The valuation problem

Bitcoin’s pseudonymous inventor was aware that the money supply must adjust to changing money demand: his intent was a better money, and a good money must not be volatile. He knew that a growing number of users requires a growing supply, and it seems he knew more than that: that the required adjustment relates to the value of goods in the supply chain.

Back in 2009 there was no known method to value those goods. Central banks would have re-introduced an unacceptable trust requirement. As he put it: “If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that.”

A decentralised adjustment method

Bitcredit solves the valuation problem by using real trades to self-regulate the currency supply.

1. 01 Electronic bills of exchange record real transaction values: objectively known prices resulting from negotiation between a business buyer and a business seller. The seller wants to sell dearer, the buyer to buy cheaper, but both want a profitable trade. When they agree a price, they have empirically determined the real-world value of the goods. Nothing has to be pegged to a government’s fiat currency, as with stablecoins.
2. 02 When a business pays with an e‑bill, its amount becomes known. The e‑bill itself is raw currency supply which adjusts the total money supply, while the goods constitute savings stocked up in the supply chain. By the time a mint receives a request to mint an e‑bill into e‑cash, the parties have already verified the value.

The mechanics

1. 03 Invoices paid by an e‑bill are encrypted and attached to it; their hash is the e‑bill’s identifier. That gives verifiable proof of value: prices and quantities can be checked for plausibility. Over time e‑bills build an immutable record of participants’ honesty: a credit history expressed in real-world value terms.
2. 04 The parties form a downstream guarantee chain of value in case of default, and the mint network forms an upstream chain backed by verifiable guarantee capital. Near-perfect payment certainty eliminates the need for trust.
3. 05 When the original buyer on-sells downstream in the supply chain, or ultimately to a consumer, the reflux of currency on payment of the e‑bill extinguishes the medium of exchange: it is destroyed, burned.

No inflationary effect

1. 06 Commercial bills of exchange are issued against real value, so they do not cause inflation. There is no Cantillon effect: the goods bought serve the production of commercial buyers, not consumption or speculation.
2. 07 Overall economic conditions and production circumstances usually do not change much over the term of a bill. Similar purchasing power at the second real exchange, at maturity, is what produces the desired stability.
3. 08 It is objected that bills, or fungible currency produced from them, are inflationary when used for speculation or for consumption that takes goods out of the supply chain. This overlooks that bills are short-term instruments while inflation takes far longer to distort prices. Repayment destroys the bill, with deflationary effect, long before any inflationary effect can manifest, leaving near-negligible volatility in the objective exchange value of the money.