posted by brwyatt on March 12, 2014

(Note: This is not meant to be presented as fact, but rather just more of a "thought exercize" of sorts. Feel free to leave a comment with your thoughts and opinions)

There is a lot of debate and misinformation around Bitcoin's inherent (and designed) deflationary monetary policy. Many cry out that deflationary systems can't work and are always, without question, a bad idea, pointing to The Great Depression as the poster child of deflation's disasterous effects; these people are not wrong. Then there are those who wave the banner that Bitcoin's policies can't ever be changed, and that this is good because no small, elite group of people can choose to, at a whim, make your life savings virtually worthless in the name of a stable economy; these people are wrong (about the never changing part, anyway, not so much the rest).

The truth of it is, however, that Bitcoin's algorithms CAN be changed and, in fact, NEED to have that ability, just as all systems need to in order to adapt to changing circumstances. It is unlikely that it will during it's infancy (and probably better that it doesn't for now), but at some point down the line, it will need to adapt and change to handle unforseen issues or the ever-changing world. However, unlike the current US monetary system, which puts monetary policy in the hands of a small group of people who have the most to lose (and gain) from the well-being of the system (mainly bankers), Bitcoin puts it in the hands of everyone, but it does get a little more complex than just simply "everyone", in much the same way that the US government is with it's system of Checks and Balances.

Here is an overly-simplified venn diagram of the US system:

US System

A bit of an over-simplification, but it works here. It is a little more complicated than that, and the FED controls much of it, but this gets the general idea. Treasury prints it, selling it to the FED, FED buys (or sells) securities to Private banks, which loan it to everyone else. Again, a simplified overview.

But the basic idea is this: The FED controls how much money is available (and thus the value of the US Dollar) at any given time (through the private banks, which are then able to loan it out to the general public, at interest of course). I'll leave you to decide whether you feel this is good or bad, but this is the basic idea. So you have a supposedly (hopefully) educated, interested (read: rich) people controlling the value of the dollar, and generally keeping a low level of inflation (devaluation) in order to encourage rapid money flow and borrowing (that is to say: consumerism via accumulation of debt).

So what then of Bitcoin? What if deflation became a problem? Some could argue it already is, and that's why alternatives such as DogeCoin have popped up. But how can Bitcoin change if it needed to create Bitcoin at a faster rate?

Here's a (somewhat less) simplified view of the major players involved with Bitcoin: (yay for more Venn diagrams!)

Bitcoin System

The miners process the transactions (think PayPal, MasterCard, Visa, etc, but in a distributed, P2P kind of way) that everyone sends, and coders write the code that the miners use to mine, and that everyone uses to connect and send money to others. Some coders are miners, but everyone uses the network.

So what happens if the Miners unanimously decide to change the monetary policy? The rest of the network (the clients that use the network) will reject the "blocks" of validated transactions created by the miners under that new policy. No transactions are sent and received, miners can't spend the Bitcoins they received in fees or from the subsidy, because no one except other miners accept them, and now no one is happy. If anyone decides to publish a client that works under different rules, the network will reject transactions they see as invalid.

So how can the policy be changed? The large majority of people in any given system will just "follow along". Lets face it, there are a lot of things in this world, and we all can't be involved or informed about everything. But what is needed is some form of consensus. If all the miners and all the coders decided to change part of the money-generating algorithms and everyone adopts it, then the change happens, transactions continue processing, and everyone is happy. But if they change it any the majority of people reject it, the change cannoy happen, and could even result in a block chain fork, essentially creating two "histories" on the same network: one with the change, and one without. Same happens if all non-miners want a change, same thing, the network stops accepting blocks from miners not following the change.

In this way, you get a bit of checks and balances. If you get about half of the miners, and half of everyone (which can include the miners), then you can effectively force a policy (everyone else following because they have no choice, majority rule). But if any one group has a majority refusing the change, it will not happen. The only group not effectively ruled by majority rule are the people with any programming or coding skill, you only really need one to code the policy, but I still felt they were worth mentioning as a group that could try (and fail) to change policy on their own.

The idea here, is just as Bitcoin took payment processing from the hands of a few, it does the same with monetary policy as well. Bitcoin CAN be changed, but that power rests with all people who use it, not the select few who are put in control to make decisions. Instead of policy decided by an oligarchy, it is, instead, decided and enacted democratically.

Whether this is good or bad is up to you: putting power to those with the most knowledge and the most to lose, but also who can be corrupted, or put the power to everyone democratically, which can be messy and slow (there is a reason the US has a REPRESENTATIVE system, can you imagine the mess if EVERYONE was able to debate and vote on every single bill?).

Anyway, just something I was thinking about today. If people are interested (or uncertain about how Bitcoin works, and what exactly mining is and what it does), I can write another post explaining Bitcoin more in depth.

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