Bitcoin: Digital Cash or Digital Gold? It's Both

In comparison, supporters of Bitcoin "digital cash" pay more attention to the availability of Bitcoin, and they believe that Bitcoin transaction fees should be kept at a low level so as to attract more users. Supporters of Bitcoin "digital gold" focus more on the security of Bitcoin, and believe that the cost of attacking Bitcoin should be at a high level.

In my opinion, Bitcoin is or will be both digital gold and digital cash.

There isn't much difference between cash and gold

Bitcoin was born out of the cypherpunk movement, which for the past 20 years has been pursuing the development of “digital cash” — also known as “digital gold.” The two terms are more similar than they appear.

The definition of "cash" is "money in the form of notes or coins" and "all forms of money that are immediately usable". The etymology of "cash" is:

"In the 1590s, a money box was also called a box that held money, coins, from Middle French caisse, Provencal caissa, Italian cassa, and Latin capsa."

In order for cash money and its value to remain “instantly usable,” it must be able to be stored privately and securely. This is why most permanent forms of cash throughout history have tended to be durable, so they can withstand the ravages of time and the stress of it — and can also be easily stored in a secure environment, such as a vault.

Therefore, anyone pursuing a durable standard for “digital cash” must consider security as a very important value. Cash that cannot be stored safely is useless. A more secure form of cash will naturally outperform a less secure form of cash under the same standards. India is a good example, with private gold holdings in the country as high as $770 billion, compared to the value of rupee notes of $210 billion.

Satoshi Nakamoto says Bitcoin is both “cash” and “gold”

In the Bitcoin white paper, Satoshi referred to Bitcoin as "electronic cash," and later referred to Bitcoin as the implementation of Wei Dai's B-Money proposal (an anonymous distributed electronic cash system) and Nick Szabo's BitGold proposal. In emails and forum posts, Satoshi compared Bitcoin to gold and gold mining in six different situations.

A clear example of Satoshi explaining Bitcoin as digital gold is a 2010 forum post:

As a thought experiment, imagine there is a base metal that is as scarce as gold, but has the following properties:

1. Color is monotonous gray

2. General conductivity

3. The hardness and toughness are not particularly strong

4. Not suitable for any practical or decorative purpose

It also has a magical property:

1. Transport can be done via communication channels

If the metal for some reason acquired some value, then anyone who wanted to transmit property over long distances would be able to buy some of the metal, send it, and sell it to the recipient.

The bridge from gold to cash

In my opinion, Satoshi was right: Bitcoin can be used both as a secure store of value and as a medium of exchange suitable for small payments. The solution is to accept and embrace an ecosystem with a division of labor, where the various parts of the system can prioritize the various parts of the solution.

With Bitcoin, you can have one part of the ecosystem prioritize security, while other parts focus on convenience and speed. Hal Finney, the first recipient of a Bitcoin transaction, explained:

“In fact, there is a very good reason for Bitcoin banks to exist, as these banks could issue their own digital cash currencies that could then be redeemed for Bitcoin. Bitcoin itself cannot scale to every financial transaction in the world, or include all transactions in the blockchain. We need a more efficient secondary payment system. Likewise, the time it takes for Bitcoin transactions to be finalized is impractical for medium to large value purchases.

(…) Most bitcoin transactions will be conducted between banks, transferring money across the network. By then, private bitcoin transactions will be as rare as bitcoin-based purchases are today.”

The above was written by Finney in 2010. Based on discussions I had with developers in 2012-2013, the idea was common: professional custodians would store bitcoins and issue easily traded deposit tokens, just as gold-backed paper currencies have been issued throughout history — only this time, the holdings would be much easier for Bitcoin Cash users to audit.

This is already a reality today. Western bitcoin exchanges process more than $80 million worth of bitcoin off-chain transactions every day; bitcoin bank Xapo processes 500,000 off-chain bitcoin transactions every day; bitcoin gambling site PrimeDice processes 13 million off-chain bitcoin bets every day, etc. Bitcoin currently has low costs and high transaction volumes - although currently transactions require trust in third-party institutions.

Modular expansion

A few years ago, few knew that Bitcoin Core developers would produce something even better than blockchain enterprise networks — technology that would truly eliminate the need for trusted middlemen. I’m talking about layer-2 solutions like Lightning, sidechains, and Mimblewimble.

Modular expansion software solutions are considered a good digital approach. Unix operating system authority Eric Steven Raymond explained:

“The only way to write complex software that is less likely to fail is to reduce its complexity—to create software that connects simple parts through well-designed interfaces, so that most problems will be local and you can upgrade the problematic parts without tearing down the whole system.”

Developer John Ratcliff was more blunt about Bitcoin Core’s scaling strategy:

“You don’t create a network protocol by cramming everything into one protocol layer; trying to solve separate problems for each separate use case in the vast, all-encompassing Bitcoin codebase. It doesn’t work! Instead, you create a series of protocol layers; each layer solves a piece of the problem that is very good, very efficient, and as simple as possible.”

To further illustrate the importance of modularity in creating functionality that will stand the test of time, we can consider its applications in product design, construction, biology, and even evolutionary psychology.

Conclusion

The question of whether Bitcoin is digital cash or digital gold is a false dichotomy: Bitcoin can be a form of money that is both secure and accessible. By implementing modularity, the Bitcoin main chain will serve as the most secure settlement layer, while the second layer payment channels can serve as channels for fast, high-liquidity transactions.