Bitcoin: The idea experiment of the next generation of currency value anchors

Author: Vimans Notes

introduction

Currency is one of the most profound and consensus inventions in the process of human civilization progress. From barter to metal currency, from gold standard to sovereign credit currency , the evolution of currency has always been accompanied by changes in trust mechanisms, transaction efficiency and power structure. Today, the global monetary system is facing unprecedented challenges: currency over-issuance, trust crisis, deterioration of sovereign debt, and geo-economic shocks caused by US dollar hegemony.

The birth of Bitcoin and its continued expansion of influence have forced us to rethink: What is the essence of currency? In what form will the future "value anchor" exist?

"Bitcoin's revolutionary lies not only in technology and algorithms, but also in its first 'bottom-up' monetary system spontaneously promoted by users in human history, is challenging the country's millennium paradigm for dominant currency issuance."

This article will review the historical evolution of currency anchors, criticize the dilemma of the real gold reserve system, analyze the economic innovation and limitations of Bitcoin, explore the ideological experiment of Bitcoin as a future value anchor, and look forward to the possible diversified evolution paths of the global monetary system.

1. Historical evolution of currency anchors

1. The birth of barter and commodity currency

The earliest economic activities of human beings mainly relied on the "barter" model, and both parties to the transaction must have exactly the items needed by each other. This "coincidence of double demand" greatly restricts the development of production and circulation [1] . To solve this problem, commodities with universally accepted value (such as shells, salt, livestock, etc.) gradually became "commodity currency", laying the foundation for later precious metal currencies.

2. Gold Standard and Global Settlement System

Entering a civilized society, gold and silver have become the most representative general equivalents due to their natural properties such as scarcity, easy division and difficulty in tampering. Ancient empires such as ancient Egypt, Persia, Greece, and Rome all used metal currency as a symbol of state power and social wealth.

By the 19th century, the gold standard was established globally, and the currencies of various countries were linked to gold, achieving the standardization of international trade and settlement. England formally established the gold standard in 1816 , and other major economies also gradually followed. The biggest advantage of this system is that the "anchored object" of the currency is clear and the cost of trust between transnationals is low, but it also causes money supply to be limited by gold reserves and it is difficult to support the expansion of industrialized and globalized economies (such as the "gold shortage" and the deflation crisis) [2] .

3. The rise of credit currency and sovereign credit

In the first half of the 20th century, the two world wars completely impacted the gold standard system. In 1944 , the Bretton Woods system was established, with the US dollar pegged to gold, and other major currencies were then pegged to the US dollar, forming the "dollar standard". In 1971 , the Nixon government unilaterally announced the decoupling of the US dollar from gold, and global sovereign currencies officially entered the era of credit currency. The country issued currencies based on its own credit and regulated the economy through debt expansion and monetary policy.

Credit currency brings great flexibility and economic growth space, but it also lays the hidden dangers of trust crisis, hyperinflation and excessive currency issuance. Third world countries have repeatedly fallen into local currency crises (such as Zimbabwe, Argentina, Venezuela, etc.), and even emerging economies such as Greece and Egypt are struggling in debt crises and foreign exchange turmoil [2] .

2. The real dilemma of the gold reserve system

1. Concentration and opacity of gold reserves

Although the gold standard has become history, gold is still an important reserve asset on the balance sheets of central banks in various countries. Currently, about one-third of the world's official gold reserves are stored in the vaults of the Federal Reserve Bank of New York. This arrangement stems from the trust of the international financial system in the US economy and military security after World War II, but also brings significant issues of concentration and opacity.

For example, Germany announced that it would ship some of its gold reserves back to its homeland from the United States, one of the reasons was its distrust of US vault accounts and its long-term failure to conduct on-site inventory. Whether the vault accounts are consistent with the actual gold reserves is difficult for the outside world to verify. In addition, the proliferation of derivatives like "paper gold" has further weakened the correspondence between "book gold" and physical gold.

2. Non- M0 properties of gold

In modern society, gold no longer has the attributes of daily currency ( M0 ). It is impossible for individuals and enterprises to settle daily transactions directly with gold, and it is even difficult to directly hold and transfer physical gold. The main role of gold is more as a tool for settlement between sovereign states, bulk asset reserves and financial market hedging.

International gold settlement usually involves complex clearing processes, long time delays and high security costs. Moreover, the transparency of gold transactions between central banks is extremely low, and account inventory relies on the trust endorsement of centralized institutions. This makes gold 's role as a global "value anchor" increasingly symbolic, rather than a real circulation value.

3. Economic innovation and practical limitations of Bitcoin

1. Bitcoin’s “algorithm anchoring” and currency attributes

Since its birth in 2009 , Bitcoin 's constant, decentralized, transparent and verifiable characteristics have triggered a new round of thinking about "digital gold" around the world. The supply rules of Bitcoin are written into the algorithm, and the total upper limit of 21 million coins cannot be changed by anyone. The scarcity of this "algorithm anchor" is similar to the physical scarcity of gold, but it is more thorough and transparent in the global Internet era.

All Bitcoin transactions are recorded on the blockchain, and anyone around the world can publicly verify the ledger without relying on any centralized institutions. This attribute theoretically greatly reduces the risk of "the book does not match the physical objects" and greatly improves the efficiency and transparency of clearing and settlement [3] .

2. Bitcoin’s “bottom-up” diffusion path

Bitcoin is fundamentally different from traditional currencies: traditional currencies are forced to be issued and promoted by state power "top-down", while Bitcoin is "bottom-up" adopted by users and gradually spread to enterprises, financial institutions and even sovereign states.

Users go first, institutions come later: Bitcoin was first spontaneously adopted by a group of cryptotech enthusiasts and liberals. With the strengthening of network effects, rising prices and expanding application scenarios, more and more individuals, enterprises and even financial institutions have begun to hold Bitcoin assets.

Passive adaptation of countries: Some countries define Bitcoin as legal currency, some countries approve Bitcoin-related financial products, allowing institutions and the public to participate in the Bitcoin market through compliant channels. Bitcoin’s user base and market acceptance have driven sovereign countries to passively embrace this new currency pattern.

Global borderless expansion: Bitcoin’s network effect breaks through the sovereign boundaries. Whether in developed countries or emerging markets, a large number of users spontaneously adopt Bitcoin in daily life, asset reserves and cross-border transfers.

This historic shift shows that whether Bitcoin can become a global currency is no longer entirely dependent on the "approval" of countries or institutions, but on whether there are enough users and market consensus.

Implications for the future monetary pattern:

-The separation of power and currency may: currency is no longer necessarily dependent on state power, but can belong to the Internet, algorithms and global user consensus.

-State support becomes "icing on the cake": Whether Bitcoin becomes a global currency no longer depends entirely on the legislative support of national institutions, as long as there are enough users and social recognition.

- New type of sovereignty challenge: Sovereign states may have to adapt in the future, and even passively accept the impact of "user-autonomous currency".

Criticism and thinking:

-Limitations and risks of user autonomy: In the absence of sovereign endorsement, how to manage risks such as extreme fluctuations, governance problems, and "black swan" events?

- Can "bottom-up" cope with the global crisis? Is a monetary system without central coordination more vulnerable when encountering a systemic financial crisis or large-scale technological attack?

-Redistribution of power: Is Bitcoin really "decentralized"? Or will a new oligarchic center emerge?

3. Realistic limitations and criticism

Although Bitcoin is revolutionary in both theoretical and technical aspects, it still has many limitations in real-life applications:

-Large price fluctuations: Bitcoin prices are very susceptible to market sentiment, policy news and liquidity shocks, and the short-term volatility is far greater than that of sovereign currencies.

- Low transaction efficiency and high energy consumption: The Bitcoin blockchain has limited transaction number per second, long confirmation time, and the proof-of-work mechanism consumes a lot of energy.

-Social boycott and regulatory risks: Some countries adopt negative or even suppressive attitudes towards Bitcoin, resulting in global market differentiation.

- Uneven distribution of wealth and technical threshold: Early Bitcoin users and a few large investors controlled a large number of Bitcoin, and wealth was highly concentrated. In addition, ordinary users need certain technical thresholds to participate and are susceptible to risks such as fraud and loss of private keys.

**4. Similarities and differences between Bitcoin and gold: Thought

experiments as future value anchors**

1. Historical leap in transaction efficiency and transparency

In the era of gold as a value anchor, international bulk gold transactions often require the use of aircraft, ships, armored vehicles, etc. for physical transfer. It not only takes several days or even weeks, but also requires high transportation and insurance costs. For example, the German Central Bank announced that it would transport gold reserves from overseas to the mainland, and the entire plan took years to complete.

More importantly, the global gold reserve system has serious problems of account opacity and inventory. The ownership, place of deposit, and actual existence of gold reserves often can only rely on the unilateral statement of centralized institutions. Under this system, the cost of trust among countries is extremely high, and the stability of the international financial system is restricted.

Bitcoin deals with these problems in a completely different way. The ownership and transfer of Bitcoin are recorded on-chain throughout the process, and anyone around the world can verify it in real time and publicly. Whether it is an individual, a company or a country, funds can be allocated at any time as long as you have a private key, without physical transfer or third-party intermediaries, and it only takes dozens of minutes to arrive worldwide. This unprecedented transparency and verifiability gives Bitcoin a foundation of efficiency and trust that gold cannot reach in terms of bulk settlement and value anchoring.

2. The "role stratification" concept of value anchor

Although Bitcoin far exceeds gold in terms of transparency and transfer efficiency, it still faces many limitations in daily payment and small circulation links - transaction speed, handling fees, price fluctuations and other problems, making it difficult to become "cash" or M0 in reality .

However, referring to the monetary stratification theory such as M0/M1/M2 , it can be imagined that the following structure will appear in the future monetary system:

• "anchors" such as Bitcoin are M1+ -level store of value and bulk settlement tools, similar to the position of gold in central bank assets, but are more transparent and easier to liquidate.

-Stablecoins based on Bitcoin, layer two networks (such as Lightning Network), sovereign digital currency ( CBDC ), etc., undertake daily payment, micro payment and retail settlement functions. These "subcurrencies" are anchored to Bitcoin or are issued with guarantees, achieving the unity of circulation efficiency and value stability.

-Bitcoin has become the "general equivalent" and "unit of measurement" of social resources. It is widely recognized by the global market, but is not directly used for daily consumption, but is like gold as the "ballast stone" of the economic system.

This hierarchical structure can not only utilize the scarcity and transparency of Bitcoin as the global "value anchor", but also use technological innovation to meet the convenience and low-cost needs of daily payments.

**5. Possible evolution and critical thinking of the future monetary

system**

1. Multi-level and multi-role currency structure

The future monetary system is likely to be no longer a single sovereign currency dominant pattern, but a three-layer coexistence of "value anchor-payment medium-local currency", and cooperation and competition go hand in hand:

-Value anchor: Bitcoin (or similar digital assets) is a decentralized global reserve asset and assumes the role of "high-level currencies" such as cross-border settlement, central bank reserves, and value hedging.

-Payment media: stablecoins, sovereign digital currency, lightning network, etc., anchor Bitcoin or sovereign currency, realize daily circulation, payment and pricing.

• Local currency: Local currencies of various countries continue to assume the regulation and management functions of the local economy and achieve tax, social welfare and economic policy goals.

Under this multi-layer structure, the three major functions of currency (media of exchange, value scale, and value storage) will be more clearly divided into different currencies and levels, and the global economy's risk dispersion and innovation capabilities will also be improved.

2. New trust mechanism and potential risks

But this new system is not without risks. Can algorithms and network consensus truly replace national sovereignty and the credit of central institutions? Will Bitcoin’s decentralized characteristics be eroded by computing power oligopolies, protocol governance loopholes or technological advances? Regulatory differences, policy conflicts, "black swan" events, etc. around the world may become unstable factors in the future monetary system.

In addition, in order to safeguard their own interests, sovereign states may restrict the expansion of Bitcoin through strong supervision, taxation, and technological blockade. Whether Bitcoin can truly achieve global consensus and maintain its status as "digital gold" in the "bottom-up" path still needs time to test.

Conclusion and openness

Looking back at the evolution of currency, from barter to gold standard, to credit currency, every change of "anchored object" is accompanied by profound changes in trust mechanisms and social organization methods. The emergence of Bitcoin has shifted the "value anchor" from physical resources and sovereign credit to algorithms, networks and global user consensus. Its "bottom-up" diffusion model, transparent and verifiable ledgers, and global network effects provide a new thought experiment for the future monetary system.

However, the path to the Bitcoin revolution is not smooth. Problems such as price fluctuations, governance problems, regulatory risks, and technical thresholds need to be solved urgently. Whether Bitcoin can eventually become the "value anchor" or "general equivalent" of the global monetary system depends not only on technological innovation and user consensus, but also on the reshaping of the global economic, social and political structure.

Open Questions:

-If it weren't for Bitcoin, what would be the value anchor in the future?

-How will the ultimate trust foundation of currency evolve?

-What kind of balance will the global value system move towards in the future between state power, user autonomy, and algorithm governance?

As we continue to pursue the next trend in the new narrative and technological waves, perhaps the most worthy of attention are those innovations that seem "simple" but are the most essentially penetrating innovations. Bitcoin, as a currency experiment in the Internet era, is worthy of our continuous and in-depth thinking.

Appendix / Notes

1. [1] Carl Menge, The Origin of Money

2. [2] Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, Oxford University Press, 1992.

3. [3] Satoshi Nakamoto, "Bitcoin: A Peer-to-Peer Electronic Cash System", https://bitcoin.org/bitcoin.pdf