Stability Property

Value is subjective and therefore price stability is an economic fiction. The exchange price of a money is is determined by its supply and demand which is in turn affected by the demand schedules of all people for all products. The stability of a money is not a tendency toward constant prices in all other things, it is a damping relationship between demand for the money and its supply.

We can organize monies into three supply categories:

• Rational supply (commodity)
• Arbitrary supply (fiat)
• Fixed supply (bitcoin)

In any money, destruction of units decreases supply and therefore increases the value of those that remain. Given that there is no financial incentive for loss it does not impact stability.

Commodity money supply increases due to the financial incentive to produce more when price is expected to be at or above production cost (inclusive of capital cost). This relationship between price and supply is predictable despite price (and therefore supply) not being so. Because price is not predictable this monetary inflation cannot be capitalized. Therefore all holders of the money suffer a reduction in value from the increased supply. Competition ensures that this production financed by existing holders is limited to the capital cost. The feedback of value decrease resulting from supply increase reduces production incentive, creating stability.

Fiat money supply is increased arbitrarily (or taxed as demurrage) by the sovereign due to the financial reward of seigniorage. When this monetary inflation is predictable it can be capitalized, which discounts the return on seigniorage. As such changes to supply are often not published. Due to state monopoly protection (i.e. production is the crime of counterfeit), competition cannot effectively limit returns. The resulting sovereign profit (tax) is the reward of seigniorage and the reason for fiat. Monopoly protection is the sole economic distinction between commodity and fiat money. The supply increase caused by seigniorage is mitigated only by political unrest as people resist the consequential value decrease. This unrest initially manifests as capital flight, which is countered by foreign exchange controls.

Bitcoin supply is independent of price. Given that subsidy is predictable it is capitalized and has no affect on price over time. Its purpose is to rationally distribute units and so is eventually phased out. As fees necessarily rise with demand the utility threshold mitigates demand. Stability results from limiting demand directly, as opposed to relying on an increase in supply to do so. This is in turn an economic pressure that precludes linear scalability. This pressure exists independent of the transaction carrying capacity of the chain. The block size limit consensus rule establishes the arbitrary trade-off between utility threshold and system security, yet at any value the system remains non-scalable due to the necessity of confirmation finality.

This raises the question of whether sufficient demand can exist to secure Bitcoin, given the requirement for risk sharing. Aggregate demand can be increased through the use of off-chain confirmation for below-threshold scenarios, settled on chain. This represents an individual security compromise (for lower-value transactions), avoiding system security compromise (for all transactions). This cost-security compromise produces its own limit. In other words Bitcoin stability is a consequence of inherent non-scalability. This implies price is not unbounded.