Borrowing in the crypto economics model would be hard
To tackle inflation, borrowing needs to be hard to poursuit. this is exactlty what BTC is making along the run of it growing value.
BTC economic model
Before diving into the comparison between the crypto-economic model vs CBDCs economic model. We need to study how crypto or BTC specifically has been increasing in value even relative to gold.
When it comes to the economics of cryptocurrency, it really depends on the coin or token we are talking about. We will definitely stick to Bitcoin since it’s the biggest competitor to the current financial system.
Unlike fiat currencies, BTC has a maximum supply of 21 million, this supply is created slowly over time, and every 4 years, the new BTC being created would be cut in half. The last BTC will be mined in the year 2140.
Economics basics principles
A gradual decrease in supply combined with more demand results in a higher price
Over the years, bitcoin has seen exponential adoption, which has resulted in an increase in demand while the supply of BTC is on the decline resulting in a high price for the BTC.
The exponential mass adoption and appreciation of the price of the BTC have incentives millions of computers to process transactions on the bitcoin blockchain, which made it extremely decentralized, therefore very secure.
In fact, Bitcoin is believed to be the most secure payment network on the planet, and as computers continue to process transactions on the Bitcoin blockchain, this blockchain will only continue to become more decentralized. This made it the best layer to build financial technologies and leverage its blockchain for its security.
Because, BTC is increasing in value over time even relative to gold, this made it more attractive to save rather than spend.
With the analogy to the current financial system, BTC economic model means that the interest rates are consistently high meaning inflation would be very low or even negative.
To wrap things up, A BTC based economy would be so expensive to borrow, in a worst-case scenario, this could lead to what we call a deflationary death sparrow, where spending decreases, resulting in lower prices, resulting in lower production, and so on so forth until the economy collapse.
The truth is, even this deflationary death sparrow is not real, it’s just a theory that the current financial system would like us to believe.
Innovation makes mankind’s economy deflationary
In human history, innovation makes everything cheaper as time goes on, which leads inevitably to deflation.
The deflation trend only changes whenever central banks decide to turn the money printer on.
In BTC based economy the BTC would act as gold which is hard money, Moreover, it could back any elastic currency as the gold is used to back national money.
In a contrast with BTC based economy, CBDC based economy would face the same sort of deflationary risks for the same reasons as cash with running the printer digital machine this time. Notice that central banks and commercial banks in order to maintain their profitability, the only way in their hands is to increase interest rates.
Financial institutions to remain profitable, they come up with something named Synthetic CBDC, which is a stablecoin that would be backed with the country’s central bank reserve or assets, or to be more explicit, it would be backed with cash only or in other words the governement debt.
Buying synthetic CBDC or regulated stablecoins, means literally that people would finance the U.S. government by indirectly purchasing its debt which will in turn keep interest rates low, and let the U.S. government fiat Ponzi continue by increasing interest rates for profitability.
The final question here is whether CBDCs will reach mass adoption. The answer is, the voluntary adoption rate would be according to the international bank of settlement statistics between 4 to 10% in developed countries. Which is significantly lower than the adoption rate for cryptocurrencies. And just the fact that financial institutions are studying the chance of creating the same mass adoption of crypto for CBDCs says it all.
Besides the fan facts that some of the developers choose to work on CBDCs for a six-figure salary at best, most of the people who know how to create distributed ledgers would choose to work on the blockchain rather than a distributed database because it turns out that creating a coin or token can result in something that is objectively useful and valuable. Working for developing a CBDC would paint you as the enemy of society in the eyes of many.
Last but not least, Politicians that are aware of the dystopian quality of the CBDCs would rather choose to propose bills on voting for central banks to roll up CBDCs since they already know that their voters don’t want them.
In the end, If this matter to you. share this page with your friends and families to know the difference between CBDCs and good old cryptocurrencies.