23. On the Subject of Money Supply

23

On the Subject of Money Supply

SATOSHI EXPLAINS his general concept on this forum and follows up about the issue of money supply versus the population. He then compares Bitcoin to precious metals and refers to a feedback loop on the price which could occur when number of users grows faster than the supply of bitcoins. Interestingly, this was indeed what did occur.

Imagine if the population were to discover, through real life experience, what it is to conduct their lives with a currency that does not lose its value, but in reality gains in value. As our economy grows and as our manufacturing capabilities increase, prices go down. The only reason that prices are not going down today—except in products where improvements are very rapid (e.g., computers)—is because of government-caused currency inflation.

Re: Bitcoin open source implementation of P2P currency

Satoshi Nakamoto February 18, 2009 at 20:50

It is a global distributed database, with additions to the database by consent of the majority, based on a set of rules they follow:

• Whenever someone finds proof-of-work to generate a block, they get some new coins

• The proof-of-work difficulty is adjusted every two weeks to target an average of 6 blocks per hour (for the whole network)

• The coins given per block is cut in half every 4 years

You could say coins are issued by the majority. They are issued in a limited, predetermined amount.

As an example, if there are 1000 nodes, and 6 get coins each hour, it would likely take a week before you get anything.

To Sepp’s question, indeed there is nobody to act as central bank or federal reserve to adjust the money supply as the population of users grows. That would have required a trusted party to determine the value, because I don’t know a way for software to know thereal world value of things. If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that.

In this sense, it’s more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes. As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.