The uniqueness of Bitcoin goes far beyond the scope of technology. It is an unprecedented wealth distribution experiment.
Original title: “Coin Metrics 丨Bitcoin: An unprecedented fair distribution experiment”
Written by: Lucas Nuzzi & Coin Metrics
Translation: Olivia
Much has been written about the fundamental difference between Bitcoin and other asset classes. In fact, the coexistence of mature commodities such as Bitcoin and gold continues to attract a large number of newcomers into the industry, whether it is institutions or retail investors.
But are there any factors that make Bitcoin fundamentally different from other crypto assets?
As the first ever successfully launched digital currency, Bitcoin is considered the pioneer of blockchain technology. However, in the eyes of many of them, Bitcoin is the first-generation technology, so it will face the problem of insufficient transaction throughput and feature richness. But don’t forget: Bitcoin’s uniqueness extends far beyond technology. It is an unprecedented wealth distribution experiment.
In a bull market, people often compare Bitcoin to dial-up Internet or email in the 1980s. In many cases, these are part of the marketing strategy that supports the implementation of emerging crypto assets, which are said to have improved and succeeded in areas where Bitcoin technology is underdeveloped. However, none is more successful than Bitcoin .
But it is undeniable that although encrypted assets have technical advantages, there are still many controversies. What technical experts and most newcomers often overlook is the role of encrypted assets as a digital economy. It is just like the real world economy. The technology through which currency is accounted (government, bank, payment network) is often far less important than how the currency is effectively distributed (monetary policy and wealth distribution) .
But on-chain data makes it possible to identify unfair wealth distribution . After all, the core of the blockchain is to provide a complete history of the ownership structure, and historical data can often explain the problem . Nepotism and other unfair supply distribution models inevitably lead to the centralization of money supply. Through the data on the chain, we can identify the ownership structure of Bitcoin and quantify the degree of wealth centralization in its digital economy.
In order to fully describe the factors that drive fair supply and distribution, we will first review the early history of Bitcoin in this article. Then, we will carefully observe the distribution situation through the impact of mining industrialization. Finally, we will show two novel supply dispersion measures to evaluate the wealth distribution of dozens of assets relative to Bitcoin.
The origin of network mining
The early history of Bitcoin proves the novelty of a pure digital currency . Its earliest traders were probably attracted by Satoshi’s post on the P2P Foundation forum, where he first introduced the system. At that time, only people who understood technology could or were willing to run a network node continuously. Fewer participants are able to take good care of their wallets, as this requires a certain understanding of PGP encryption and a lot of patience to deal with the inevitable errors in the first Bitcoin wallet (if you can even call it that) . There is not even an exchange rate that allows the earliest adopters to value their Bitcoin.
Coupled with the above-mentioned technical complexity, the results of Bitcoin’s early experiments were disastrous: a large amount of BTC was believed to have been lost forever during that period . After all, traders still treat Bitcoin as it was at the time: a strange experiment in digital monopoly money.
Maybe there is no other time series that can better show people’s casual attitude towards Bitcoin in the early days . It shows that until nearly 2011, Bitcoin traders started to use decimals (green line) when sending BTC. Prior to this, all transactions used full BTC units (purple line), because users were trying to send full bitcoins to each other.
This proves the obvious difference between Bitcoin and all subsequent encrypted assets. Bitcoin created a precedent for the convertibility of digital assets and legal currencies such as the US dollar. Therefore, early adopters of other crypto assets assumed value from day one instead of experimenting casually. Although it is obviously better for the end user to have reliable custody and some asset valuation ideas from the beginning, this kind of experiment with Bitcoin eventually led to an unparalleled supply turnover rate.
A direct way to measure supply turnover is through the supply speed indicator . As introduced in previous issues of SOTN, speed measures the number of times that a unit of supply of the product is transferred. It is generally calculated by dividing the transferred supply by the total monetary base. To better reflect the short-term turnover rate, the special change in speed shown below is to filter activities based on the active supply in the next year (rather than using the total supply).
Fairly distributed by design
As mentioned in the preface, the basic technology of encrypted assets is definitely not the only factor that determines its intrinsic value . However, it is still an important consideration because it often plays a huge role in the distribution of supply. Bitcoin solves a decades-long problem in distributed computing, known as the “General Byzantine Problem”, which is related to reaching a consensus on the validity of a statement between untrusted parties. What is truly remarkable is that Satoshi’s solution not only solves the problem of distributed consensus, but also solves it with an activity that essentially promotes currency decentralization: mining .
From a design perspective, Bitcoin mining is an activity that promotes the fair distribution of power. In order to be profitable, miners must operate in a long-term time frame because they have fixed operating costs. However, due to the high volatility of the price of Bitcoin, the BTC rewards issued for this event will fluctuate greatly. This has prompted miners to carefully manage their wallets and continue to sell their BTC for operational purposes such as paying electricity bills, as well as strategic needs such as upgrading hardware to maintain competitiveness. This will eventually increase the supply turnover rate .
In addition to effective verification of Bitcoin transactions, this activity also strengthens the network by increasing the cost of attacks. In its essence, Bitcoin’s basic monetary policy promotes competition because its inflation rate decreases every time it halves over time . Even though over time, miners have integrated and fully industrialized, but the scale of their existing business has made them less and less room for speculation, which has pushed new supplies to change hands.
Encrypted assets and wealth inequality
So far, we have covered the basic factors that affect the distribution of Bitcoin supply. Now is the time to assess the extent to which these factors distinguish Bitcoin from other assets. In economics, there is a large amount of literature on measures of wealth inequality and supply dispersion. Unfortunately, the crypto asset industry has not yet converged on an equivalent set of indicators. We hope to change this situation and design a new set of indicators to quantify the wealth inequality of many crypto assets.
The first one we will show is the Supply Equality Ratio (SER) . It is similar to the 20:20 ratio; this is a traditional measure of wealth inequality that compares the average income of the richest 20% of the society and the poorest 20%. SER is not looking at income, but the supply of different accounts in the network. It compares the poorest account (the sum of all accounts with a balance less than 0.00001% of the supply) and the richest account (the sum of all addresses with the highest 1%).
High SER means that the distribution of supply is more even . As assumed, among the assets evaluated, Bitcoin has the highest SER, followed by Ethereum and Litecoin . This is very significant because Bitcoin is also the main encrypted asset that is hosted by large financial institutions; this trend increases the denominator of SER and puts an overall downward pressure on the ratio. Bitcoin’s SER continues to increase, indicating that despite large institutions entering the field, Bitcoin is still favored by the public. The number of small accounts holding less than 1.85 BTC continued to increase and offset the growth of the top 1% addresses.
Although SER provides a supply distribution that cannot be observed for most traditional assets, an important reminder is that one person can own many crypto asset addresses. Therefore, a person may hold many addresses, and the distribution of supply does not directly map to an individual’s holdings.
Another way to assess the degree of dispersion of supply is through the network distribution factor (NDF) . This ratio covers a wider economic group and may be equivalent to a combination of middle class and lower class. It is calculated by evaluating the sum of addresses holding more than 0.01% of the supply of encrypted assets, and then dividing that number by the total supply.
in conclusion
In short, as the first ever successfully implemented crypto asset, Bitcoin’s turbulent history contributed to a high level of supply turnover throughout the 2010s. Its fair issuance mechanism further supports the distribution, because miners have an inherent need to redistribute new issuance. The combination of these factors makes Bitcoin the fairest crypto asset in existence, as exemplified by the ratio of SER and NDF .
Source link: mp.weixin.qq.com
