Bitcoin's monetary policy is causing a lot of ink to flow, both from its supporters and from its detractors. A number of units in circulation limited to 21,000,000? A new block of transactions every 10 minutes? Why a halving of the issuance of new units in circulation each four-year period? Many people wonder how Bitcoin monetary policy works, either directly or indirectly.
We are conditioned to listen to central bankers tell us how much our currency is worth and at what interest rate it will trade for a given period. It is therefore normal to wonder whether it is possible for a computer program to be able to carry out this work in a transparent and independent manner and, in the event of a positive answer, how is this possible? To fully understand the monetary policy of Bitcoin, we must first make an incursion into the universe of currencies that we use daily.
How Familiar Currencies Work
The currencies that we are used to dealing with, such as the American dollar, the Canadian dollar or the euro, all have a common characteristic. They are operated, regulated and controlled by the central bank of their respective country. A committee of specialists from each country meets on specific dates to discuss the state of the economy, the level of indebtedness and a multitude of economic statistics. They then agree together on the actions to be taken in relation to monetary policy. Among other things, adjusting the amount of money in circulation (adding or removing it) and determining the base interest rate.
Although few people are accustomed to carefully following the events that unfold during these meetings, their quality of life is greatly impacted. We have seen these effects in the recent post-pandemic period. We could identify several possible factors as being responsible for the inflationary crisis that is currently eating away at us. It is however logical to deduce that the massive amount of money that has been injected into the system (following a central bank decision) is responsible for a significant part of the problem. In short, central bank currencies are backed by humans with strengths and weaknesses. It is obvious that when humans are involved in a decision-making process, the risk of fault, whether due to incompetence, corruption, or bad faith, is very present.
How is Bitcoin different?
As you might expect, the Bitcoin protocol works differently than traditional currencies. There is no committee that meets at regular intervals to determine the future of Bitcoin monetary policy. It has been decided in advance since the creation of the protocol and it can be roughly summarized in three elements:
- A quantity of 21 million units issued at most
- A transaction block is validated on average every 10 minutes (see Bitfeed )
- Every 4 years, the amount emitted is halved (see Halving )
Every person who starts mining, validating transactions on the network and/or using bitcoin as a currency, demonstrates their approval of this monetary policy. Simply using or owning it is an act of trust in this way of working.
Bitcoin offers a choice
It is important to specify that users of the Bitcoin protocol do so on their own and not through coercion. Conversely, it is difficult for a Canadian to have an impact on the monetary policy of the Canadian dollar, he must necessarily accept the terms and use the currency. Some will say that it is possible for a Canadian citizen to influence the dollar through his political choices and they are not wrong. However, the results are likely to be mixed. And, what about countries that are currently governed by a dictatorship? Before the advent of Bitcoin, there was no alternative in terms of currencies.
It can therefore be said with complete transparency that Bitcoin brings new freedom for citizens around the world. People now have the freedom to choose between the currency that has been assigned to them according to the territory they live in and another, global and decentralized. No one has an obligation to use it, but in my opinion, the choice of those who use it should still be considered in any self-respecting legal society.
With decision-making power removed from the hands of a small group of individuals, the risk of corruption or influence peddling disappears. It indeed becomes impossible for a minority, regardless of their wealth and social status, to have an impact on the monetary policy of Bitcoin. With Bitcoin, the computer code is put first and the human, as well as their weaknesses, second.
Who has the power to influence Bitcoin monetary policy?
But, could this stable and predictable monetary policy that bitcoin enthusiasts appreciate change in the future? After all, could it be that the system Satoshi Nakamoto put in place when designing the Bitcoin protocol needs some tweaking? What you need to know is that despite the fact that a small group does not officially meet to determine it, there are indeed people behind the monetary policy of bitcoin.
These are miners, who are responsible for producing blocks, and validators, who are responsible for validating transactions. These two categories of people or companies are invested in the future of bitcoin and have every interest in protecting its key characteristics as well as its value proposition. It is therefore impossible for changes that are harmful to the adoption, the growth of the network and the value of each unit to be adopted. In order to allow a change in the monetary policy of Bitcoin, a majority of miners and a majority of validators must approve and accept this change. It is important to specify that these people are very numerous, spread all over the world, do not know each other and all have their own interests. The risk of collusion is therefore nil.
A typical case
In the event of a proposed change, for example, the removal of the 21 million unit limit, miners and validators would have to make a choice between investing in the new version of Bitcoin (the one without the limit of 21 million) or the old one (the one that keeps the limit).
This modification would benefit miners, who could increase the reward awarded to them for each mined block. However, it offers no benefit to validators. Additionally, the community would find themselves sacrificing a fundamental and valued feature of Bitcoin's value proposition. This change would therefore not be able to obtain the support of the majority of the two groups and would not be implemented.
Strong and flexible at the same time
Since the interests of these two groups are similar (both want Bitcoin to succeed) but are also divergent (some create the new blocks and others validate the transactions), it is obvious that any proposed changes that benefit a group at the expense of the other will be invalidated.
This way of working protects the monetary policy of Bitcoin from any bad influence and bad faith, but it also allows a certain flexibility. If, for example, a catastrophic error was detected in the Bitcoin source code, miners and validators would surely agree on the need to make a correction, and a corrected version of Bitcoin would be adopted without delay by all. of the community, unanimously.
In summary, it is extremely difficult, if not impossible, to implement harmful changes to Bitcoin monetary policy, and extremely easy to gain consensus for corrections or adjustments that are necessary and mandatory. Bitcoin is therefore both solid and flexible, with all the advantages that this brings.
The monetary policy of Bitcoin is a complex and interesting subject, both for finance enthusiasts and the curious who are interested in it. This is not only a new way of working, but a complete revolution in the decision-making process that influences the value of a currency. Users now have the ability to exercise their democratic right to directly guide monetary policy. Something that seemed impossible to achieve until recently.