They cannot be seen or touched but they can still be used to exchange for other goods. According to Coinmarketrate.com, in electronic payment systems, cryptocurrency is digital money that (as a rule) does not require governmental support or intermediaries such as banks. Instead of this, using certain protocols, system participants verify payments.
Compared to centralized digital money and central banks, cryptocurrencies imply decentralization which does not require control by a single entity or group of entities, but rather the entire network works together to achieve consensus.
Some of these cryptocurrencies operate in a certain mode with the use of blockchain technology that serves as a database or as a public record of completed transactions. Bitcoin is a striking example of this.
BTC was invented by an anonymous or by a group of people But only in 2009 the implemetation was released as a software with an open source code.
This crypto represented a way to generate an electronic transactions in a peer-to-peer network. From this moment on, the popularity and use of Bitcoin have been quickly growing until it became a prominent a digital money system. To date, this is not the only development related to the world of cryptocurrencies but it is also the most popular and the most important one.
The authenticity of BTC coins is provided by blockchain. This is a database technology in which information is stored in blocks using cryptography. Each block contains a timestamp, information about transaction and a pointer to the previous block forming the chain.
This makes blockchain extremely resistant to changing information, since after recording, subsequent blocks must be changed in order for the changes to be valid, which, thanks to Bitcoin mining, is becoming increasingly difficult.
In BTC network, mining is a process during which transactions are confirmed. The efforts for which miners are rewarded with the so-called block reward are mainly new Bitcoins generated for this purpose.
Since BTC is a decentralized coin, there is no authority that could print or generate new BTC out of thin air. This task can only be performed by mining.
Mining uses computing power distributed across the network in order to unite pending Bitoin transactions and combine them into a single block. This requires time since each miner has to solve a cryptographic issue that requires many attempts before the necessary solution is found.
On the other hand, in order for BTC to retain its value, miners can only mine up to 21 million of coins. After that new BTC will be impossible to obtain via mining, so this is the total supply. It is expected that the total of 21 million of coins will be mined by 2140.
But mining serves not only to bring new BTC into this world but also to use a huge amount of computing power to protect the network. After all, as we have already seen, anyone who wants to change a record in the network must change the old blocks, and for this it is necessary to extract blocks anew. The more computing power a network has, the more difficult it becomes for an attacker.
The structure of the monetary policy of the BTC
Bitcoin ‘s monetary policy consists of two main aspects:
- RETENTION
Each block mined in Bitcoin carries a certain amount of BTC as a reward, which decreases every 4 years during an event known as halving.
To be more precise, this event occurs every 210,000 blocks, which takes about 4 years, since each block takes an average of 10 minutes.
When Bitcoin started its journey in 2009, the reward for each block was 50 BTC every 10 minutes. Then, in November 2012, it was reduced to 25 BTC. Then in July 2016, it was reduced to 12.5 BTC. And finally, in May 2020, it was 6.25 BTC.
With each halving of this network, cryptocurrency mining became a more competitive and challenging job, leaving aside people who perceived it as a hobby, and freeing up space for companies and professionals coming into the industry.
Such a reduction in the amount of Bitcoin that can be mined also increases its cost, since it is necessary to pay for equipment costs, and this puts pressure on the price.
It is also true that this price increase is due to the shortage that the market is currently experiencing, and over the next four years, an increasingly smaller part of BTC will be put up for sale when miners have to pay for their operations.
- BLOCK FREQUENCY
The block frequency means the time it takes to generate one block of this chain. In the case of Bitcoin, this value is 10 minutes, but it can be different for each cryptocurrency. For example, it takes 15 seconds for Ethereum.
This indicator is not accurate, but is an approximate value that is given by increasing or decreasing the difficulty of mining, which ultimately determines whether the block will be extracted faster or not.
If over a period of 2 weeks, 2,016 blocks, on average, more than 10 minutes have passed, the difficulty increases. Otherwise, the complexity is reduced so that the average time is close to this time.
Bitcoin and Inflation
Thus, Bitcoin’s monetary policy sets a limit of 21 million coins that can be created. This limits supply and allows you to control inflation.
There are no central banks here that could control the distribution of money or change monetary policy at their discretion. Instead, there are algorithms that work to ensure that only 21 million are generated, and that this production is predictable.
This ensures that deflation will reign in Bitcoin, at least as long as demand persists or grows. This is a big advantage over fiat money, which can be printed without restrictions until they create serious inflationary problems.
Bitcoin’s monetary base will not expand, so even if it reaches normal acceptance, the currency is subject to extreme deflation.
Immutability in the BTC protocol
Well, now it’s time to talk about the immutability of the Bitcoin protocol. This first level of immutability is very important because it affects the main aspects of cryptocurrency, in particular the monetary policy of Bitcoin, which cannot be changed.
This immutability is achieved thanks to tens of thousands of Bitcoin nodes that independently execute code that complies with the established rules.
There is not a single entity, neither miners nor the government, that could change the consensus rules of this cryptocurrency without first convincing all these nodes to do so.
This gives users, both individuals and legal entities who use it, some confidence in the scarcity and durability of Bitcoin.
Secondly, the immutability lies in the fact that the history of Bitcoin cannot be easily rewritten. This allows us to trust Bitcoin as a payment method more easily than fiat money.
The Bitcoin blockchain works as a database where only information can be inserted, because after creating a block with information, it is very difficult to change or delete it.
As a result, the history of Bitcoin is unchanged. This is achieved thanks to the SHA-256 hash function, which is used by miners to search for a reliable block.
When a miner calculates a block hash, it tries to find one that is smaller than the specified hash. This solves the proof-of-work problem and also ties the nodes together to form a chain.
The possibility of mining for the immutability of Bitcoin
Mining is what makes double spending or reverse transactions extremely difficult and expensive for an attacker. Thus, a high degree of immutability is achieved. But we must also pay tribute to the huge decentralization that arises thanks to all the people who independently manage the node.
Any person or company can join the network to provide their mining capacity. They don’t need anyone to give them permission to do this.
Anyone who wants to change Bitcoin’s past will have to achieve a much larger share of hashing than the network currently possesses, and with each new miner joining it becomes more difficult.
The complexity that Proof of Work provides means that anyone who wants to mine Bitcoin currently needs special mining equipment called ASIC.
They are very expensive and have only one function – to mine Bitcoin at any cost. Anyone who buys these devices to trigger an attack on Bitcoin will end up with a bunch of paperweights that will be of little use.
A successful attack on this cryptocurrency could mean the end, and therefore, an attacker, even if he manages to profit from his attack, will end up with a bunch of this equipment without any use, which cost him a fortune.
This point is a big problem that needs to be solved if someone wants to try something to oppose Bitcoin. And the more powerful the network becomes, the more difficult it is to do something like this. In reality, this is almost impossible.
Immutability is achieved in Bitcoin thanks to mining, because if an attacker gets enough ASIC equipment to carry out an attack, he will still have to get access to electricity to make it work.
This is not only an extremely high cost, but also a serious logistical problem. He has to find an energy source that will allow him to run these ASICs, or distribute them to different areas of the planet, which is another problem.
Eventually, he would have to invest a lot of money, but the price of Bitcoin that he could get would fall, which would make it impossible to return his investment.
An attacker would have to buy a large amount of mining equipment, he would have to pay for and manage electricity to power the ASIC, and on top of that, he would not be able to earn more than what he used for such an enterprise.
All this makes an attack on Bitcoin almost impossible, since in this case there will be no profit. This is why immutability can be protected in Bitcoin, at least to some extent.
It is true that there may be attackers who are not looking for financial gain, but want to destroy this network, and that cost will not be a problem. We are talking about countries opposed to the ideas of Bitcoin. Fortunately, more and more money is being invested in the mining industry.
And while some consider this activity a waste of resources, the truth is that it serves to protect the most important form of money that has appeared in the history of mankind.