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Satoshi Nakamoto's 21 million Bitcoin limit introduced the concept of digital scarcity, revolutionizing the financial world. This fixed supply is enforced by Bitcoin’s code and supported by network nodes, ensuring the scarcity remains integral.
What was Satoshi Nakamoto’s most brilliant idea when it comes to Bitcoin? Hard to answer, but the 21 million limit is up there. With Bitcoin’s finite supply, Nakamoto discovered digital scarcity and changed the trajectory of the whole world. Why 21 million, though? How is the hard cap enforced? Do the users have some guarantee that the limit won’t be changed at some point?
The seemingly arbitrary hard cap generates several questions and Blink is here to answer them.
As established by the beloved and not abusive at all US Federal Reserve, the functions of money are “medium of exchange,” “store of value,” and “unit of account.” Additionally, the characteristics of money are acceptability, divisibility, durability, portability, scarcity, and stability.
Throughout human history, gold took over as the ideal form of money because it’s the scarcest of the precious metals. Note that gold doesn’t excel in divisibility, portability, or stability, but it still won. That’s because, as Saifedean Ammous wrote in “The Bitcoin Standard,” “scarcity is the fundamental starting point of all economics.”
We can’t understate the importance of Bitcoin achieving absolute scarcity from the get-go. Neither gold, nor real estate, nor anything in the real world can be perfectly scarce. Bitcoin can and is, though. There will only be 21 million Bitcoin.
Another mind-blowing characteristic of digital scarcity is that you can’t create more of it, “Once Satoshi Nakamoto discovered digital scarcity, every person who tried to replicate his ideas and create more digital scarcity, actually created less digital scarcity.” That means that those 21 million Bitcoin are all there is, and all the world will ever need.
As of 2024, the Bitcoin network has released nearly 20 million or 90% of the supply. However, that remaining 10% will slowly appear in ever-decreasing quantities over the next hundred years. That’s no exaggeration, the estimation is that the last Bitcoin will be released around 2140.
That mind-blowing fact leads us to the next question…
The finite supply is part of Bitcoin’s code and the nodes enforce the 21 million Bitcoin hard cap. To understand that, a rudimentary understanding of how the Bitcoin network issues new coins is necessary. In a nutshell, the system works as follows:
The network processes a block every ten minutes. The lucky miner who finds a block gets to validate transactions, include them in said block, and get the “block reward” plus all the transaction fees as compensation for their work. The alternative term, “block subsidy,” more precisely describes what’s happening here.
Everybody who uses the Bitcoin network pays for those rewards through a controlled and predictable inflationary process. That’s the price of the security of the network. Every 210,000 blocks, which amounts to approximately every four years, the Bitcoin network cuts the “block subsidy” in half.
The event is called “the halving” or “the halvening” and it just happened, on April 20th we entered the 3.125 BTC per block era. Before that, the reward had been 6.25 BTC for four years; before that, it was 12.5 BTC for four years.
The logic behind the process dictates that when the block subsidy runs out, when all of the 21 million Bitcoin are out there, the network will be mature enough to rely on transaction fees alone to pay for the security and processing capacity that the miners bring.
Bitcoin critics often attack the end of the “block subsidy” and denounce an “issue with the security budget.” Those critics, maybe willfully, ignore that Satoshi Nakamoto already answered that question in the early days. One of his most famous quotes is, “In a few decades when the reward gets too small, the transaction fee will become the main compensation for [mining] nodes. I’m sure that in 20 years there will either be very large transaction volume or no volume.”
If the value of Bitcon and the transaction volume don’t increase, sure, there’s an “issue with the security budget.” However, that would mean that the Bitcoin experiment failed and we all would have more important things to worry about. On the other hand, if the value of Bitcon and the transaction volume do increase, the issue doesn’t exist.
Those are the two possible scenarios.
On February 23rd, 2014, during the legal procedures of an infamous character who we won’t name, early Bitcoin developer Martti Malmi released his email correspondence with Satoshi himself. Among many other revelations, the creator of Bitcoin explained the reasoning behind the 21 million hard cap.
In Satoshi Nakamoto’s own words:
“I wanted to pick something that would make prices similar to existing currencies, but without knowing the future, that's very hard. I ended up picking something in the middle. If Bitcoin remains a small niche, it'll be worth less per unit than existing currencies. If you imagine it being used for some fraction of world commerce, then there's only going to be 21 million coins for the whole world, so it would be worth much more per unit. Values are 64-bit integers with 8 decimal places, so 1 coin is represented internally as 100000000. There's plenty of granularity if typical prices become small. For example, if 0.001 is worth 1 Euro, then it might be easier to change where the decimal point is displayed, so if you had 1 Bitcoin it's now displayed as 1000, and 0.001 is displayed as 1.”
There you have it, not even Satoshi could predict the future. His solution is elegant, though. And the math that makes the Bitcoin network go round has extra data to clear the issue even further.
Eleven years ago someone asked “Why was 21 million picked as the number of bitcoins to be created?” in a classic Bitcoin forum. The “mathematical explanation” provided became part of Bitcoin’s canon, even though it doesn’t actually explain the why behind the hard cap.
This is the explanation:
“Calculate the number of blocks per 4 year cycle:
6 blocks per hour
* 24 hours per day
* 365 days per year
* 4 years per cycle
= 210,240
~= 210,000
Sum all the block reward sizes:
50 + 25 + 12.5 + 6.25 + 3.125 + ... = 100
Multiply the two:
210,000 * 100 = 21 million.
Economically, because the currency is effectively infinitely divisible, then the precise amount doesn't matter, as long as the limit remains fixed.”
That’s right, what matters is that “the limit remains fixed.” That opens up the next question…
Bitcoin critics are a funny bunch. Their thesis is that, eventually, miners will not accept the end of the “block subsidy” and will try to change the protocol’s rules. While this is possible in theory, it would require the majority of the community to accept these changes. This is where the nodes come into play. It’s their job to enforce the 21 million limit and it’s in their best interest to do so.
Also, consider this: if the miners are only motivated by profit as the bitcoin critics suggest, would they be willing to kill the golden goose? It’s as River explains:
“There is a lack of an incentive to increase the bitcoin supply because it would result in inflation and destroy the core investment thesis for Bitcoin – its scarcity. For many investors, the allure of Bitcoin is the predictable, fixed supply.”
The fact of the matter is that more coins don’t create more value. Moreover, we could argue that they destroy value. Why would any miner want to do that?
At the time of writing there are 17808 reachable Bitcoin nodes, and who knows how many anonymous ones. A rough estimation is that there are 57362 total, but consider that “multiple nodes from the same IP address, but different port numbers are counted as one node in this report.” To that number, add all of the nodes that bitcoiners will spin in the next hundred years.
A majority of those would have to agree to run a client that lifted the 21 million hard cap for the rule to get into effect. Even in that unlikely scenario, the 21 million supply would persist. River explains:
“Nodes and miners who refused the change would now operate a minority fork, preserving the original Bitcoin network, and the two networks would compete for market share and hash rate. Thus, the 21 million supply of the original bitcoin can never be changed.”
Now that we cleared that up, one last question remains…
As some of you might know, the Bitcoin protocol is a harsh mistress. An honest mistake in copying an address might send your coins into a vacuum that they can’t return from. And throughout history, people have been losing private keys left and right. Not only that, the system has lost several coins for different reasons.
Let’s quote Unchained for details:
“Core contributor Pieter Wuille has explained that the real total is a bit lower. While the sum of the block subsidies if collected in their entirety is 20,999,999.9769, after accounting for the coins created in the genesis block not being spendable, early bugs, and miners experimenting with the code (some blocks claimed less than allowed), the total supply is actually less—closer to 20,999,817 bitcoin.”
Additionally, according to Bitcoin Supply, at least 2,828.8 BTC are permanently lost. Some coins have not moved since Bitcoin started operating, and that includes the million that Satoshi Nakamoto mined. Other examples are “the now defunct MtGox exchange made 497 BTC unspendable amongst a set of malformed transactions.” and “in block 501,726 the miner didn't accept the 12.5 BTC block reward.”
In conclusion, even though there will only be 21 million coins, some of them are and will forever be unspendable. Bitcoin is even more scarce than you previously thought.
