Bitcoin – A New Gold for a New Bretton Woods

The Bretton Woods monetary system emerged from the wreckage of World War II, serving to stabilize the World economy ravaged after 5 years of conflict.? It was based on a simple principle: global currencies were pegged to the US dollar which was, in turn, valued against the physical asset of gold, initially priced at $35 per ounce.? This is the origin of the US dollar’s ‘reserve currency’ status – all other currencies were priced as a function of it.?

One of the implicit conditions underpinning Bretton Woods – and resulting stability – was the necessity to manage (even, limit) the supply of money released into the economy, and – simultaneously – for the US economy to continuously maintain a trade surplus.? Only strict adherence to these twin policies would ensure that – whatever volumes of US currencies were circulating abroad – they would always be matched by the level of physical assets backing the same in the US; ie. gold.? The logic being that – in the final instance – dollar holders (wherever they were) could always claim their equivalent in gold, if they wished to.

By the beginning of the 1970s, however, the US gold supply was no longer sufficient to cover the value of dollars in circulation globally, and – after a brief run on the dollar – exchange between the currency and gold was temporarily suspended.? The cornerstone of Bretton Woods was finally removed (ie, the dollar’s link with a physical asset) and the dollar has floated more or less freely with respect to other currencies ever since.??

The Bretton Woods ‘confidence trick’

While President Nixon was in the hot seat at the time, the collapse of the system was inevitable since the twin policies of constantly reducing (or, at last maintaining) the money supply to mitigate the risk of inflation, while continuing to maintain a trade surplus (to ensure it could always be matched by physical gold) are, at heart, little more than a ‘confidence trick’.? By 1971, adherence simultaneously to both had proved politically unviable; and therefore impossible.?

One could even argue that the abandonment of Bretton Woods was actually inevitable, even fifty years before its establishment.? Since the foundation of the US Federal Reserve in 1913 to 2009, the actual gold content of 1 dollar has dropped from 1.6 grams to just 0.018 grams – a depreciation of 99%. A fact perfectly reflecting the decline of the dollar in absolute terms over the same period.

One of the limitations of the dollar – and all currencies – was revealed by Karl Marx when he stated: “Gold and silver are not by nature money, but money consists by its nature of gold and silver.” The reality is that gold and silver are not currency equivalents, nor can they be considered ‘guarantors’ for the same.? They are physical objects with limited physical divisions, which far from meet the liquidity needs of the global market.? The collapse of the Bretton Woods system was, therefore, inevitable; just one example of this distinction playing out.

The emergence of a ’new gold’ – beyond Gresham’s Law

In 2008, Satoshi Nakamoto brought us a better "gold" - Bitcoin. Bitcoin uses Blockchain technology and decentralized design to issue currency and transfer value without a central bank. In addition, the total supply of Bitcoin is 21 million, and the production is halved every 4 years, which imposes strong constraints on currency issuance and inflation.

Given these fundamentals (similar to gold which also has a limited/finite supply), Bitcoin holders have traditionally chosen to collect rather than spend Bitcoin given its likelihood of appreciating in value.? This is the essence of Gresham’s Law – people will tend to hold onto ‘good’ assets (in the hope of appreciation) and spend ‘less good ones’.?

Beyond speculation on future price movements, until now, there has been no other way of monetizing Bitcoin; hence the ubiquity of so-called ‘buy-to-hold indefinitely’ (HODL) investors. Any other form of transaction was seen against the opportunity cost of future price rises – Gresham’s Law at work again?

In reality – not quite . . . . Without questioning Bitcoin’s quality as a long term ‘hold’ asset, the reality of actually transacting with the currency has also proved dissuasive.?

According to global research from the BIT Index , for instance, while 38% of ‘tech-savvie’ consumers across the globe are already transacting with Bitcoin at least once a week, 20%, remain uncomfortable using the currency, with experiences ranging between ‘terrifying’ and ‘anxious’; and here we are talking about self-declared ‘tech-savvy’ respondents.? For more mainstream consumers, such experiences are likely to be more common.? Research from the renowned Brookings Institute , for instance, describes crypto transactions as ‘slow’ and ‘cumbersome’;? according to the report: ‘It takes?about 10 minutes ?to validate most transactions using the cryptocurrency and the?transaction fee ?has been at a median of about $20 this year . . ‘.

This is the reality – not just Gresham’s Law – that has traditionally restricted Bitcoin’s liquidity. In part this is design, the unprecedented levels of security and integrity associated with the currency stem from the fact that – unlike Ethereum, for instance – more sophisticated assets such as smart contracts can’t be denominated directly in Bitcoin.?

Layer 2; towards a smarter Bitcoin

Due to its controlled and predictable supply Bitcoin is – by design – an inflation resistant medium of exchange; perfectly fulfilling one of the Bretton Woods’ pillars of stability.? The challenge remains: how to increase liquidity (beyond speculation) without compromising the security and integrity on which its value has been founded.?

The emergence of Bitcoin Layer 2 (BeL2) could represent the missing piece towards an alternative reserve currency.? The BeL2 protocol enables smart contracts to be created and managed directly in Bitcoin, complete with all the associated conditions, dependencies and obligations.? Throughout the process, Bitcoin integrity remains uncompromised since – unlike bridging or wrapping alternatives – through the principle of "no cross-chain assets, only cross-chain information", the BTC network remains untouched.

BeL2 achieves this through the innovative use of ZK proof (ZKP) protocols that generate mathematical proofs for certain complex calculation processes. By verifying the proof results, it can be confirmed that the corresponding calculation process is valid, expected, credible and unforgeable. The result: the integrity of Bitcoin remains intact (in terms of security and integrity), and there are no additional network fees or congestion that typically result from adding traffic to the BTC layer.??

And don’t just take my word for it. BeL2’s ability to empower Bitcoin with Layer 2 functionality corresponds precisely to Bitcoin Magazine’s own definition of the same; namely:

●??????? Use bitcoin as its native asset:?The L2 must be foundationally designed to use bitcoin as its primary token or unit of account, and the mechanism for paying fees for the system. If it has a token, it must be?backed by bitcoin .

●??????? Use Bitcoin as a settlement mechanism to enforce transactions:?Users of the L2 must be capable of exiting the system through a mechanism (trusted or trustless) that returns control of their funds on Layer 1. Demonstrate a functional dependence on Bitcoin:?If Bitcoin were to experience a total failure, and the system in question were to remain operational, then it is our position that that system is not a Layer 2 of Bitcoin.

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Putting Bitcoin to work

One immediate benefit of making Bitcoin ‘smart’ and a key driver of liquidity is Bitcoin staking; the chance to earn ‘interest’ (or a return) from the Bitcoin tokens under management.? While Blockchains such as Tezos, Cosmos, Solana, Cardano and, most famously, Ethereum have traditionally enabled ‘dormant’ tokens to be put to work (verifying transactions and the status of tokens, according to the corresponding smart contracts), this has never been possible with Bitcoin.? In effect, ‘saved’ Bitcoin tokens remained ‘dormant’; apart from trading on price fluctuations, there was previously no other manner to create value from them.

This is not only a technological innovation, but more importantly, it makes Bitcoin officially an interest-bearing asset with a market-based interest rate, which is of massive significance.? If/as Bitcoin starts to behave as reserve currency, no single body (currently the Federal Reserve) will be able to exercise a veto on what return savers earn on their assets; the age of the people’s interest rate may have just begun!

A new Bretton Woods

The global monetary system undergoes a small cycle of anchoring approximately every 40 years and a large cycle of anchoring every 80 years. The dollar is gradually declining as an anchor of global currency, and Bitcoin may play a unique role in the transformation of the international monetary system; representing, not just a store of value, but of liquidity.

Satoshi Nakamoto brought us digital gold; and let’s not forget Bitcoin was still the best-performing asset class in the world during the decade from 2011-2021, delivering annualized returns of 230%. Now that’s value!

Through BeL2, this can be coupled with liquidity – the everyday use of Bitcoin as a medium of exchange, assurance, security and interest.? All without compromising the integrity that made Bitcoin the world’s best performing asset class in the first place.?

By using Bitcoin as an anchor asset, a more stable and sustainable digital currency ecosystem can be built. This system can not only provide users with a safer and more reliable digital currency payment tool, but also bring more innovation and development opportunities to the financial industry.

In essence, a new Bretton Woods offering both value and liquidity; but this time, not controlled by a single individual or country, but instead by the collective choices of its users.

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