Can a lesson in bimetallism help the long-term stability of Bitcoin and privacy coins?


The crypto market has been on a downtrend since the tail end of 2021. In early May 2022, this culminated in a downtrend that hit traditional markets equally hard. The recent bust removed some of the speculation from the market. But the shakeup is different from before. There are still many more active users using the bitcoin network than we have seen in previous cycles. Many more holders and true believers surpassed it. However, as it grows over time, one of the few concerns about bitcoin (BTC) may affect its adoption. There is an economic incentive, not just utility, that privacy coins can offer as a solution.

At different points in the first half of 2022, both in crypto market rallies and massive dumps, privacy coins such as Monero (XMR), Dash (DASH) and Zcash (ZEC) have performed relatively well against other altcoins. Does this mean that there is an inherent demand for interest in crypto privacy?


The Bitcoin Standard Is Finally Here (Well, Not Yet)

For the sake of this discussion, let’s assume bitcoin created it. Bitcoin is now the dominant currency globally. But due to the pseudo-anonymous nature of the bitcoin blockchain, anyone can see all transactions for each wallet. And for every coffee purchased, the buyer’s spending habits, the location where the spend occurred and all the other dystopian trappings of the 1984-inspired nightmare are a reality. This nightmare is what inspired the creation of such as Monero, Zcash, Dash, Decred (DCR), Secret (SCRT) and Horizon (Zen) to name a few. Some of these have properties similar to those of bitcoin. Zcash is designed with a 21 million hard cap supply similar to bitcoin and is powered by proof-of-work.

Could it be out of the question that one or two of these blockchain protocols will be adopted as an “everyday” transaction currency to complement the bitcoin standard? Protocols like Monero and Zcash have either a shallow inflation rate or a limited supply. They operate with their Tokenomics and promise to do nothing more than protect user privacy, as a medium of exchange and store of value.

related: Loss of Privacy: Why We Should Fight for a Decentralized Future

Bimetallism: What is that, and why does it matter?

Bimetallicism is a concept long before and before the advent of cryptocurrencies. As the name suggests, the idea behind bimetallicism is that different types of precious metals will be used to offset price inflation rates relative to each other. Gold traditionally contained silver and conversely if one began to have too much purchasing power, the other could be balanced. For example, one horse is worth one gold coin or 10 silver coins (gold and silver are rare to varying degrees but still have different intrinsic properties for utility). If the horse is now worth two golds a year later, it may only be 12 silver coins, which makes trading more attractive to the holder of silver, while putting pressure on the inflationary price of gold. This bimetallic arrangement works in principle when you have the same medium of exchange, like two precious metals. When the state introduced fiat currency into the mix, Grisham’s law took effect, and with a vengeance.

Grisham’s law states that bad money drives out the good. If a holder holds fiat or bitcoin, there is a high probability that they will value the good/service less than BTC and will turn away fiat, which has a potentially unlimited supply. This means that bitcoin will sit in people’s pockets forever unused, destroying some of the value proposition of sound decentralized money to the world. If we assume that the world is moving towards digital means of exchange, it will not change the laws of economics.

There will still be adjustments in the price level of things for tradable assets. Other assets may be required as alternatives to keep these various means under control. However, if we don’t want to re-implement Grisham’s law, bitcoin should have a similar asset, yet propose a different value proposition. Enter Privacy Coins.

related: Gold, Bitcoin or DeFi: How can investors hedge against inflation?

privacy matters

Bitcoin can be a unit of account, medium of exchange, store of value and other properties that fit into the Gold 2.0 narrative. And traceability of bitcoin is a nice feature it has its uses. As we see now with bitcoin-backed loans, the transparency of assuring creditors that the funds exist is a great utility of the chain. But do you want the coffee barista to know that you shop at the antiques store every Wednesday? Do you want your personal finances to be known to your boss? Or for anyone who wants to see your payment history?

This is where the idea of ​​bimetallicism, or “bicryptoism”, can and does emerge and solve these issues. If bitcoin is adopted along with one or two different scarce and limited mediums of exchange (a privacy coin), these can help keep the purchasing power of goods/services against each other in a constant “steady fluctuating”. can do. This, of course, is in the future when bitcoin is the dominant currency in the world.

Because these different protocols have different properties (like gold and silver), they can perform different functions in users’ lives. For daily transactions, users can enjoy the privacy that a privacy coin can provide while utilizing all the benefits of a decentralized ledger and blockchain technologies. When users wish to transfer their money to a wallet with a publicly-facing address, they can choose to keep their funds in bitcoin. Perhaps, through functions such as on-chain atomic swaps, this could be even simpler than a decentralized or centralized exchange.

Satoshi Nakamoto, the mysterious inventor of bitcoin, once wrote: “For greater privacy, it is best to only use a bitcoin address once.” A new BTC address for every user would be impractical for a 2022 crypto user, never mind a world where bitcoin is the standard medium of exchange. Users will either have to try and create a Bitcoin Improvement Proposal (BIP) to replace bitcoin to include privacy-enhancing features or co-opt one or more privacy coins with options in a “bicryptoism” setup. be in existence. There are additional economic benefits of keeping inflationary pressures on prices down over time.

These are some ideas for the future, and the larger crypto community needs to think about these potential issues as we move forward. Economics played a huge role in the founding of bitcoin and the cryptocurrency revolution, and it should be a great source of informing its future as well.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.

The views, opinions and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Michael Tabone is an economist at Cointelegraph Research. a Ph.D. Candidate, Engineer, Economist and Business Strategist, he also provides strategic consulting to firms focusing in DeFi and the Blockchain space. Michael has co-authored several reports for Cointelegraph Research and writes a quarterly venture capitalist report published on the Cointelegraph Research Terminal. His Ph.D. The dissertation is on DAOs and their practical applications in the business world.