Most people who understand bitcoin know that there are two types of bitcoin. One is bitcoin, the asset that has a fixed supply and is quite volatile, and the second type of bitcoin, the network and protocol that maintains an immutable ledger that has never been hacked and is bullet, bomb and tank proof. . In my opinion, there is too much focus on the asset and not enough on the network, protocol and immutable ledger.
While listening to a bitcoin-satoshis-vision-with-dhruv-bansal-wbd786″>Recent podcast Peter McCormack had with Dhruv Bansal They discussed the network and protocol in a new way.
I really liked Dhruv's formulation on how to view the fixed supply of bitcoin. The two versions can be simplified as follows:
Version 1: The common vision
The 21 million will be issued over a 131-year period from 2009 to 2140. Not all bitcoins have been issued or created yet. This opinion maintains that, as of March 2024, approximately 19,659,000 bitcoins have been issued or created, representing 93.62% of the entire supply. In today's day and age, the way you would describe this is “6.25 bitcoins are created approximately every ten minutes.”
Version 2: View of Dhruv
ALL 21 million were created through the network, consensus mechanisms, algorithms and protocol on January 3, 2009 and from that date its monetary policy was set and therefore the issuance of supply for those 21 million. THE 21,000,000 ALREADY EXIST BUT HAVE NOT YET BEEN RELEASED OR UNLOCKED. Dhruv used the term “released” to indicate how many bitcoins are issued every ten minutes. I'll use the term “unlocked” for the rest of this article to further amplify the brilliance of Dhruv's framing. Bitcoiners are already familiar with time-locked bitcoin, and in a sense, Dhruv's framework simply extends the idea of time-locked bitcoin to its logical conclusion. The time blocking schedule for Epoch 1 spanned 210,000 blocks. The next time blocking schedule for Epoch 2 was 210,000 blocks and so on.
Why is Dhruv's framing important?
By framing mining as buy coins instead of creating Coins helps us make sense of the ever-increasing difficulty. How do we protect this fixed supply of 21 million coins and prevent human deception for 131 years?
If the miners are creating bitcoins, then it seems like they are using more and more resources to create fewer and fewer coins over time. This makes it seem like bitcoin suffers from “scale inefficiency”: as bitcoin adoption grows, more resources are used in mining and the cost of producing bitcoin *increases* rather than decreases, as we would expect in any other industry. This is part of the reason (Dhruv suspects) why many people are prima facie opposed to bitcoin mining: it seems silly and wasteful for it to work this way!
On the contrary, if we think of bitcoin miners as *purchasing* bitcoins from an existing supply (paid in calculations), then increasing resources used by miners makes sense: as bitcoin adoption grows, bitcoins become more valuable, network security increases, and the network adjusts the price of newly launched bitcoins upwards. Dhruv believes this framework could help alleviate some people's negative first impressions of the mining market.
Note: The reason this framing makes sense is that Satoshi created a completely new way of telling time with distributed systems. I don't think we give him enough credit for this! As Gigi points out in bitcoin Is Time, in the absence of a central authority, Satoshi had to invent a new way for a group of decentralized computers to tell time. Satoshi chose ten minutes as the target block time and enforced it through an auction. Humans are deeply tied to time as we understood it before bitcoin, so some of us will find it difficult to see it as Dhruv suggests.
bitcoin base layer has two markets
Dhruv postulates that there are two markets operating in bitcoin AT ALL TIMES and they constitute the base layer of bitcoin. Layer zero and Layer one.
Layer zero is what I would call the security layer and the monetary policy layer and is enabled by math and code in an auction that occurs on each block and takes an average of 10 minutes. Every block since January 3, 2009, the bitcoin network has held an auction that has a fixed sale price (measured in calculations) that sells the next tranche of bitcoin. that already exist to the entire global bitcoin mining industry. An example of mass collaboration if there ever was one! When it was just Satoshi and Hal Finney there was no global bitcoin mining industry, but you get the gist.
Nowadays I think the global bitcoin mining industry is best and most accurately viewed as the security layer of the bitcoin network, but that is a topic for another article. Dhruv points out that it is a “two-sided auction where you get so many coins for so many calculations.” The entire industry of bitcoin miners (timestamp servers) paid the computational price collectively for that block. There are only so many coins (depending on the time) for so many calculations and the network waits to unlock the next batch of coins until a lucky miner arrives who meets that minimum computational price.
There is a persistent guessing game using proof of work that takes place between all timestamp servers that are connected to the bitcoin network. This is what gives the bitcoin network such amazing security. Finally, one of these timestamp servers “wins the auction” using the Dhruv framework and gets the block reward. Each timestamp server during that 10-minute period serves the purpose of making the network extremely secure, but only one timestamp server earns the block reward. Technically, this timestamp server usually runs on a mining pool, but that doesn't matter for the purposes of this article. If the network paid too many calculations or too few, then the TIME IT TOOK TO FULFILL THAT OFFER WAS DIFFERENT FROM 10 MINUTES.
The network protocol and software tracks these 2016 auctions over this period of 2016 blocks and makes note of the timings of each block. He says: “Each of those moments can be considered in itself as an offer. The entire industry offers these deals in sequence and the network pauses and says “what were the most recent deals over time?” and readjusts the price it pays to miners (security forces) so that the supply time matches the target time.”
The big idea is that bitcoin Layer zero is a market among the entire network of users. and the entire network of bitcoin miners that forms the security layer of the network. This market acts as an energy force field protecting the grid every moment of every day since 2009. Why call it a market? Dhruv believes that all decentralized systems must be markets in order to function. (In this case, Layer Zero is a collective market that involves calculations for the scheduled release or unlocking of bitcoin. And, in addition, this collective market provides security services for the time chain.)
What is the main trade in layer zero?
What is the main trade in Layer Zero? Bansal says “they are calculations for bitcoin.” Layer 0 is a “market between two aggregates”. It is a market between the entire bitcoin network (which wants security) and the entire bitcoin mining industry which wants security and block reward. There are only two “participants” in this layer. This market is closely related to another market (Layer 1), which is the block space market. Bob Burnett has also said this in a different way by pointing out that there are two types of scarcity in bitcoin. We can call Layer One the final settlement and transaction layer of bitcoin.
Layer zero solves the problem of how to fairly release or unlock a fixed supply of currency for circulation. and secure the network until the year 2140 using proof of work.
The Layer 1 market is how do I get transactions to reach finality and change ownership in an immutable ledger? Each market has an artificial and decided restriction. Layer 0 is the fixed amount of coins released or unlocked for 131 years. Layer 1 is the block size or block space. Layer 1 is a market between individuals. How much is the individual user willing to pay to include this transaction in a block?
Occasionally, blocks are mined that have no transactions. For those thinking “what a waste”, think again. These blocks prove the value and existence of the security layer. Any block mined without transactions proves that a Layer Zero market exists and ignores the Layer 1 market. (It also reinforces Dhruv's point that there are two markets.) Over time, as all the bitcoins are put into circulation, the Zero Layer market disappears. It is no longer necessary. At that point, the only market left for the base layer will be Layer 1. Most bitcoiners believe that transaction fees alone will be enough to continue securing the bitcoin network in the future. Conceptually, the Layer One marketplace will take over and secure the immutable ledger to make sure no one cheats.
There are those who believe that transaction costs will not provide enough incentives for miners to continue mining, but there are two markets, and the first market, Layer Zero, is far from finished.
The incentives to mine are already very strong (there are around 20 publicly traded companies) and these incentives are getting stronger every day. I know many bitcoiners who currently run their miners by the heat they generate and so have a strong incentive to continue even after the Layer Zero market has served its purpose. There are entrepreneurs looking to build businesses around these timestamp servers that will heat swimming pools, heat hot water, heat rooms, heat homes and buildings, and provide electricity to people in the world who don't have it. In fact, I predict that in the coming years there will be appliances built for the heat they produce.
Additionally, miners are constantly searching around the world for places where there is free energy, stranded energy, wasted energy, methane mitigation, and even waste tires that they can use as a fuel source. There are also nation states that are mining bitcoins. Anyone holding a significant amount of bitcoin will have plenty of incentive to keep mining as long as the value of the network continues to grow AND nation states continue to devalue their currency to zero. Additionally, there is a new form of energy technology called OTEC that I suspect will become an innovative form of energy that will prove viable near the equator thanks to bitcoin mining.
bitcoin is a layer of markets. These first two markets operate separately from each other. And there is a Layer 2 that has emerged and is still being built that offers fast settlements and payments. Layer zero is the security layer and the supply unlocking layer. Layer 1 is the store of value layer and the final settlement layer. Layer 2 is the middle layer of rapid exchange and settlement.
For those who find these ideas strange or difficult to understand, feel free to ignore them or tell us where our gaps in thinking occur. Take comfort in the idea that the free market and mathematics secure your bitcoins (rather than central bankers) and will do so for the foreseeable future.
Special thanks to Dhruv Bansal for providing constructive input on this article.
This is a guest post by Mark Maraia. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
