One of the reasons Bitcoin has grown exponentially in the last 10 years is that there is overwhelming consensus surrounding the programmatically fixed supply – it appears to be uninflatable. This is a trait unique to Bitcoin. All other known assets are prone to inflation if the value rises high enough to warrant additional efforts to increase supply. For example, if the value of gold increases, we spend more time and effort mining gold until supply and demand meet an equilibrium (profits from mining head towards 0).
I’m going to walk through the steps one would need to take in order to inflate Bitcoin, and the reasons why I don’t think it is possible to convince the market to accept inflation. The arguments I’ve heard suggesting Bitcoin could be inflated boil down to 2 possibilities.
Possibility 1: A bug is discovered and exploited that allows someone to inflate the supply
This is the most realistic way someone could attempt to inflate Bitcoin, and in September of 2018, developers discovered and fixed a bug that could have been exploited to do just this. Imagine if this bug had been exploited. Everyone running a Bitcoin client containing the bug has now had their wealth inflated against their will, finding themselves accidentally caught on an out-of-consensus network due to mistakenly running buggy software (older Bitcoin clients were not affected). There are very strong economic incentives for them to run a patched version of the software to get back into consensus. Consensus is measured by the market and which software full node operators decide to run.
I updated my personal node to run the patched software that prevents the bug from being exploited. I would certainly run a client that patched the bug if it had been exploited because nobody can force me to run their buggy software. In this case, if the fix receives overwhelming consensus from the market and full node operators, the update would split Bitcoin into 2 networks. The first network would be the majority against the bug and the second would be the minority supporting the bug. I would trade all of the coins I had on the minority inflation bug network for coins on the majority bug free network. If a new network is created against consensus, it’s not inflation, it’s a cheap knock-off and an opportunity for in-consensus users to redistribute Bitcoins from out-of-consensus users. Would this bug impact Bitcoin’s adoption? In the short-term yes, but probably not long-term because the network would almost certainly follow the inflationless ledger due to individuals like myself trading the buggy version for the uninflated version. The value of the Bitcoin network clones created out of consensus (BAB, BTG, BCX, BCD, BTCP, etc.) measured against BTC is historical evidence that the market harshly punishes those that try to profit off of inflating Bitcoin against consensus.
Possibility 2: Bitcoin participants reach consensus to inflate supply
This is extremely unlikely due to the overwhelming consensus already established about the supply, but here’s the premise I’ve heard from skeptics: Once the 21 million supply cap is reached in the year 2140, the network is no longer able to maintain the level of security required through miner fees, making it vulnerable to attack. An overwhelming majority of users will run new Bitcoin implementations that inflate the supply to give miners additional incentives to secure the network for the cost of some inflation. This will be a hard fork, which means that it will create 2 networks unless it has 100% consensus, and then the market will choose the network that has the inflation by completely abandoning the uninflatable network.
The assumptions this argument has to make in order to make any sense are the following:
- Bitcoin has not reached complete global adoption in the next 122 years despite being the reason it was created, the exponential growth we’ve witnessed in the first 10 years, the empirical evidence of its currently increasing adoption, and all of the economic theory and monetary history that describes and predicts its continued growth. If the entire world uses it as the primary currency, it’s likely that all surplus energy produced will be used to secure Bitcoin because everyone needs it to be secure and we don’t trust each other.
- Mining looks identical to today, meaning ASIC chips are not super cheap, not widely distributed, and are not securing the network entirely off of excess-generated renewable energy. Bitcoin doesn’t necessarily need mining to be run as a specific industry. mining is already on the path to becoming standard for green energy production as a way to offset the cost of excess energy, making green energy cheaper than dirtier alternatives.
- Finally, if the above 2 assumptions are correct, it assumes that it’s possible to achieve an overwhelming consensus around abandoning the uninflatable version of Bitcoin and going all-in on the inflatable version. This is extremely unlikely because it requires non-mining node operators to vote against their economic interests (devalue their own wealth) and give additional authority to mining nodes. The higher supply issuance rate of the first 10 years of Bitcoin and the history of how national economies evolve over time both demonstrate how inflation contributes to the centralization of wealth over time.
All this goes to say that until humans evolve into some sort of inhuman hive mind creature, or until a sentient evil AI simultaneously hacks every computer and takes control of the Bitcoin network shutting down the entire world economy and enslaving humanity, Bitcoin can’t be inflated.
Inflating Bitcoin was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.