Intro

This is my first steemit post so please be patient with me. Since I know Bitcoin and am fascinated by it's technology and the technology of all cryptocurrencies I am thinking a lot about how far can we go concerning cryptocurrencies as currency (clearly in the last few years many other use cases for cryptocurrencies were introduced but in this post I am concerned with using them as a currency).

In this post I want to discuss what bitcoin would need and what would happen if it becomes the main currency in the world (basically replacing all fiat currencies). You could replace bitcoin with any other cryptocurrency in this post as I only use it as an example to show up some benefits and some problems. Another point of viewing this post is that I want to discuss what properties a new cryptocurrencies would need to be the main currency in the world. I only want to consider economical consequences and not technical issues in this post.

I am not a finance or economy expert. I am just a crypto fan and supporter. So I will use my noobish knowledge of the economy and finance world to describe what I think about this. This post should more be of a discussion and less an information post, so I would be happy to get some nice comments and maybe start some nice discussions.

A Bitcoin World

Lets assume now for this post that the world only has one currency: Bitcoin, no fiat currencies and no other crypto currencies.

Clearly every human on this planet would possess some bitcoins, some people more and some less (as it is also at the moment with money). This is no problem, since bitcoins can be arbitrarily divided. So in average one person would possess 21,000,000 / 7,500,000,000 = 0.0028 Bitcoins (I assume here, that all Bitcoins are already mined). For us "early" supporters this would clearly be great since if we assume in average a person possesses 10,000$ (just some random number, I have no idea how much fiat currency is really there at the moment) the value of one bitcoin would be around 10,000 / 0.0028 ~ 3.5 million $. Ok this sounds nice, but this is clearly just a mind game ;).

Consider now what would happen with the economy compared to the current situation with fiat currencies. The main idea of cryptocurrencies is that they are decentralized and this is also the biggest difference to fiat currencies. Fiat currencies get regulated by some central institution. This institution decides if and how much new money should be printed and how to distribute it. Many economists are of the opinion that a low inflation is good for the economy to encourage company investments and therefore the central institution prints money to hold a small inflation. Furthermore they can use the newly printed money to support governments and banks.

In the bitcoin world we would not have a inflation, since no new money would be printed. On the contrary if we assume that the world population further increases this would mean that more people need to share the same amount of Bitcoins which would lead to a deflation. As far as I understand deflation leads to the fact, that companies save their Bitcoins (since their value will increase in future) instead of investing them which would be bad for the economy. On the other hand one could also few this in this way: If there is a inflation a company invests if the expected revenue of the investment is positive or negative but not as negative as the value decrease of the money through inflation, if there is a deflation a company invests only if the expected revenue of the investment is bigger than the value increase of the money through the deflation. One can say now maybe its a good thing that companies only invest in investments with high revenues, but I am not an expert in economy to determine that.

How could we solve the problem of deflation?

So maybe the main reason for this post is to discuss what could be possible solutions for this problem.

Mining

Clearly one solution to enforce a inflation is mining: We just keep generating new coins and give them to the miners. By the amount of new generated coins we can steer the inflation. But in my opinion mining has another flaw for the economy. In a perfectly balanced situation the costs (hardware + electricity etc.) are almost equal to the mining reward. Because otherwise this would be an incentive for investors to invest into mining hardware and win money. This leads to two problems. First of all big collections of mining hardware are more efficient (cooling and maintaining and so on) and therefore they will keep small miners out of the game since its not profitable for them anymore, this leads to some kind of centralization. But this is not the biggest problem of mining, the other problem is that it is just a waste of electricity and hardware. So in this scenario almost all of the value of the newly generated coins gets wasted by electricity and hardware which is bad for the economy (this electricity and hardware could be used for other things) and bad for the environment!

Distribute new coins to all coin holders

The second option of just distributing new coins to all coin holders is useful for the blockchain itself if you combine it with a consensus algorithm like proof of stake but it does not solve the problem of deflation: Since ALL coin holders get the new coins this just means that the value of a coin decreases but the value of a stake stays the same (since the stake increases, if we consider again that the world population increases the value of a stake would increase over time), therefore we have still the same economic situation: A company could still keep coins as a stake and their value will increase over time and therefore it will only invest if the revenue of the investment is higher than the value increase of the stake.

Distribute new coins to just some institutions like governments or banks

This would be the option as it is at the moment with fiat currencies. But to do this with cryptocurrencies we would need some centralized system which decides who is the government and how much money does it get. So I though a lot about this option and how we could do such a similar thing in a decentralized system (maybe some decentralized voting of governments?) but I didn't come up with a good solution for it. Maybe there are already solutions for such a system or maybe you have some good ideas, I would be happy to discuss about it in the comments :).

Conclucion

I started writing this article about how a world would look like which only has one currency, a cryptocurrency, and wanted to describe possible problems for the economy, but I only ended up talking about the inflation/deflation problem. In principle I think a world with only a cryptocurrency would work (and would be better in many aspects) but would also have some problems. But thinking about the problems I only came up with the deflation problem, maybe we find (and solve?) some other problems in the discussions in the comments.

I hope you liked my article and I hope you leave some comment and maybe start some interesting discussion. I am looking forward to your comments!