Why Sound Money Requires Unforgeable Costliness

Central bank balance sheet expansion is a political decision with near-zero marginal cost, decoupling money from real economic output. This leads to:

• Cantillon Effects: New money benefits issuers and early recipients first, acting as a hidden tax.
• Time Inconsistency: The promise of restraint is broken during crises, as seen in 2008 and 2020.
• Global Reserve Dilemma: Systems like Bretton Woods collapse when the anchor asset (e.g., USD) loses its costliness constraint.

Bitcoin's security is not cryptographic but economic. Miners convert real-world energy into immutable blockspace, creating a provably scarce digital commodity.

• Attack Cost = Security Budget: To rewrite history requires outspending the entire honest mining network, a $30B+/year commitment.
• Waste is the Feature: The "wasted" energy is the sunk cost that makes ledger history unforgeable and consensus objective.
• Hashrate as Sovereignty: The global, permissionless distribution of hashrate makes censorship a physical impossibility.

Networks like Ethereum replace energy expenditure with capital opportunity cost. Validators stake native tokens, which are slashed for misbehavior.

• Capital Efficiency vs. Attack Vectors: Lower ongoing energy cost, but introduces social coordination and staking centralization risks.
• Liveness over Censorship Resistance: A 34% cartel can halt the chain (liveness failure), whereas a 51% PoW attack can rewrite it.
• The Yield Trap: Staking yields can create perverse incentives for validators, aligning them with the protocol's inflation rather than its security.

DeFi protocols like Aave and Compound require accurate price feeds. Chainlink and other oracles solve this by making data manipulation economically irrational.

• Staked Bond Slashing: Node operators post collateral that is destroyed for providing incorrect data.
• Decentralized Data Sourcing: Aggregating from 100s of independent nodes makes Sybil attacks prohibitively expensive.
• The Final Cost Layer: Even with a perfect blockchain, applications fail if their external data inputs are cheap to corrupt.

Maximal Extractable Value is not a bug but a fundamental cost of block production. It represents the economic rent for the right to order transactions.

• Auctioning Block Space: Protocols like Flashbots and CowSwap attempt to make this auction efficient and transparent.
• The Builder Market: A $1B+ annual market where searchers and builders compete to capture value from arbitrage and liquidations.
• Protocol-Enforced Redistribution: EIP-1558 burns base fees, and designs like MEV smoothing attempt to socialize this cost.

New models attempt to bridge digital scarcity with real-world value anchors, facing the oracle trust problem at scale.

• Algorithmic Stablecoin Failure: Terra/Luna proved that circular collateral and off-chain promises are not a costly guarantee.
• Asset-Backed Tokens: Gold (PAXG) or Treasury Bills (USTB) require trusted, audited custodians—re-introducing centralization cost.
• The Verifiable Cost Challenge: The endgame is a digital asset whose costliness to create or corrupt is cryptographically verifiable on-chain, without trusted intermediaries.

Central banks create money at near-zero marginal cost, diluting purchasing power and creating a hidden tax. This seigniorage profit flows to the state and connected entities first, creating the Cantillon Effect where the rich get richer from inflation.

• Key Mechanism: Central bank balance sheet expansion via asset purchases.
• Historical Proof: The US M2 money supply grew by ~40% from 2020-2022, directly fueling asset price inflation.
• Result: A systemically unfair transfer of wealth from late to early recipients of new money.

Bitcoin solves forgery by anchoring issuance to a physical, competitive energy market. The SHA-256 hash function creates a cryptographic lottery where winning a block requires burning real-world joules.

• Unforgeable Costliness: The ~$20B annualized energy expenditure is a sunk cost that cannot be faked or reclaimed.
• Verifiable Scarcity: The 21M cap and predictable halving schedule are enforced by the network's consensus rules.
• Result: A monetary base whose production cost establishes a non-political, global floor value, resisting sovereign debasement.

Stablecoins like USDC and USDT reintroduce the forgery problem at the custodial layer. Their "soundness" is a promise, not a cryptographic proof, relying on opaque banking and legal systems.

• Centralized Mint/Burn: Issuers can create or destroy tokens at will, replicating central bank power.
• Counterparty Risk: $65B+ USDC is only as sound as Circle's reserves and the US banking system.
• Result: A regression to trust-based money, vulnerable to seizure, freeze, and the very inflation they aim to escape.

Sound money requires not just costly creation, but unforgeable ownership. Bitcoin's Elliptic Curve Digital Signature Algorithm (ECDSA) and Unspent Transaction Output (UTXO) model provide this.

• Non-Repudiation: A valid signature cryptographically proves ownership of a specific UTXO without revealing identity.
• Double-Spend Prevention: The global UTXO set is a single source of truth, making duplication computationally impossible.
• Result: A system where value transfer is as verifiable and final as the creation of the money itself, completing the sound money loop.