jakedasnake123 on Nostr: # The Bitcoin Medium of Exchange Problem ## The Core Issue Bitcoin has two ...
# The Bitcoin Medium of Exchange Problem
## The Core Issue
Bitcoin has two fundamental functions that should work together:
1. Store of Value (SoV)
2. Medium of Exchange (MoE)
Current data shows 94% of Bitcoin users treat it purely as a store of value. While this might seem fine on the surface, it creates a deep structural problem that threatens Bitcoin's long-term health.
## Why This Matters
### The Gold Comparison
Gold failed as money because it couldn't practically function as a medium of exchange. This led to paper claims on gold, which eventually became fiat currency. However, gold's physical properties (atomic number 79) remain unchanged regardless of usage patterns.
Bitcoin is different. Its properties aren't maintained by physics - they're maintained by active network participation. The 21 million cap isn't a law of nature; it's a rule that must be continuously enforced by network participants through active sovereign usage and verification.
### The Verification Loop
Every sovereign Bitcoin transaction serves two purposes:
1. Transfers value
2. Verifies and reinforces the network's fundamental properties
When users only hold and never transact, or transact only through custodians, they're not participating in this verification loop. This creates a critical weakness: the network's properties become theoretical rather than actively proven.
## The Monetary Law Problem
### Gresham's Law
"Bad money drives out good money" - when two forms of money are legally required to be accepted at the same face value, people will:
- Hoard the "good" money (Bitcoin)
- Spend the "bad" money (Fiat)
This perfectly explains current Bitcoin behavior. When prices are denominated in fiat with Bitcoin accepted at market rate, Gresham's Law makes hoarding Bitcoin the rational choice.
### Thiers' Law
"Good money drives out bad money" - when exchange rates can float freely and people can choose which money to accept, they'll:
- Prefer to use the good money
- Refuse the bad money
This is what we see in hyperinflationary scenarios where people actively prefer to transact in harder money despite legal requirements.
## The Paradox
This creates a complex challenge:
1. Under current conditions (fiat-denominated prices), Gresham's Law makes hoarding Bitcoin rational
2. But Bitcoin requires active sovereign usage to maintain its properties
3. Without maintained properties, Bitcoin can't reliably serve as a store of value
In other words: individual rational behavior under Gresham's Law threatens the very properties that make Bitcoin valuable.
## The Real Risk
Current trends point toward:
1. Increasing institutional adoption
2. More custodial solutions
3. Growing regulatory frameworks
4. Reduced sovereign usage
This mirrors how gold was captured:
1. Direct usage became impractical
2. Custodial solutions emerged
3. Paper claims replaced physical settlement
4. Properties became theoretical rather than actively verified
But Bitcoin faces an even greater risk than gold because its properties require active maintenance. Without sufficient sovereign usage:
1. The 21M cap becomes a theoretical construct rather than an actively enforced reality
2. Network security becomes dependent on regulated entities
3. Censorship resistance degrades
4. Bitcoin becomes "digital gold" in the worst sense - captured and neutered
## The Convenience Trap
The path of least resistance leads toward:
1. Custodial solutions
2. Regulatory compliance
3. Reduced sovereignty
4. Less direct verification
Each step seems individually rational but collectively threatens Bitcoin's fundamental value proposition.
## Why Technical Solutions Don't Fix This
Current proposals focus on:
1. Scaling solutions (Lightning)
2. Protocol improvements (Covenants)
3. Efficiency gains
But these don't address the core issue: people simply aren't choosing to use Bitcoin in a sovereign way, even when it's easy and cheap to do so. Current fees are minimal (~12 cents) and blocks aren't full, yet sovereign usage remains low.
## The Cultural Shift
The original Bitcoin culture emphasized:
1. Permissionless transactions
2. Censorship resistance
3. Individual sovereignty
Current culture emphasizes:
1. Store of value
2. Institutional adoption
3. Regulatory clarity
This shift matters because it changes behavior patterns that maintain Bitcoin's fundamental properties.
## The Core Question
How does Bitcoin maintain its store of value properties if its medium of exchange function is neglected?
The answer might be: it can't. Just as gold's store of value proposition was ultimately compromised by the failure of its medium of exchange function, Bitcoin faces the same risk - but with even greater stakes because its properties require active maintenance.
## Why This Isn't FUD
This isn't about:
- Price predictions
- Short-term concerns
- Technical limitations
- Regulatory threats
It's about the fundamental requirements for Bitcoin to function as designed. The store of value proposition depends on properties that must be actively maintained through sovereign usage.
## The Core Issue
Bitcoin has two fundamental functions that should work together:
1. Store of Value (SoV)
2. Medium of Exchange (MoE)
Current data shows 94% of Bitcoin users treat it purely as a store of value. While this might seem fine on the surface, it creates a deep structural problem that threatens Bitcoin's long-term health.
## Why This Matters
### The Gold Comparison
Gold failed as money because it couldn't practically function as a medium of exchange. This led to paper claims on gold, which eventually became fiat currency. However, gold's physical properties (atomic number 79) remain unchanged regardless of usage patterns.
Bitcoin is different. Its properties aren't maintained by physics - they're maintained by active network participation. The 21 million cap isn't a law of nature; it's a rule that must be continuously enforced by network participants through active sovereign usage and verification.
### The Verification Loop
Every sovereign Bitcoin transaction serves two purposes:
1. Transfers value
2. Verifies and reinforces the network's fundamental properties
When users only hold and never transact, or transact only through custodians, they're not participating in this verification loop. This creates a critical weakness: the network's properties become theoretical rather than actively proven.
## The Monetary Law Problem
### Gresham's Law
"Bad money drives out good money" - when two forms of money are legally required to be accepted at the same face value, people will:
- Hoard the "good" money (Bitcoin)
- Spend the "bad" money (Fiat)
This perfectly explains current Bitcoin behavior. When prices are denominated in fiat with Bitcoin accepted at market rate, Gresham's Law makes hoarding Bitcoin the rational choice.
### Thiers' Law
"Good money drives out bad money" - when exchange rates can float freely and people can choose which money to accept, they'll:
- Prefer to use the good money
- Refuse the bad money
This is what we see in hyperinflationary scenarios where people actively prefer to transact in harder money despite legal requirements.
## The Paradox
This creates a complex challenge:
1. Under current conditions (fiat-denominated prices), Gresham's Law makes hoarding Bitcoin rational
2. But Bitcoin requires active sovereign usage to maintain its properties
3. Without maintained properties, Bitcoin can't reliably serve as a store of value
In other words: individual rational behavior under Gresham's Law threatens the very properties that make Bitcoin valuable.
## The Real Risk
Current trends point toward:
1. Increasing institutional adoption
2. More custodial solutions
3. Growing regulatory frameworks
4. Reduced sovereign usage
This mirrors how gold was captured:
1. Direct usage became impractical
2. Custodial solutions emerged
3. Paper claims replaced physical settlement
4. Properties became theoretical rather than actively verified
But Bitcoin faces an even greater risk than gold because its properties require active maintenance. Without sufficient sovereign usage:
1. The 21M cap becomes a theoretical construct rather than an actively enforced reality
2. Network security becomes dependent on regulated entities
3. Censorship resistance degrades
4. Bitcoin becomes "digital gold" in the worst sense - captured and neutered
## The Convenience Trap
The path of least resistance leads toward:
1. Custodial solutions
2. Regulatory compliance
3. Reduced sovereignty
4. Less direct verification
Each step seems individually rational but collectively threatens Bitcoin's fundamental value proposition.
## Why Technical Solutions Don't Fix This
Current proposals focus on:
1. Scaling solutions (Lightning)
2. Protocol improvements (Covenants)
3. Efficiency gains
But these don't address the core issue: people simply aren't choosing to use Bitcoin in a sovereign way, even when it's easy and cheap to do so. Current fees are minimal (~12 cents) and blocks aren't full, yet sovereign usage remains low.
## The Cultural Shift
The original Bitcoin culture emphasized:
1. Permissionless transactions
2. Censorship resistance
3. Individual sovereignty
Current culture emphasizes:
1. Store of value
2. Institutional adoption
3. Regulatory clarity
This shift matters because it changes behavior patterns that maintain Bitcoin's fundamental properties.
## The Core Question
How does Bitcoin maintain its store of value properties if its medium of exchange function is neglected?
The answer might be: it can't. Just as gold's store of value proposition was ultimately compromised by the failure of its medium of exchange function, Bitcoin faces the same risk - but with even greater stakes because its properties require active maintenance.
## Why This Isn't FUD
This isn't about:
- Price predictions
- Short-term concerns
- Technical limitations
- Regulatory threats
It's about the fundamental requirements for Bitcoin to function as designed. The store of value proposition depends on properties that must be actively maintained through sovereign usage.