Its Gresham's law. Bad money drives out good.
You don't spend bitcoin cause you have other options. But that's a market inefficiency.
Eventually supplies don't accept other forms of money.
But that's also where a more efficient market cab be made because spending would have to be more valuable than your money.
Instead of the current inefficient use of capital
it isn't "market inefficiency." it's the way people are.
there have always been other MOEs that people have used.
which is yet *another problem with the hard cap. it creates the need for an inflationary L2 for transactions so that they don't have to spend their UTXOs.
suppliers have their own needs. they don't want to spend their UTXOs either.
a hard cap incentivizes *literally everyone* to actually transact on another layer.
and eventually Saylor says " here use this e-cash from my bank"
or the Fed says "here use this CBDC, we'll start you out with $1,000 when you download your wallet."
and in 10 years you're back in inflationary fiat banking, backed by Bitcoin UTXOs.
1 if you're going to argue its just how people are then why would the current system be broken at all. Sov real estate and gold, moe dollar.
2 layer 2 are not inflationary. Lightning does not create more bitcoin. People can choose to create paper on top of any system.
3 its not the hard cap that incentivises higher layers its block size, latency and risk. In bitcoin you can trade security for speed by using lightning but not risk rehypothication
Ecash has more custody risk but adds privacy.
There will also be debt built on top eventually.
The point is that it can always fall back to layer 1 which garuntees security and hard cap.
Unless you believe .7 monero in 2min blocks is the perfect amount humans will ever need forever for all use cases, you will need a layer 2 too
we aren't talking about technical reasons that drive the creation of a L2, we're talking about macroeconomic conditions that do.
LN solves some of the technical problems but obv doesn't address the macroeconomic ones, if anything it makes them worse. because now the network is divided up and there's friction moving between on chain and LN.
so a hard capped underlying layer means there WILL be a liquid secondary layer. All other ways of transacting are not going to just magically disappear. people will want Bitcoin, but once they get it they don't want to spend it. they want to spend something else.
and it's obvious, we already see it happening.
after all, this is a primary reason the gold standard was abandoned.
I don't know if 0.6 units every 2 minutes is the sweet spot or not. but it's definitely better than 0 and better than an increase as % of circulating supply.
If your argument that the roughly 3% inflation gold necessitated a second layer because it was too scarce means both bitcoin and monero needs a layer 2
I think you're wrong in every part of it.
You seem to be pretty indiscriminate in your terminology so lets clarity what you mean
When you say the friction between lightning and base and it exaserbates macro economic issues what specifically do you mean?
Also what is a liquid layer.
What is the liquidity you're referring to?
"liquidity" refers to how quickly money can move to where there is demand for it. That's all.
The lack of liquidity under a gold standard was a primary reason why there was demand side deflation and severe liquidity shocks, creating the famous deflationary spirals.
if you divide up the money supply between different layers (and there's friction moving between them) that reduces the liquidity in any one place.
so a "liquid layer" is one where money can easily flow to where it is needed without friction.
The Assholes Who Run the World leveraged those liquidity problems to get off the gold standard and take complete control of the money supply.
but that doesn't mean that those problems are completely dismissible.
a hard cap is a knee jerk reaction to their fiat insanity. it is not good monetary policy.
So here s the problem you just contradicted yourself in the first 2 lines.
If you define liquidity as the speed at which money can move and you argue that deflationary shocks (I'm assuimg you mean great depression) was caused by the slow movement of gold that can't be.
At that point the dollar certificate was 40-55% backed by gold and moved across the monetary system at the speed of telecommunications.
Usually the argument about liquidity is about the flexibility of the money supply.
People argue that golds supply growth wasn't elastic enough.
when the banks run out of money that is also money not being able to move where its needed.
we can call that "flexibility" if you prefer.
The point is if you have zero supply inflation, liquidity shocks are magnified.
there's no decentralized way to solve the problem, the best we can do is pick a small stable number to cushion liquidity shocks.
but you're right. "how quickly" isn't the most important characteristic.
OK let me try to steelman your argument.
Company a has liabilities due soon and must be financed. It usually does so by taking loans from a bank which is repaid by the proceeds from the final good they produce.
There's a extrinsic shock that suddenly made company b unable to repay their loan to the same bank.
Because of this the bank is unable to finance company a at the same rate.
In a elastic money supply a government can increase the ms to increase the amount of currency units to reduce the cost of capital and stabilize prices so that company a can finish their production and the damages of company b failing is minimized.
If you want to avoid a gov as money supply creator a bank could also just increase their own currency units
Essentially you moved the risks of failure out of bank a into the currency in both cases.
Sound right?
That's certainly a thing that could happen.
not sure what you mean "risks of failure out of bank A into the currency in both cases"
I don't think it quite addresses the point that we're talking about, the entire system and how it's going to avoid liquidity shocks, demand shortages and deflationary contractions on a hard money.
but for the sake of the discussion we can go with this 👍
Cause if you can't make money to lower the price of capital either company a has to pay a higher rate and or the bank has to realize the losses from company b failing.
The price suppression from money supply changing means that the currency now has more units than before compared to a underlying collateral so its more likely to fail or if its fiat the purchasing power of the currency gets debased.
Well isn't this what you're referring to in terms of a liquidity shock? When company a is unable to finance its production due to the money destroyed? Deflationary contraction is just this situation rippling through an economy right?
What do you mean by demand shortage? Demand of what?
gotcha.
I think this example is specific to liquidity shortages and solvency. it doesn't quite describe a deflationary contraction, although this scenario would ripple out throughout the economy in the case of a deflationary contraction.
there's just more different assets, institutions and examples to bring up to describe "deflationary contraction" more completely.
maybe another way we could clarify what I mean and tie it back to the Lightning Network
suppose your bank has illiquid assets (bonds or real estate something) that it could sell at a loss to cover their liquidity crunch. so they're technically solvent but they have a liquidity problem. so the network is divided and the friction causes a liquidity problem.
(not saying that onchain versus LN is this bad, just saying it's *like this)
"demand shock"
I just mean the other side of the equation from "liquidity crunch." demand goes down, reducing liquidity. the pattern could begin with negative demand because of a crop failure or a pandemic or whatever.
OK for your collateral example I think you're misunderstanding the real issue of liquidity.
In our current system there's 2 main issues.
1 collateral rehypothecation, there's more claims on the collateral say mortgages cause bonds have more issues. There's more claims on the dereivarive instruments from the mortgage than the value of the underlying real estate.
2. The value of the underlying is fundamentally a stream of future dollar's. Which is all debt.
The problem isn't that illiquidity is some artificial aberration from the market. Where the price of the distresset asset is wrong.
Its that given the increased risks in the market caused by the shock your assets are actually worth less. The market would clear just fine if prices could adjust.
The reason we can't is that market clearing Price of all the debt based assets would be 0, or very close.
So in your example they actually aren't solvent system wide because as liquidations happen all the leverage which is more than the assets that got liquidated would cascade.
In my example company c can't get a loan and fails because company a couldn't pay their debts.
Your interpretation is that this is a market failure but what it really is that these companies are really actually insolvent at the new cost of capital. They're supposed to fail.
Demand of what would fall?
Demand of. capital increases during liquidity shocks. Demand of real goods and services also unaffected in first order effects.
I literally don't known what you mean
also correct that the lack of liquidity under gold probably means that Monero isn't inflationary enough to be a base money without an L2.
but I never expect to see that happen. (in my lifetime anyway)
So you're not expecting things to actually ever change? Are you just blackpilled?
when the internet started to get traction in the '90s, we all thought it was going to usher in a new Renaissance. decentralized trustless information! freedom!
instead we got mobile phones and social media. 30 years later and we're still trying to free the internet. (a decentralized trustless protocol that anybody can participate in)
Bitcoin is just like this.
everything's moving in the right direction, but it's going to take much longer than anybody thinks.
The revolution didn't start with Bitcoin and it's not going to end with it either.
Right cause we stopped using the internet in the last 30 years and we've moved on
you missed the point
we 99% use it in a 3rd party permissioned way
Yes were you hoping technology would get rid of stupid lazy people?
It's always a minority that cares enough about anything to deeply understand it.
The internet made it easier for people who want to self host things to be able to do so compared to before. It also shakes up the previous set of winners so that they lose to a new set of winners.
In relation to bitcoin its that the new money let's people who care about self sovereign money have a better shot than before. Its also going to shake up who the winners are.
Most people will do neither.
But overall they are better off than before
