Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The Crypto Market ends the week at a total market capitalization of $2,120 trillion. Bitcoin is up by nearly 4% in comparison with last Sunday. Ethereum lost 2% in value over the week. XRP is down by roughly 4% after a troublesome week. Most altcoins, except Avalanche, have traded in the red for most of the week. The DeFi sector gained almost $1.4 billion from the…
The Bitcoin Solution
With the advent of Bitcoin came a newfound revolution – a revolution in distributed computing, decentralized organizations, and, most importantly, in the borderless medium of exchange. To many, Bitcoin represents a form of hope, a mechanism that would finally help the world get rid of centralized power and control. To others, Bitcoin was nothing more than an alternative for money.
Satoshi Nakamoto, the pseudonym behind Bitcoin’s creation, saw their invention as nothing more than an experiment. To Satoshi, Bitcoin was a tool to see how a distributed form organization could work. They wanted to know how a network run by its participants would evolve.
What is so Special About Bitcoin?
There are probably a dozen or more innovations in bitcoin that are worth a section of their own. But for the sake of this particular article, we will focus on the Bitcoin mining process.
Bitcoin mining is a mechanism that rewards network nodes with a certain amount of bitcoin upon successful verification of a block. A miner’s role is rather simple – verify a certain number of transactions, link it to the blockchain, and get rewards for their participation.
When bitcoin was first initiated, the network reward was 50 bitcoins per block mined. The rewards follow a deflationary schedule where they halve every four years. In 2012, the reward halved to 25 BTC and then to 12.5 BTC in 2016. It is estimated that around May, the reward will halve again to 6.25 BTC. This means that the reward for miners who verify the blocks gets smaller and smaller over time.
Following the same halving reward logic, it is easily determined that the total supply converges to 20999999.97690000 or approximately 21 million.
Now here’s the mystery – why did Satoshi Nakamoto choose 21 million as the maximum number of bitcoins that can be brought into circulation? Why wasn’t the number higher or lower? If they wanted an asymmetric decreasing supply schedule, why didn’t they choose any other supply distribution strategy?
Looking at the Bitcoin P2P whitepaper and going through the email correspondences that Satoshi had with several ‘Crypto Punks,’ we can make several informed assumptions.
What Can We Say For Sure
- Satoshi wanted the supply to be deflationary.
- They wanted to ensure no fresh issue was possible beyond the set limit.
- The eventual scarcity of Bitcoin’s supply, to Satoshi, was of utmost importance.
- The diminishing rewards schedule would, in turn, fuel the increase in the rate of users.
- As long as there is divisibility of units, it wouldn’t matter how many “bitcoins” are issued.
Now that we have cleared the motivation behind Satoshi’s invention of Bitcoin, what can we say about the supply cap?
Why Did Nakamoto Choose 21 Million?
As of August 2020, about 18.5 million Bitcoins have already been mined, which means that only 2.5 million bitcoins remain. When referring to the supply schedule, one can see that a vast majority of the supply has already been put into circulation within the last 10 years, with the rest taking another century to do so. This clearly represents a deflationary supply schedule where a small number of initial miners have already claimed a bulk of the total supply.
In his own words, Satoshi explained the decision as “my choice for the number of coins and distribution schedule was an educated guess. It was a difficult choice because once the network is going, it’s locked in, and we’re stuck with it.”
Although we can never quite know, let us investigate several theories that the Internet has speculated.
- 1 Satoshi = 1 Dollar
It is clear from the correspondences Satoshi had with Mike Hearn that he wanted Bitcoin to eventually come to a place where it can be denominated with other major currencies. In his words, Satoshi said:
“I wanted to pick something that would make prices similar to existing currencies, but without knowing the future, that’s very hard. I ended up picking something in the middle”.
This means that Satoshi planned for Bitcoin’s denomination to be equivalent to a major currency, say 0.00000001 (1 satoshi) = 1 Dollar. This would make calculations to and from fiat currencies easier and efficient. A deflationary supply that increases in value over time could do the trick. Maybe that is why Satoshi choose 21 Million.
- 21 Million Was Just a By-product
The theory with the biggest consensus is that the number 21 Million was just a by-product. As discussed above, Satoshi planned to make the supply schedule with diminishing rewards so that the miners will slowly come to value their effort. The schedule that he planned, with 50 Bitcoin per block and half the reward after every four years, would have meant that the number would eventually stop at 21 million. If Satoshi had devised another reward schedule, maybe the number 21 million would’ve been higher.
The Internet is not one to hold back on conspiracy theories. Ever since the discussion about the origins began, people have thrown their opinions, whether logical or not. Some say that the reason for the 21 million caps was because Satoshi loved to play blackjack. Some point to astrology and numerology as the reason for its implementation.
There is no way we can know the reasons behind Satoshi Nakamoto’s decision of 21 million bitcoin until we know who Satoshi Nakamoto is. Ever since the disappearance of Satoshi, there have been dozens of questions that remain unanswered. The only thing we can do is see how the decision pans out in the future.