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Comment by j4cobgarby | Hacker News Reader

I never quite understand this stuff, maybe someone can help.

Are cryptocurrencies supposed to be a potential replacement for real life cash? This was my understanding of the motivation behind Bitcoin, at least.

If so, why does it make sense that people can "generate" cash by proving some amount of work done? This of course cannot be done with normal cash.

Is the main functionality of these cryptocurrencies supposed to be "people can send currency to each other", or "people generate currency -- a number -- and sell this currency for real life money"?

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Before a new currency exists, it doesn't exist. Someone has to mint it. It has to be inflated into existence, in the monetary sense. How is this done?

For a state or central bank the answer is obvious: The state or bank itself prints it.

For a private actor the technical means is perhaps less obvious, but the actor behind the currency obviously gets to decide.

For a decentralized open source project, it is less clear. You could do it so every node in the system gets a piece of every newly printed unit of currency, but if it is free to run a node everyone could just run a billion nodes and take all the currency for themselves.

Bitcoin solved the problem with Proof of Work, which is elegant because both the double spend problem and the minting problem is solved together. Every node has to prove it has run a unit of useless computation and inflation is spread evenly across worker nodes. This led to a split between nodes and miners with the use of specialized hardware, but the basic premise still holds.

Crypocurrencies in general are very different. Ethereum, the second most popular, was created by a private actor and the that actor decided to print 72 M for themselves and promptly sold 80+% before the release of the software which gave rise to the term ICO which was very trendy for several years. After the initial release inflation continued according to the miner model.

> Are cryptocurrencies supposed to be a potential replacement for real life cash?

They are supposed to be a medium of exchange. “Real life cash” is one of many forms of money; even for any particularly currency, like dollars, a very small fraction of use is “real life cash”. But, yes, in the most extreme visions, cryptocurrencies replace other currencies for all uses. More moderate visions, however, exist. So, as always when you use “supposed”, the answer is undefined without qualifying it as to by whom it is supposed.

> If so, why does it make sense that people can "generate" cash by proving some amount of work done?

Because there needs to be some mechanism to provide the currency supply, and also some incentive for people to provide the infrastructure on which the currency system relies. For fiat money systems the first is typical policy making in a central bank, and the second is government action to control competition in the banking space and to support banks, reinforcing the profitability of banks. Mining serves both of those functions in a cryptocurrency system (both reinforcing the profitability of transaction network participants and providing the mechanism by which currency supply is managed.)

> Is the main functionality of these cryptocurrencies supposed to be "people can send currency to each other", or "people generate currency -- a number -- and sell this currency for real life money"?

Participants in a currency system selling it for other currencies (FOREX) is a feature of every currency system in a world with more than one currency. Again, the degree to which each of those is “supposed” to be the main function depends on exactly whose supposition you are looking at it.

> More moderate visions, however, exist. So, as always when you use “supposed”, the answer is undefined without qualifying it as to by whom it is supposed.

And in some cases, which mutually-inconsistent argument the same entities are making. For example, when the thing's a dollar-replacing currency at the start of the interview, and can't-miss investment commodity by the end of it.

One of the weird things about our world is that money is central to everything, but it’s hard to understand how it works. There’s a great deal of handwaving around how, for example, dollars are created, much of which is, in fact, not correct at all (most dollars are created not by the government, or even the Federal Reserve, but by private banks, via a mechanism which I will not pretend to fully understand).

The big flaw of Bitcoin, to my mind, is that it is an inherently deflationary currency. Deflation is one of those things that seems great on the surface: prices go down, not up, but when that happens it ends up creating an economic incentive to avoid spending since why buy something today if it will be cheaper tomorrow, and this ends up causing economic activity to slow down or stop entirely. A small amount of inflation, on the other hand creates an incentive to either spend money or invest it in something that will provide a better than inflation return, whether that’s putting it in a high-yield savings vehicle or making capital or financial investments. With deflation, you can just leave your funds in cash (where they will not provoke any economic growth) and get a return.

I’d argue that this is more of a feature than a bug.

The assumption behind the “deflation is bad” argument is that spending itself is the goal. But spending is not automatically good. Productive spending and productive investment are good. Wasteful consumption, speculation, and forced risk-taking are not.

If money holds its value, people become more selective. They still buy food, housing, tools, entertainment, experiences, and things they genuinely want. Humans have needs, preferences, status impulses, advertising pressure, and finite lives. Demand does not disappear just because money is sound. What disappears is some of the artificial urgency to spend before your cash loses value.

The more important point is investment. In an inflationary system, holding money is punished, so everyone is pushed out onto the risk curve. You are not only investing because an opportunity is great; you are investing because the currency is being diluted and you need to escape it. That distorts the real cost of capital and makes mediocre investments look better than they are in nominal terms.

With harder money, investment has to beat the return of simply holding the money. That is a healthy hurdle rate. Capital should have to prove that it creates real value. If an investment only makes sense because the denominator is being debased, or because everyone is forced into assets to avoid inflation, then maybe that investment was not as productive as it looked.

This also matters for inequality. Inflation does not hit everyone equally. People with capital can protect themselves by owning stocks, real estate, ETFs, businesses, and other assets. They can diversify, borrow against assets, and ride asset inflation. Poorer people are more likely to hold wages and cash, so they are the ones whose purchasing power gets diluted first. Then they are told to “just invest,” but they are competing against people who already have capital, better access, better tax treatment, and more room to take risk.

So inflationary money quietly forces the poor to compete with the rich on the rich person’s playing field: asset ownership. A broad ETF may look like a safe wealth-preservation tool for someone with money, but for someone living paycheck to paycheck, the need to buy risk assets just to avoid being diluted is itself a problem.

A deflationary or hard-money system would probably reduce some marginal consumption and speculative investing. But that is not obviously bad. It may mean fewer bad investments, less artificial asset inflation, and more pressure for capital to flow only into things that genuinely outperform money itself. It would also be much more sustainable, not just economically but materially: if money no longer pressures everyone to consume and invest constantly just to outrun debasement, there is less incentive to waste real-world resources on unnecessary production, overconsumption, and short-lived goods.

The fear is that nobody would spend. But people do not stop buying things just because they expect their money to hold value. They stop buying things that are not worth giving up good money for. That sounds like discipline, not economic failure.

In a deflationary system, rich people just hold money, and earn more in interest from holding the money, than everyone else earns combined. They use that interest to buy things from the poor while not producing or investing themselves. Poor people realize if they switch currencies they can have more things because they don't have to give a percentage of everything to the rich. This makes the system unstable.

Bitcoin might be approaching it.

Spending shouldn't be the goal, but exchange of goods and services should be. Representation of real value should be a goal. If you can receive real goods and services as a consequence of holding numbers on a spreadsheet, instead of a consequence of providing real goods and services yourself, the economy has a problem. Maybe a system with zero inflation or very slight deflation can be stable, but the extreme deflation seen in Bitcoin is destabilising.

This still does not work.

“Holding money and earning interest from holding it” is a category error. Holding Bitcoin pays zero yield. No coupon, no dividend, no debtor, no tax stream, and no mechanism by which poor people pay holders a percentage. If someone earns interest, they are not merely holding money; they are lending it, which means they are taking risk and providing capital.

The “numbers on a spreadsheet” objection is also just an objection to money itself. Money exists so someone can produce value today, save the claim, and exchange it later for real goods and services. That is not a bug. That is saving.

A non-inflationary currency is actually a better representation of real value, because the unit is not constantly being diluted. Inflationary money lets nominal wealth rise even when no real value was created. Hard money makes the test harsher: did you actually create value, or did the measuring stick just get worse?

And no, people would not “just sit on Bitcoin.” People still eat, rent, travel, build, compete, seek status, start companies, buy homes, and take risks to outperform others. The only thing that changes is the hurdle rate: an investment has to be better than simply holding money. That is not economic failure. That is discipline.

The fair criticism of Bitcoin is volatility and unequal distribution, not this imaginary mechanism where holders magically receive interest from the poor by owning spreadsheet entries. That mechanism does not exist.

EDIT: The rich/poor angle is almost backwards. In an inflationary system, holding money is a guaranteed loss, so ordinary people are forced to become amateur investors just to avoid being debased. Rich people are already positioned for that: they own assets, businesses, real estate, equities, and can borrow cheaply against them.

In a non-inflationary or hard-money system, simply holding money is not a guaranteed losing strategy. You keep your share unless you voluntarily take risk to increase it. That is a very different game. The rich can still get richer, but they have to outperform by allocating capital well, not merely by being closest to the asset-inflation machine.

Same with wages. Under inflation, your employer can cut your real salary without saying anything: they just give you a raise below inflation, or no raise at all. You have to fight constantly just to stay even.

Under hard money, that hidden pay cut is much harder. If prices are falling or money is appreciating, keeping the same nominal salary can mean your real wage rises. To reduce your real compensation, the employer has to make the cut explicit or offset it with benefits. That is a completely different power dynamic.

So no, inflation is not obviously pro-poor. Very often it is a quiet tax on people least able to escape cash and wages.

Real value deteriorates due to entropy. If I harvested some lettuce this week, in a year I don't still have lettuces - I have a pile of stinky mush. Keeping value steady requires a continual input of effort.

I'd accept "leaky currency" as a substitute for inflation. The important thing about inflation is that you have to keep running just to stay in one place - not that the numbers keep going up. Stable prices are nice, I agree on that.

Bitcoin's volatility is caused by its deflationary nature. Monero is inflationary, and much less volatile.

In an inflationary system, normal people are forced to keep earning money. "Becoming amateur investors" is your way to say "keep generating real value". If you want to surpass Elon Musk you have to invest, but that's nothing to do with the inflationary currency. That's because Elon Musk uses deflationary currencies like land and Ponzi currencies like Tesla stock. He just sits on them, and he will get out of the Ponzi ones before the top because he controls them. As they say, bad money drives out good. But you cannot build a stable economy on hyper-volatile gambling.

Monero is disinflationary, not inflationary. The rate of new coin emission is only enough to maintain equilibrium with the rate of coins being lost (due to people losing wallet keys, etc.). So your comment about being forced to keep earning doesn't apply to Monero.

The price is intended to decrease. If people are losing money (causing the price to increase) at the same rate the price decreases that's on them.

> The price is intended to decrease.

No. Monero's tail emission rate was specifically chosen to be less than the rate of global gold production. Do you claim the price of gold is intended to decrease?

A continuous emission like Monero's doesn't equate to inflation/devaluation. It allows its userbase to expand organically, without artificial scarcity pumping its price.

This mixes up real depreciation with monetary debasement.

Lettuce rotting is not an argument for money rotting. Perishable goods decay, machines depreciate, buildings need maintenance, and inventories have storage costs. Prices can reflect all of that. The measuring unit does not also need to decay.

Money is not supposed to preserve lettuce. It is supposed to preserve a claim on value across time. If I produce value today and save the proceeds, I should not be forced to lose purchasing power just because the unit of account was designed to leak.

Also, “forced to keep earning money” and “forced to become an investor” are not the same thing. In every system, people have to keep producing if they want to keep consuming. The difference is that under inflation, even after producing and saving, your savings are diluted unless you buy risk assets. That does not necessarily mean “generating real value.” Often it just means bidding up existing assets.

Bitcoin’s volatility is not simply “caused by deflation.” It is caused by uncertain demand, adoption cycles, liquidity, leverage, regulation, speculation, and the fact that it is still monetizing. A fixed supply makes price more sensitive to demand shocks, sure, but that is not the same as saying deflation mechanically causes volatility. Monero’s tail emission is also tiny, under 1% and declining over time, so it is hardly a normal inflationary currency.

And the Elon Musk example basically proves the opposite point. Rich people already escape inflation by holding scarce assets: land, equity, businesses, real estate. Poor people are the ones stuck holding wages and cash. A harder money system does not eliminate inequality, but it at least stops making cash itself a guaranteed melting ice cube.

Money is time. The time that’s passed isn’t as good as right now.

>In a deflationary system, rich people just hold money, and earn more in interest from holding the money, than everyone else earns combined.

Wrong, in a 'deflationary' system the more a rich person holds money in proportion to the total money the less interest they are likely to extract/get. If they hold all the money interest they will be effectively get/extract will be zero.

> But spending is not automatically good. Productive spending and productive investment are good. Wasteful consumption, speculation, and forced risk-taking are not. That is indeed a great distinction that you have pointed out.

I think it's good to remember neither saving nor spending is the goal. The goal is productive real activity. Money is a means to get there.

Your entire post is flawed by a giant mistake: thinking that money has any intrinsic value.

Money doesn't have any value, none, zero.

Unless you like watching a piece of paper with Washington or the Queen of England or landmarks in Europe on it, so at least it could hold a value of "I can look at it/burn it".

It's value is none, zero.

That's true both for fiat and crypto.

They are absolutely, inherently, worthless.

The value is given by third parties wanting that money. That's the only reason it has a value.

And your country making some currency (generally its own) the legal tender ensures that that specific currency is used to trade in that country thus reinforcing this "value".

To me the entire idiocy of the crypto cultists is not understanding that money is worthless.

Even the richest people on the planet have very little of it. Their wealth is tied to owning assets be it estate, shares, art, cars, whole companies, funds, etc.

Money is worthless, you're at the mercy of other people wanting it tomorrow or in one year or in 10, and at the mercy of what the market will decide it is worth.

I thought private banks create money the moment they take out a credit from the central bank. The central bank's job is to set the interest rate for those loans, et viola.

That's one method, but consider what happens when someone deposits a million dollars at a bank. This million dollars can be lent out to another person as a mortgage, and guess where that person accepts that money? That's right, a bank. That same 1 million dollars could be lent out to 10 different people, expanding the supply of money many times over. The only limit to this are the capitalisation ratios legislated and enforced by government (the bank must retain some % of total outstanding liabilities as capital it can move immediately). There are a few other ways I understand (and probably many more I dont) that the monetary supply can be expanded via, but that is the simplest one to conceptualise.

"This million dollars can be lent out to another person as a mortgage"

It can't. It isn't. And it never has been.

What banks do is provide liquidity against your collateral. You sell them a charge over your house (for example), and they give you a credit for it. That credit can then be passed on to other people.

Banks are in the business of discounting. They don't take anything in and give it out to other people. [0]

[0]: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Allen Farrington makes a solid case in this essay [1] about deflation being the more effective mode of economy.

[1]: http://x.com/i/article/2045147796752175104

> most dollars are created not by the government, or even the Federal Reserve, but by private banks, via a mechanism which I will not pretend to fully understand

Fractional reserve banking. Basically, bankers start getting very anxious when they see the masses of people depositing mountains of cash into them. They look at the cash hoard they have suddenly amassed and think, we can't just leave this pile of cash here doing nothing, we have to efficiently allocate all of this capital. So they lend it out to people who need cash, charge interest and pay account holders their yields.

Deposit $100. Bank loans out $90, and $10 sits in its reserves. Your account still says $100, even though the bank is now leveraged against loans to third parties. Guy who took the $90 loan pays some bills, and that $90 ends up deposited right back into the same bank. So it keeps $9 and loans out $81. There is now $100 + $90 + $81 in circulation, but only that $100 is real money, the rest are all made up. They only become real when loans are repaid. So, the $81 gets spent, deposited back into the bank, and so on, and so forth, expanding the money supply like a fractal until the amounts become too infinitesimal to track. Thus $1,000 easily becomes $100,000 literally overnight. Government could run its presses 24/7 and it would not be able to outcompete the banks when it comes to inflating the money supply.

Banks are the financial call stacks of society. Better hope there aren't any exceptions (defaults), or the whole thing unwinds and comes crashing down.

It's like a society wide financial version of ISP oversubscription. The assumption is nobody is going to stress test the system by saturating the link 24/7. Everything breaks the second the invariants are violated. Banks similarly assume that not everybody will need all of their dollars immediately, which lets them "efficiently allocate" all of those dollars. Entire government systems exist just to bail out the banks where this assumption fails to be load bearing.

It's amazing this myth continues when the Bank of England debunked it in 2014. [0]

[0]: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

So it's no longer "reserves", it's "capital requirements", "liquidity coverage ratios" or whatever else. Banks inverted the technical language. They don't literally loan out deposits anymore, now they just create loans out of nowhere. Except they still can't create loans out of thin air unless they have actual equity to back at least a fraction of those loans. They still can't create money unless they have... reserves...? And what do you know... Deposits just happen to be the the easiest way to fund that equity account..?

Yep. Not a single change to the moral calculus here. Banks want to be as leveraged as possible. They want to risk it all: their own assets, and other people's money. And they want that risk to be subsidized by society itself. And society allows it because it's addicted to cheap credit. Loans are so thoroughly wired into people's finances at this point that weaning them off it is actually dangerous, not just politically inconvenient. So we'll keep building up and unwinding financial call stacks, and the godlike oligarchs observing and programming the system will keep profiting from the peaks and valleys while everybody else just keeps getting rekt. Nothing new here.

They never did loan out anything. It’s always been a myth propagated by people who have never been involved in banking [0]

The limits to banking are when the last creditworthy person prepared to pay the current price of money walks through the door.

[0]: https://new-wayland.com/blog/post-war-banking-policy/

Also the process is loans creates deposits creates equity.

What do you buy bank shares with? Bank deposits.

Can banks individually create money out of nothing? — The theories and the empirical evidence https://www.sciencedirect.com/science/article/pii/S105752191...

Yes, Bitcoin is a replacement for central banking currencies. Its the first few lines of the white paper.

This is how money works. If you use a medium of exchange and unit of account for goods and services then that medium must increase at the same rate as the increase in goods and services otherwise you get second and third order effects such as inflation, contraction, rising unemployment, etc., directly impacting its ability to act as a unit of account.

In Bitcoin you don't generate cash, you earn block rewards for acting as a consensus broker which otherwise would require a central banking settlement layer. This activity, tied directly to the transaction layer, acts to maintain the equilibrium between increases in goods and services and expansion of the money supply.

Wall Street got ahold of it and now Bitcoin is primarily acting as a Store of Value for the purpose of speculative investments. Driven primarily by the fear of missing out and market manipulation since Bitcoin is heavily centralized.

> Wall Street got ahold of it and now Bitcoin is primarily acting as a Store of Value for the purpose of speculative investments

Insomuch as beanie babies are a store of value. Speculative assets only have value as long as there are more greater fools to buy in. When you've exhausted the supply of greater fools, there is no more reason to buy the speculative asset because its price won't go up, so it will fall to its intrinsic value, which is the worth of a normal stuffie for a beanie baby (roughly $5) or the worth of a number stored on other people's disks for a Bitcoin (roughly $0), which is the value ultimately stored. Wall Street is only involved in Bitcoin to facilitate trade between fools because we have collectively done a poor job of regulating this madness, allowing so many fools to eventually lose their money to a distributed Ponzi scheme and sanctioned countries.

You can't send a Beanie Baby to someone on the other side of the planet instantly.

Which is why they're more difficult for Russia and North Korea to steal and less useful speculative assets for them to fund their regimes.

Roughly the same argument could be applied to gold, and yet it has been used as a value store for ages.

Can't say I like crypto, but I think better arguments can be made against it.

Gold has a use value.

90% percent of gold is used in jewelry or bars so use value isn't that much unless price is prohibiting use cases.

Jewellery is a use for gold, people like it because it is pretty and shiny and easily worked not just because it is rare.

The artificial scarcity and lack of actual use of bitcoin really isn’t the same.

So do beanie babies. Might be less than gold, but that's why I'm calling this argument flawed.

The second part is that despite these disclaimers, I don't think gold has, in modern history, or will in our lifetimes, reach a price reflecting just the use/intrinsic value. The reasons being twofold: the storage of value IS a use itself; and importantly, which applies to Bitcoin and others, there are always people that will be willing to buy the dip, which is how the requested new generation of "fools" comes from.

> the storage of value IS a use itself

And for this, having a private ledger is cheaper and more efficient for moving stored value in a way that is recoverable by law and doesn't support sanctioned regimes.

1 Trillion of market cap can stay wrong longer than some random loud mouth on the internet can stay right about why everybody else is wrong. There is no 'intrinsic' value to most bits of information written on paper or disks, by some definition.

> In Bitcoin you don't generate cash, you earn block rewards for acting as a consensus broker which otherwise would require a central banking settlement layer. This activity, tied directly to the transaction layer, acts to maintain the equilibrium between increases in goods and services and expansion of the money supply.

Block rewards have no connection to transaction volume or economic activity, the protocol is designed such that bitcoin supply increases at a predictable (and diminishing) rate. Bitcoin is deflationary by design, which is one of the major issues that stopped it from becoming anything other than a speculative store of value.

Yes, they absolutely do. That's what dictates difficulty. It is not deflationary, deflation is not the same as supply constraint. Deflation is a reduction in price level, constraining supply is precisely how it moderates the equilibrium of value which is why it is a threat to existing monetary control.

The bitcoin price level reduces as an effect of bitcoin's design, therefore it's a deflationary design.

Well, for now. Obviously it can't reduce forever, and it will eventually slam back up to infinity (bitcoin will collapse) when no normal person feels like it's worth getting any because so much of it is already owned by wealthy people. Until that happens we're surfing the Ponzi wave. Inflationary designs are way more stable.

> If so, why does it make sense that people can "generate" cash by proving some amount of work done?

Think of it this way: If you pay with physical cash, there are people somewhere who do the work of digging ore out of the ground, smelting it, shaping it into coins, cutting and printing paper and so on. All these people do that, because they get paid in the same currency that they themselves have minted.

It turns out that nobody has yet found a way to create a digital decentralized currency that that works without incorporating a similar concept of incentivizing the creation of currency.

ETH is trying right now with proof of ownership.

Which automatically makes in possibly centralized (you can never ever guarantee that not a single entity - or group of colluding entities - hold the majority stake and thus excert control).

Isn't the point of Proof of Stakes that you hold some amount of coin to exert that control. If someone or some group get majority stake, doing anything nefarious would result in crashing the coin value, and thus nuke their own coin value?

Yes, but they can make it up with some other gain in value. For example if you're a US state agency tasked to destroy the Chinese economy, you might overall benefit from buying a ridiculous amount of Chinese money and then setting it on fire, if it means everyone else's Chinese money catches fire too.

Yes, but thinking this is a safeguard presumes the exchange value of the coin must outweigh any other concerns the actor has.

There are mechanism in place to prevent attacks, that require more than 51% control of staked ETH. The team behind ETH probably stayed on PoW for a long time to build the market cap such as to make attacks unlikely by the sheer amount of capital required.

The same is true for PoW, though. You can never guarantee that a single entity or a group of colluding entities will not gain control of most of 50+% of the compute power required. If the compute hardware is useful for other purposes than mining your particular coin, the risk is in fact greater - someone could build or buy up this compute power, destroy the currency, and then use the assets for other purposes, recouping some of their investment. With PoS, at least this much is not possible - anyone who would want to destroy the currency would lose their whole investment.

There is some information on energy usage (production and consumption). There is not much information on crypto ownership besides private keys

Bitcoin was designed to be a replacement for real life cash, but it ultimately failed in this role. Nonetheless it was a great experiment that essentially invented the industry.

Most cryptocurrencies, if we go only by their number, are designed to make their creators rich and moderately succeed at that. This is your ERC20s, pump dot fun, et cetera.

If we only consider ones that have any serious chance of being usable as actual currencies, these days they're usually designed to run arbitrary money-like programs known as "smart contracts", of which traditional money is just one.

Money can't be sent until it's generated, that's the same whether you're talking bitcoin or dollars. There's always a rule for who gets the new money when it's created, and somehow the rule always ends up being "rich people get the new money". Dollars go to politicians and big bankers, bitcoins go to big compute farms, ethers go to big bankers, monero goes to big compute farms. The aforementioned get-rich-quick currencies go to their creators, if course.

> Bitcoin was designed to be a replacement for real life cash, but it ultimately failed in this role

The BTC implementation clearly has failed in this role, but not Bitcoin protocol (look at BCH, for instance)

You can't "generate cash" for doing some amount of random work. You are getting paid for securing the network and keeping it decentralized, and this payment is done in the native token of the network. It's an incentive mechanism, it's a reward for the people who provide the infrastructure for the network.

It's just a mechanism to incentivize mining. The alternative is that miners are paid only via fees, but that risks making it prohibitively expensive to transact. Minting new coins distributes the cost of mining over all holders by inflating the currency a little bit. Fees are still necessary to avoid spamming.

Bitcoin was intended to be funded entirely by transaction fees and the minting was just to jumpstart the currency, which is why the new coin minting rate tends to zero. This was a naïve mistake. Other cryptocurrencies have start high and approach a lower nonzero value.

> Bitcoin was intended to be funded entirely by transaction fees

Transaction fees used to be free, but miners started to require at least 1 sat/b, to prevent "spamming" the mempool, so... no.

> Are cryptocurrencies supposed to be a potential replacement for real life cash? This was my understanding of the motivation behind Bitcoin, at least.

This was the original stated purpose, yes. But this works poorly in practice. Hypothesized frictionless tooling that would make it easy to make purchases with crypto has not emerged.

Nowadays it's held more like a speculative asset with value that comes from scarcity and demand, much like gold (though gold has some industrial application which Bitcoin does not).

Broken Money by Lyn Alden is a good book on the topic

Lyn Alden is great. Andreas Antonopoulos is also a great educator.

> If so, why does it make sense that people can "generate" cash by proving some amount of work done?

Because you need an incentive for 'miners' to participate in transaction processing.

Main functionality is transactions which are not controlled by any single entity (like the government).

Most of it is speculation unfortunately, which gives it a bad name, drowning out real usecases.

So now I'm wondering, why wouldn't they just charge a transaction fee in Monero?

Why mine at all?

If you want to scale up to Mastercard levels.

A transaction fee of what? To take a fee from a transaction there has to be a transaction to take a fee from, which needs some sort of "coin" that came from somewhere. Somebody has to create a money supply and distribute it somehow. When the network first comes into existence, nobody has any money, so where does it come into being from?

Mining is what generates the coins. And you need mining because otherwise you need some other issuing organism. Without decentralized mining you get a central issuer, and that's untrustworthy and possible to shut down.

It is subtle, but PoW mining itself doesn't generate coins. It isn't like someone is digging a hole in the ground and extracting gold.

PoW miners are rewarded for correctly validating transactions, with newly minted coins.

The whole proof of work thing is that you proved that you validated a transaction by expending energy, and the network pays you for that security service.

Miners then need to sell those coins on the open market in order to pay for their capex/opex, which creates the market.

The open question is that if you have a fixed supply of coins that eventually runs out, what will carry the miners?

It'll be increased fees or the network will switch to another solution.

Agreed with your explanation.

I would add a different way to make sense of it.

Proof of work allows for what Keynes called "Bancor". BTC is succesful because unlike fiat central banks, the money supply isn't dictated by interest rates (and thus loans) but by the effort of participants. The price of BTC is almost irrelevant, BTC itself is a paradigm shift.

Regarding the fixed supply, it's only fixed because participants agree to the consensus algorithm that fixes it. Many cryptocurrencies have different tokenomics, such as ETH's rules under PoS. BTC miners could vote onchain for a hard fork to change the 21M cap - or another solution.

Full disclosure, I was a bitcoin, and 5MW litecoin miner, and 150,000 GPU ETH miner, so I was pretty deeply involved in it for many years.

Correct on the rest, but I just want to say that I was intentionally avoiding discussing specific tokens or the politics due to HN's stance on crypto.

The money supply of BTC has a fixed schedule. It has nothing to do with the effort of participants.

I believe transactions are quite optional though? A miner could choose to mine empty blocks if they truly wanted, which transactions to include if any is up to them.

Correct, one can mine empty blocks, but in practice, dumb idea. Most people mine with a pool. The pool decides what goes into a block. Even at scale. The point is that it smoothes out the reward cycle. For ETH, we mined with a pool that dual mined ETH+ZIL, which increased our overall rewards.

In a distributed system you still need all the features of the centralised system.

For a currency, that means you still need issuance, and you still need security.

Miners, glossing over a lot of theory, provide security in exchange for receiving issuance. They can be seen like the decentral bank of the crypto world.

They're meant to replace the bank.

Cryptocurrencies allow market participants to communicate value to each other without having to trust other market participants or an institution. Mining verifies transactions and commits them to the public record, earning the miner a fee for their work.

> Are cryptocurrencies supposed to be a potential replacement for real life cash?

I think the better word would be alternative, rather than replacement.

Crypto currencies have way too many flaws to be really useful as currencies.

Not just usability, technology, fees, etc, but the very deflationary nature of most of them makes them unsuitable as a currency because the incentive is hoarding, not spending.

But...you can still use them as a mean of transferring money. So they are absolutely an alternative.

> This of course cannot be done with normal cash.

Normal cash is just printed out from thin air by those who have the power. In that sense (some) cryptocurrencies are better because at least the process is open.

Fiat money is proof of stake, except the failure mode is economic collapse or military collapse.

Is it not printed out of thin air by those that have compute power ?

Running computer power costs a lot more than thin air.

Bitcoin attempted to replace cash, but failed because the transaction costs are orders of magnitude too high. The high cost of zero-trust makes it a desirable medium of exchange only for criminals and scammers.

In an effort to make Bitcoin a reasonable medium of exchange, various businesses arose to act as intermediaries/market makers. But this violates the trust-free model – and many of those intermediaries have proven to be outright scams. It turns out that trusting an intermediary to handle your cryptographically untraceable asset is not a wise thing to do.

So that leaves Bitcoin in a similar category as gold. You're either a paranoid type for whom the high cost of holding and transacting the asset is a price you're willing to pay for an asset that could survive a global meltdown. OR you extend trust to various intermediaries (gold ETFs, bitcoin ETFs for example) and treat it as just another tradable financial asset.

Bitcoin is undeniably the cleverest way anyone ever became a billionaire. Nakamoto's sole contribution was posting an anonymous 9 page whitepaper to the internet and voila, today he (or she, or it) is worth $80+ billion.

>Bitcoin attempted to replace cash, but failed because the transaction costs are orders of magnitude too high.

The current fees are less than 0.40$. It may be too high for a starbuck coffee, but that's way lower than the fees charged by a credit card provider if you are purchasing something over 50$. On a 2%+0.10$ structure, you only need to transfer around 15$ before your credit card fee is higher than the current average BTC tx fee.

> This of course cannot be done with normal cash.

Yes, it can be! Just open a bank.

There are two parts of an answer to this, because your questions are somewhat divergent:

> why does it make sense that people can "generate" cash by proving some amount of work done? This of course cannot be done with normal cash.

People do generate money when they work, in a sense, because money doesn't have value. Money represents value. To really understand that you need to think about what money is and why it was invented in the first place.

Before the invention of money there was only direct exchange; I do/give something for/to you and you do/give something for/to me in return. But what if you want what I have but I don't want what you have? Or what if we want something from each other but are too far apart to make the exchange directly? Well, we find a third participant who can act as a kind of transfer agent. They could, for instance, have something I want that you don't want and also want something from you. They trade with you first so now you have something from them that you don't want that you can then trade to me for the thing you want, and everyone is happy. This extends to arbitrarily many, dozens or hundreds even, of intermediate steps.

Now it should be easy to recognize two things:

1) Everyone needing to store a bunch of stuff they don't actually want just so they can pass it on to the next person can become a huge burden for everyone. And how do you store labor anyway? You can't. You can only store goods.

2) Organizing dozens of intermediate links is an extremely difficult problem to solve just so you can get what I have.

The first one can be solved by exchanging IOU vouchers instead. The holder of the voucher becomes entitled to the thing that hasn't yet been given or done. Storing those vouchers is trivially easy compared to storing the things. And you can just as easily store vouchers for work that hasn't been done yet as you can for goods that haven't been given yet.

The second one can be solved by saying what if people put their vouchers into a central voucher bank instead of passing all their vouchers around to each other directly, and then the central voucher bank organizes all the intermediate steps for people without people needing to figure out who has the vouchers they need to complete the chain.

And then once you're there, why even use specific IOUs at all? Why not have all the vouchers be generic but you get different amounts of them instead of different kinds that you can then use freely for anything? And that's obviously what money is.

And from there a new thing should become obvious: The money itself doesn't have any intrinsic value. The labor/good behind it does. Money is just a way of representing the value of something you did/produced in a form that can be easily traded for other things. It's the medium of exchange, not the product. And when there are fewer vouchers in the system relative to what's being produced, each voucher becomes worth more (deflation), and vice versa (inflation). And then the government literally prints and destroys vouchers as needed to try to keep a balance. That is a thing that happens. And so what if there can be prolonged time delays between you doing your work and you receiving your vouchers under some systems? Time delays are not inherent, just practical for bookkeeping. And when long time delays are not practical for bookkeeping they become shorter.

> Are cryptocurrencies supposed to be a potential replacement for real life cash? This was my understanding of the motivation behind Bitcoin, at least.

Only as an unrealistic pretense in the current climate. The reality is that a currency needs to be both moderately inflationary and also very stable to be useful as a medium of exchange of goods/services. You never want it to be a better financial decision to hold onto currency forever instead of using it, and you also never want people to randomly wake up destitute. And regardless of whether bitcoin is technically inflationary in the near term, it is not practically inflationary, and it's definitely not stable.

I would say Bitcoin was a good attempt to create digital fiat money but it ultimately failed, both because it's deflationary and because of throughput limits. Monero succeeded a little bit more but will eventually collapse because of storage limits and the impossibility of pruning, and it's banned in most countries because their intelligence agencies can't track it.

> Before the invention of money there was only direct exchange; I do/give something for/to you and you do/give something for/to me in return.

This is ahistoric. Widespread barter is only really takes place in post-currency societies. Pre-currency societies mostly engaged in reputation or "gift" economies. When I have a surplus, I share with peers, with the understanding that they have done and will do the same in the future. It can be tempting to map that social obligation onto currency debt, but reputation doesn't really behave the same way as currency does. It's not linearly combined (giving someone with no bread a loaf of bread is going to provide you much greater than half as much standing with that person than giving them 2 loaves), its transaction costs are much, much lower (you probably wouldn't pay the village idiot, but if you enjoy listening to his tall tales, you probably think fondly enough of him to help him out in a pinch, or share some extra berries you found, or you might value the fact that your neighbor gave a loaf of bread to the guy with none from the earlier example, but it would be weird to pay him for that indirect, incidentally service), and it's barely portable: maybe your kid might benefit somewhat from your prestige in the community, but unless he lives up to it it doesn't matter if you saved the village by single-handily slaying the lion that was picking off children and livestock. Likewise you can't just hop over to the next village and expect people to help you any more than basic hospitality rules demand.

yes, Bitcoin was hijacked by the company, Blockstream and they injected the SegWit and RBF attacks to kill it as a currency, Bitcoin Cash still functions as Bitcoin however.

Monero is similar to Bitcoin Cash, a useful replacement for cash in most cases.

Bitcoin Cash's value begs to differ.

segwit is an optimization, not an attack wtf. I'd get it if you said Ethereum Classic, since that fork actually did come from an attack on the protocol that successfully reversed transactions on the main chain, but Bitcoin Cash is not of that nature.

SegWit added unnecessary complexity (~5,000 LOC) to a problem that could be solved just increasing the max block size (1 LOC)

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