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Coinmonks

# Fiat money’s inflation, bitcoin’s volatility bug, and stablecoins’ prowess

## Functions of fiat money

1. To calculate: In order to be a part of society and a complex economy, I need to know how to value my productive output and what I can get in return for it. For example, without money, say I am an apple producer, I would need to know the relative price of everything in terms of apples. But what if the thing I want to buy (e.g., pears) has no value in apples simply because their producer does not want apples. Money is a common denominator that allows me to easily evaluate my apple’s relative worth to pears and many other goods and services. We can think of it as an S.I. unit, such as Meters, to measure the worth of things instead of length or weight. As such, this function of money is usually referred to as the unit of account.
2. To transact: Consider again the scenario where I’m an apple producer looking for pears, but this time I already know that the pear producer does not want my produce. So I go to a tomato producer who wants my apples and exchange my apples for tomatoes, which I intend to exchange for pears. Unfortunately, once again the pear producer rejects my offer because she doesn’t want my tomatoes. With money however, I could go to the tomato producer, exchange my apples for money, and buy pears with that money. A more efficient process thanks to money acting as a medium of exchange for apples, pears, tomatoes, and many other goods and services.
3. To save: Sometimes our productivity exceeds our current needs and we want to save the “fruits” of our work for later enjoyment. For example, as an apple producer, I may have produced more apples than my needs. So instead of wasting my excess apples by having them rot, I need to exchange them for something that will preserve its value the next week and/or month. Without money, I end up having to go through the burdensome process of knocking on the door of many producers, hoping that one with durable goods would buy my excess apples. With money however, I wouldn’t have to go through the tedious task of finding producers of durable goods specifically looking for apples. I could simply sell my apples to anyone that wants apples and keep the money from this sale in my safe as a store of value.

## Enters Bitcoin

• Bitcoin has a finite supply of 21 million units (vs. fiat money has infinite supply)
• Bitcoin supply grows each time a miner (think a gold miner) discovers a new block on the blockchain
• Bitcoin supply rate is fixed and decreases over time. Block discovery rate is adjusted every two weeks, and the number of bitcoins generated per block decreases geometrically. This means that every 210,000 blocks (~4 years), number of bitcoins created per block decreases by 50% (rate of increase of blue line decreases)
• Bitcoin’s supply algorithm is cemented on the blockchain and agreed upon by all node operators. To change bitcoin’s supply schedule requires more than 50% of the decentralized set of node operators to agree — which is algorithmically disincentivized given it would be like shooting themselves on the foot for miners