What is the fiat leak?
Bitcoiners are quick to point out that money must be burned in order to create value on the Bitcoin network, but what does that mean? And how exactly does fiat ...
What's up, party people? Chris DeRose here, Community Director of the Counterparty Foundation. And in today's video, I wanted to address the question, "What is the fiat leak?" So, this is a term that was around, I guess as early as 2011, I want to say that I really heard it the first time, and there's this notion back then, and this notion may still be true now. But there was this notion back then that fiat was leaking, it was leaking into the crypto-economy. And of course, at the time, the numbers were so small, and even now, the numbers are very small, but there's something to this notion. As we see digital currency and certainly Bitcoin, start to succeed, we have to ask ourselves, at what expense? Where is this capital coming from, that's coming into the Bitcoin system? And well, certainly wealth can always be generated through work and all kinds of other means. In the case of Bitcoin, what we see often is this notion of "burning" to create Bitcoin.
So, you take it to the next level of comprehension and you start to realize that Bitcoin is created by burning dollars. Now, more specifically, it's created by burning energy, but that energy was paid for, and it was paid for in dollars. Those dollars don't disappear from the economy, what actually does disappear is usable energy. But as the crypto-economy grew, at least at some capacity, people started to frame the notion of its growth in terms of coming at consequence to the market cap of the dollar. Now, it's such a small movement at this point, it's very hard to really compare the success of Bitcoin to the success of any fiat currency. But you know, I talk about this at times, and there's sort of this fiat coo that I talk about that might actually be in a sense how we see cryptocurrencies succeed, at expense to more traditional currencies, fiat currencies.
In the Bitcoin world, what I like to talk about is that perhaps it could be said that Bitcoin is a very superior payment mechanism to the dollar, in the same way that the credit cards have been a superior payment mechanism than paper money. And, in a scenario by which maybe Bitcoin does become used at point-of-sale terminals and online, they start to displace credit cards. But we are in this weird spot where perhaps fiat is being converted into Bitcoin, Bitcoin goes to the point-of-sale terminal, and then it goes back into U.S. dollars again. But all of a sudden, the rug has been pulled out from underneath the fiat currencies and that all fiat currencies are decomposing into Bitcoin for the purposes of actually completing a sale.
Now, this may or this may not happen, I certainly think a lot of this will happen in terms of the payout mechanism benefits of Bitcoin, superseding the credit card payment mechanism, and it is a sort of logical extension of that, yeah, we are kind of in a weird spot, where maybe Bitcoin will supersede the dollar in some sense as people see that underlying every transaction is no longer the dollar, but is in fact Bitcoin. But, we'll see, I don't know, it's a weird world we are heading into and that may play out, or it may not. But that's what the fiat leak is, this notion of burning some sort of fiat currency in order to get Bitcoin. It's a little bit relevant to the Counterparty space because in Counterparty, we certainly believe in burning Bitcoin in very similar ways. And this sort of attests to the notion of cryptocurrency in general in proof-of-work systems, where something has to be burnt in order to create stake, and something has to be burnt in order to maintain consensus and to really keep the network chugging. It's a longer discussion of how proof-of-work works, but, get used to it.
It's a very important function of cryptocurrencies. That's it, that's what is the fiat burn, and maybe I answered your question, maybe I didn't. If I didn't, why don't you ask me? You can leave a question in the comments below or you can Tweet me online, at DeRoseTech, and subscribe to the channel if you like this video and you want to see some more.