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Is Bitcoin An Inflation Hedge? A Critique Of The Bitcoin As Money Narrative

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Is Bitcoin An Inflation Hedge? A Critique Of The Bitcoin As Money Narrative

This is an opinion editorial by Taimur Ahmad, a graduate student at Stanford University, focusing on energy, environmental policy and international politics.

Author’s note: This is the first part of a three-part publication.

Part 1 introduces the Bitcoin standard and assesses Bitcoin as an inflation hedge, going deeper into the concept of inflation.

Part 2 focuses on the current fiat system, how money is created, what the money supply is and begins to comment on bitcoin as money.

Part 3 delves into the history of money, its relationship to state and society, inflation in the Global South, the progressive case for/against Bitcoin as money and alternative use-cases.

Bitcoin As Money: Progressivism, Neoclassical Economics, And Alternatives Part I


I once heard a story that set me on my journey to try and understand money. It goes something like:

Imagine a tourist comes to a small, rural town and stays at the local inn. As with any respectable place, they are required to pay 100 diamonds (that’s what the town uses as money) as a damage deposit. The next day, the inn owner realizes that the tourist has hastily left town, leaving behind the 100 diamonds. Given that it is unlikely the tourist will venture back, the owner is delighted at this turn of events: a 100 diamond bonus! The owner heads to the local baker and pays off their debt with this extra money; the baker then goes off and pays off their debt with the local mechanic; the mechanic then pays off the tailor; and the tailor then pays off their debt at the local inn!

This isn’t the happy ending though. The next week, the same tourist comes back to pick up some luggage that had been left behind. The inn owner, now feeling bad for still having the deposit and liberated from paying off their debt to the baker, decides to remind the tourist of the 100 diamonds and hand them back. The tourist nonchalantly accepts them and remarks “oh these were just glass anyways,” before crushing them under his feet.

A deceptively simple story, but always hard to wrap my head around it. There are so many questions that come up: if everyone in the town was in debt to each other, why couldn’t they just cancel it out (coordination problem)? Why were the townsfolk paying for services to each other in debt — IOUs — but the tourist was required to pay money (trust problem)? Why did no one check whether the diamonds were real, and could they have even if they wanted (standardization/quality problem)? Does it matter that the diamonds weren’t real (what really is money then)?

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We are in the midst of a poly-crisis, to borrow from Adam Tooze. As cliché as it sounds, modern society is a major inflection point across multiple, interconnected fronts. Whether it is the global economic system — the U.S. and China playing complementary roles as consumer and producer respectively — the geopolitical order — globalization in a unipolar world — and the ecological ecosystem — cheap fossil fuel energy fueling mass consumption — the foundations atop which the past few decades were built are permanently shifting.

The benefits of this largely stable system, although unequal and at great cost to many social groups, such as low inflation, global supply chains, a semblance of trust, etc., are quickly unraveling. This is the time to ask big, fundamental questions, most of which we have been too afraid or too distracted to ask for a long time.

The idea of money is at the heart of this. Here I don’t mean wealth necessarily, which is the subject of many discussions in modern society, but rather the concept of money. Our focus is typically on who has how much money (wealth), how we can get more of it for ourselves, asking is the current distribution fair, etc. Underneath this discourse is the assumption that money is a largely inert thing, almost a sacrilegious object, that gets moved around every day.

In the past few years, however, as debt and inflation have become more pervasive topics in mainstream discourse, questions around money as a concept have garnered increasing attention:

  • What is money?
  • Where does it come from?
  • Who controls it?
  • Why is one thing money but the other isn’t?
  • Does/can it change?

Two ideas and theories that have dominated this conversation, for better or for worse, are Modern Monetary Theory (MMT) and alternative currencies (mostly Bitcoin). In this piece, I will be primarily focusing on the latter and critically analyzing the arguments underpinning the Bitcoin standard — the theory that we should replace fiat currency with Bitcoin — its potential pitfalls, and what alternative roles Bitcoin could have. This will also be a critique of neoclassical economics which governs mainstream discourse outside the Bitcoin community but also forms the foundation for many arguments on top of which the Bitcoin standard rests.

Why Bitcoin? When I got exposed to the crypto community, the mantra I came across was “crypto, not blockchain.” While there are merits to that, for the specific use-case of money especially, the mantra to focus on is “Bitcoin, not crypto.” This is an important point because commentators outside the community too often conflate Bitcoin with other crypto assets as part of their critiques. Bitcoin is the only truly decentralized cryptocurrency, without a pre-mine, and with fixed rules. While there are plenty of speculative and questionable projects in the digital asset space, as with other asset classes, Bitcoin has well established itself to be a genuinely innovative technology. The proof-of-work mining mechanism, that often comes under attack for energy use (I wrote against that and explained how BTC mining helps clean energy here), is integral to Bitcoin standing apart from other crypto assets.

To repeat for the sake of clarity, I will be purely focusing on Bitcoin only, specifically as a monetary asset, and mostly analyzing arguments coming from the “progressive” wing of Bitcoiners. For most of this piece, I will be referring to the monetary system in Western countries, focusing on the Global South at the end.

Since this will be a long, occasionally meandering, set of essays, let me provide a quick summary of my views. Bitcoin as money does not work because it is not an exogenous entity that can be programmatically fixed. Similarly, assigning moralistic virtues to money (e.g. sound, fair, etc.) represents a misunderstanding of money. My argument is that money is a social phenomenon, coming out of, and in some ways representing, socioeconomic relations, power structures, etc. The material reality of the world creates the monetary system, not vice versa. This has always been the case. Therefore, money is a concept constantly in flux, necessarily so, and must be elastic to absorb the complex movements in an economy, and must be flexible to adjust to the idiosyncratic dynamics of each society. Lastly, money cannot be separated from the political and legal institutions that create property rights, the market, etc. If we want to change the broken monetary system of today — and I agree it is broken — we must focus on the ideological framework and institutions that shape society so we can better use existing tools for better ends.

Disclaimer: I hold bitcoin.

Critique Of The Current Monetary System

Proponents of the Bitcoin standard make the following argument:

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Government control of the money supply has led to rampant inequality and devaluation of the currency. The Cantillon effect is one of the main drivers behind this growing inequality and economic distortion. The Cantillon effect being an increase of money supply by the state favors those who are close to the centers of power because they get access to it first.

This lack of accountability and transparency of the monetary system has ripple effects throughout the socioeconomic system, including decreasing purchasing power and limiting the saving capabilities of the masses. Therefore, a programmatic monetary asset that has fixed rules of issuance, low barriers to entry and no governing authority is required to counter the pervasive effects of this corrupt monetary system which has created a weak currency.

Before I begin to assess these arguments, it is important to situate this movement in the larger socioeconomic and political structure we live in. For the past 50-odd years, there is considerable empirical evidence to show that real wages have been stagnant even when productivity has been rising, inequality has been surging higher, the economy has been increasingly financialized which has benefited the wealthy and asset owners, financial entities have been involved in corrupt and criminal activities and most of the Global South has suffered from economic turmoil — high inflation, defaults, etc., — under an exploitative global financial system. The neoliberal system has been unequal, oppressive and duplicitous.

During the same period, political structures have been faltering, with even democratic countries having fallen victim to state capture by the elite, leaving little space for political change and accountability. Therefore, while there are many wealthy proponents of Bitcoin, a significant proportion of those arguing for this new standard can be seen as those who have been “left behind” and/or recognize the grotesqueness of the current system and are simply looking for a way out.

It is important to understand this as an explanation to why there is an increasing number of “progressives” — loosely defined as people arguing for some form of equality and justice — who are becoming pro-Bitcoin standard. For decades, the question of “what is money?” or the fairness of our financial system has been relatively absent from mainstream discourse, buried under Econ-101 fallacies, and confined to mostly ideological echo chambers. Now, as the pendulum of history turns back towards populism, these questions have become mainstream again, but there is a dearth of those in the expert class that can sufficiently be sympathetic towards, and coherently respond to, people’s concerns.

Therefore, it is critical to understand where this Bitcoin standard narrative emerges from and to not outrightly dismiss it, even if one disagrees with it; rather, we must recognize that many of us skeptical of the current system share a lot more than we disagree upon, at least at a first principles level, and that engaging in debate beyond the surface level is the only way to raise collective conscience to a stage that makes change possible.

Is A Bitcoin Standard The Answer?

I will attempt to tackle this question at various levels, ranging from the more operational ones such as Bitcoin being an inflation hedge, to the more conceptual ones such as the separation of money and The State.

Bitcoin As An Inflation Hedge

This is an argument that is widely used in the community and covers a number of features important to Bitcoiners (e.g., protection against loss of purchasing power, currency devaluation). Up until last year, the standard claim was that as prices are always going up under our inflationary monetary system, Bitcoin is a hedge against inflation as its price goes up (by orders of magnitude) more than the price of goods and services. This always seemed like an odd claim because during this period, many risk assets performed remarkably well, and yet they are not deemed as inflation hedges in any way. And also, developed economies were operating under a secular low inflation regime so this claim was never really tested.

More importantly though, as prices surged higher over the past year and Bitcoin’s price plummeted, the argument shifted to “Bitcoin is a hedge against monetary inflation,” meaning that it doesn’t hedge against a rise in the price of goods and services per se, but against the “devaluation of currency through money printing.” The chart below is used as evidence for this claim.

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Source: Raoul Pal’s Twitter

This is also a peculiar argument for multiple reasons, each of which I will explain in more detail:

  1. It again relies on the claim that Bitcoin is uniquely a “hedge” and not simply a risk-on asset, similar to other high-beta assets that have performed well over periods of increasing liquidity.
  2. It relies on the monetarist theory that increase in the money supply directly and imminently leads to an increase in prices (if not, then why do we care about the money supply to begin with).
  3. It represents a misunderstanding of M2, money printing, and where money comes from.

1. Is Bitcoin Simply A Risk-On Asset?

On the first point, Steven Lubka on a recent episode of the What Bitcoin Did podcast remarked that Bitcoin was a hedge against inflation caused through excessive monetary expansion and not when that inflation was supply-side, which, as he rightly pointed out, is the current situation. In a recent piece on the same topic, he responds to the critique that other risk-on assets also go up during periods of monetary expansion by writing that Bitcoin goes up more than other assets and that only Bitcoin should be considered as a hedge because it is “just money,” while other assets are not.

However, the extent to which an asset’s price goes up shouldn’t matter as a hedge as long as it is positively correlated to the price of goods and services; I’d even argue that price going up too much — admittedly subjective here — pushes an asset from a hedge to speculative. And sure, his point that assets like stocks have idiosyncratic risks like bad management decisions and debt loads that make them distinctly different to Bitcoin is true, but other factors such as “risk of obsolescence,” and “other real-world challenges,” to quote him directly, apply to Bitcoin as much as they apply to Apple stock.

There are many other charts that show Bitcoin has a strong correlation with tech stocks in particular, and the equity market more broadly. The fact is that the ultimate driving factor behind its price action is the change in global liquidity, particularly U.S. liquidity, because that is what decides how far across the risk curve investors are willing to push out. In times of crisis, such as now, when safe haven assets like the USD are having a strong run, Bitcoin is not playing a similar role.

Therefore, there doesn’t seem to be any analytical reason that Bitcoin trades differently to a risk-on asset riding liquidity waves, and that it should be treated, simply from an investment point of view, as anything different. Granted, this relationship may change in the future but that’s for the market to decide.

2. How Do We Define Inflation And Is It A Monetary Phenomenon?

It is critical to the Bitcoiner argument that increases in money supply leads to currency devaluation, i.e., you can buy less goods and services due to higher prices. However, this is hard to even center as an argument because the definition of inflation seems to be in flux. For some, it is simply an increase in the price of goods and services (CPI) — this seems like an intuitive concept because that’s what people as consumers are most exposed to and care about. The other definition is that inflation is an increase in the money supply — true inflation as some call it — regardless of the impact on the price of goods and services, even though this should lead to price increases eventually. This is summarized by Milton Friedman’s, now meme-ified in my opinion, quote:

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

Okay so let’s try to understand this. Price increases due to non-monetary causes, such as supply chain issues, are not inflation. Price increases due to an expansion of the money supply are inflation. This is behind Steve Lubka’s point, at least how I understood it, about Bitcoin being a hedge against true inflation but not the current bout of supply-chain induced high prices. (Note: I am using his work specifically because it was well articulated but many others in the space make a similar claim).

Since no one is arguing the effect of supply chain and other physical constraints on prices, let’s focus on the second statement. But why does change in the money supply even matter unless it is tied to a change in prices, regardless of when those price changes occur and how asymmetric they are? Here is a chart showing annual percentage change in different measures of the money supply and CPI.

Data source: St. Louis Fed; Center for Financial Stability

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Technical note: M2 is a narrower measure of money supply than M4 as the former does not include highly liquid money substitutes. However, the Federal Reserve in the U.S. only provides M2 data as the broadest measure of money supply because of the opaqueness of the financial system which limits proper estimation of the broad money supply. Also, here I use the Divisia M2 because it offers a methodologically superior estimation (by applying weight to different types of money) rather than the Federal Reserve’s approach which is a simple-sum average (regardless, the Fed’s M2 data is closely aligned with Divisia’s). Loans and leases is a measure of bank credit, and as banks create money when they lend rather than recycling savings, as I explain later, this is important to add as well.

We can see from the chart that there is weak correlation between changes in money supply and CPI. From the mid-1990s till the early 2000s, the rate of change of money supply is increasing while inflation is trending lower. The reverse is true in the early 2000s when inflation was picking up but money supply was coming down. Post-2008 perhaps stands out the most because it was the start of the quantitative easing regime when central bank balance sheets grew at unprecedented rates and yet developed economies continuously failed to meet their own inflation targets.

One potential counterargument to this is that inflation can be found in real estate and stocks, which have been surging higher through most of this period. While there is an undoubtedly strong correlation between these asset prices and M2, I don’t think stock market appreciation is inflation because it does not impact the purchasing power of consumers and hence, does not require a hedge. Are there distributional issues that lead to inequality? Absolutely. But for now I want to focus on the inflation narratively solely. With regards to housing prices, it’s tricky to count that as inflation because real estate is a major investment vehicle (which is a deep structural problem in and of itself).

Therefore, empirically there is no significant evidence that an increase in M2 necessarily leads to an increase in CPI (it is worth reminding here that I am focusing on developed economies primarily and will address the topic of inflation in the Global South later). If there was, Japan would not be stuck in a low inflationary economy, well below its inflation target, despite the expansion of the Bank of Japan balance sheet over the past few decades. The current inflationary bout is because of energy prices and supply chain disruptions, which is why countries in Europe — with their high dependence on Russian gas and poorly thought-out energy policy — for example, are facing higher inflation than other developed countries.

Sidenote: it was interesting to see Peter McCormack’s reaction when Jeff Snider made a similar case (regarding M2 and inflation) on the What Bitcoin Did podcast. Peter remarked how this made sense but felt so counter to the prevailing narrative.

Even if we take the monetarist theory as correct, let’s get into some specifics. The key equation is MV = PQ.

M: money supply.

V: velocity of money.

P: prices.

Q: quantity of goods and services.

What these M2 based charts and analyses miss is how the velocity of money changes. Take 2020 for example. The M2 money supply surged higher because of the fiscal and monetary response of the government, leading many to predict hyperinflation around the corner. But while M2 increased in 2020 by ~25%, the velocity of money decreased by ~18%. So even taking the monetarist theory at face value, the dynamics are more complicated than simply drawing a causal link between money supply increase and inflation.

As for those who will bring up the Webster dictionary definition of inflation from the early 20th century as an increase in money supply, I’d say that change in money supply under the gold standard meant something completely different to what it is today (addressed next). Also, Friedman’s claim, which is a core part of the Bitcoiner argument, is essentially a truism. Yes, by definition higher prices, when not due to physical constraints, is when more money is chasing the same goods. But that does not in and of itself translate to the fact that increase in the money supply necessitates an increase in prices because that additional liquidity can unlock spare capacity, lead to productivity gains, expand the use of deflationary technologies, etc. This is a central argument for (trigger warning here) MMT, which argues that targeted use of fiscal spending can expand capacity, particularly through targeting the “reserve army of the unemployed,” as Marx called it, and employing them rather than treating them as sacrificial lambs at the neoclassical altar.

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To bring this point to a close then, it’s hard to understand how inflation is, for all intents and purposes, anything different to an increase in CPI. And if the monetary expansion leads to inflation mantra does not hold, then what is the merit behind Bitcoin being a “hedge” against that expansion? What exactly is the hedge against?

I will admit there are a plethora of issues with how CPI is measured, but it is undeniable that changes in prices happen because of a myriad of reasons across the demand-side and supply-side spectrum. This fact has also been noted by Powell, Yellen, Greenspan, and other central bankers (eventually), while various heterodox economists have been arguing this for decades. Inflation is a remarkably complicated concept that cannot be simply reduced to monetary expansion. Therefore, this calls into question whether Bitcoin is a hedge against inflation if it is not protecting value when CPI is surging, and that this concept of hedging against monetary expansion is just chicanery.

In Part 2, I explain the current fiat system, how money gets created (it’s not all the government’s doing), and what Bitcoin as money could lack.

This is a guest post by Taimur Ahmad. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

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El Salvador Takes First Step To Issue Bitcoin Volcano Bonds

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El Salvador Takes First Step To Issue Bitcoin Volcano Bonds

El Salvador’s Minister of the Economy Maria Luisa Hayem Brevé submitted a digital assets issuance bill to the country’s legislative assembly, paving the way for the launch of its bitcoin-backed “volcano” bonds.

First announced one year ago today, the pioneering initiative seeks to attract capital and investors to El Salvador. It was revealed at the time the plans to issue $1 billion in bonds on the Liquid Network, a federated Bitcoin sidechain, with the proceedings of the bonds being split between a $500 million direct allocation to bitcoin and an investment of the same amount in building out energy and bitcoin mining infrastructure in the region.

A sidechain is an independent blockchain that runs parallel to another blockchain, allowing for tokens from that blockchain to be used securely in the sidechain while abiding by a different set of rules, performance requirements, and security mechanisms. Liquid is a sidechain of Bitcoin that allows bitcoin to flow between the Liquid and Bitcoin networks with a two-way peg. A representation of bitcoin used in the Liquid network is referred to as L-BTC. Its verifiably equivalent amount of BTC is managed and secured by the network’s members, called functionaries.

“Digital securities law will enable El Salvador to be the financial center of central and south America,” wrote Paolo Ardoino, CTO of cryptocurrency exchange Bitfinex, on Twitter.

Bitfinex is set to be granted a license in order to be able to process and list the bond issuance in El Salvador.

The bonds will pay a 6.5% yield and enable fast-tracked citizenship for investors. The government will share half the additional gains with investors as a Bitcoin Dividend once the original $500 million has been monetized. These dividends will be dispersed annually using Blockstream’s asset management platform.

The act of submitting the bill, which was hinted at earlier this year, kickstarts the first major milestone before the bonds can see the light of day. The next is getting it approved, which is expected to happen before Christmas, a source close to President Nayib Bukele told Bitcoin Magazine. The bill was submitted on November 17 and presented to the country’s Congress today. It is embedded in full below.

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How I’ll Talk To Family Members About Bitcoin This Thanksgiving

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How I’ll Talk To Family Members About Bitcoin This Thanksgiving

This is an opinion editorial by Joakim Book, a Research Fellow at the American Institute for Economic Research, contributor and copy editor for Bitcoin Magazine and a writer on all things money and financial history.

I don’t.

That’s it. That’s the article.

In all sincerity, that is the full message: Just don’t do it. It’s not worth it.

You’re not an excited teenager anymore, in desperate need of bragging credits or trying out your newfound wisdom. You’re not a preaching priestess with lost souls to save right before some imminent arrival of the day of reckoning. We have time.

Instead: just leave people alone. Seriously. They came to Thanksgiving dinner to relax and rejoice with family, laugh, tell stories and zone out for a day — not to be ambushed with what to them will sound like a deranged rant in some obscure topic they couldn’t care less about. Even if it’s the monetary system, which nobody understands anyway.

Get real.

If you’re not convinced of this Dale Carnegie-esque social approach, and you still naively think that your meager words in between bites can change anybody’s view on anything, here are some more serious reasons for why you don’t talk to friends and family about Bitcoin the protocol — but most certainly not bitcoin, the asset:

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  • Your family and friends don’t want to hear it. Move on.
  • For op-sec reasons, you don’t want to draw unnecessary attention to the fact that you probably have a decent bitcoin stack. Hopefully, family and close friends should be safe enough to confide in, but people talk and that gossip can only hurt you.
  • People find bitcoin interesting only when they’re ready to; everyone gets the price they deserve. Like Gigi says in “21 Lessons:”

“Bitcoin will be understood by you as soon as you are ready, and I also believe that the first fractions of a bitcoin will find you as soon as you are ready to receive them. In essence, everyone will get ₿itcoin at exactly the right time.”

It’s highly unlikely that your uncle or mother-in-law just happens to be at that stage, just when you’re about to sit down for dinner.

  • Unless you can claim youth, old age or extreme poverty, there are very few people who genuinely haven’t heard of bitcoin. That means your evangelizing wouldn’t be preaching to lost, ignorant souls ready to be saved but the tired, huddled and jaded masses who could care less about the discovery that will change their societies more than the internal combustion engine, internet and Big Government combined. Big deal.
  • What is the case, however, is that everyone in your prospective audience has already had a couple of touchpoints and rejected bitcoin for this or that standard FUD. It’s a scam; seems weird; it’s dead; let’s trust the central bankers, who have our best interest at heart.
    No amount of FUD busting changes that impression, because nobody holds uninformed and fringe convictions for rational reasons, reasons that can be flipped by your enthusiastic arguments in-between wiping off cranberry sauce and grabbing another turkey slice.
  • It really is bad form to talk about money — and bitcoin is the best money there is. Be classy.

Now, I’m not saying to never ever talk about Bitcoin. We love to talk Bitcoin — that’s why we go to meetups, join Twitter Spaces, write, code, run nodes, listen to podcasts, attend conferences. People there get something about this monetary rebellion and have opted in to be part of it. Your unsuspecting family members have not; ambushing them with the wonders of multisig, the magically fast Lightning transactions or how they too really need to get on this hype train, like, yesterday, is unlikely to go down well.

However, if in the post-dinner lull on the porch someone comes to you one-on-one, whisky in hand and of an inquisitive mind, that’s a very different story. That’s personal rather than public, and it’s without the time constraints that so usually trouble us. It involves clarifying questions or doubts for somebody who is both expressively curious about the topic and available for the talk. That’s rare — cherish it, and nurture it.

Last year I wrote something about the proper role of political conversations in social settings. Since November was also election month, it’s appropriate to cite here:

“Politics, I’m starting to believe, best belongs in the closet — rebranded and brought out for the specific occasion. Or perhaps the bedroom, with those you most trust, love, and respect. Not in public, not with strangers, not with friends, and most certainly not with other people in your community. Purge it from your being as much as you possibly could, and refuse to let political issues invade the areas of our lives that we cherish; politics and political disagreements don’t belong there, and our lives are too important to let them be ruled by (mostly contrived) political disagreements.”

If anything, those words seem more true today than they even did then. And I posit to you that the same applies for bitcoin.

Everyone has some sort of impression or opinion of bitcoin — and most of them are plain wrong. But there’s nothing people love more than a savior in white armor, riding in to dispel their errors about some thing they are freshly out of fucks for. Just like politics, nobody really cares.

Leave them alone. They will find bitcoin in their own time, just like all of us did.

This is a guest post by Joakim Book. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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RGB Magic: Client-Side Contracts On Bitcoin

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RGB Magic: Client-Side Contracts On Bitcoin

This is an opinion editorial by Federico Tenga, a long time contributor to Bitcoin projects with experience as start-up founder, consultant and educator.

The term “smart contracts” predates the invention of the blockchain and Bitcoin itself. Its first mention is in a 1994 article by Nick Szabo, who defined smart contracts as a “computerized transaction protocol that executes the terms of a contract.” While by this definition Bitcoin, thanks to its scripting language, supported smart contracts from the very first block, the term was popularized only later by Ethereum promoters, who twisted the original definition as “code that is redundantly executed by all nodes in a global consensus network”

While delegating code execution to a global consensus network has advantages (e.g. it is easy to deploy unowed contracts, such as the popularly automated market makers), this design has one major flaw: lack of scalability (and privacy). If every node in a network must redundantly run the same code, the amount of code that can actually be executed without excessively increasing the cost of running a node (and thus preserving decentralization) remains scarce, meaning that only a small number of contracts can be executed.

But what if we could design a system where the terms of the contract are executed and validated only by the parties involved, rather than by all members of the network? Let us imagine the example of a company that wants to issue shares. Instead of publishing the issuance contract publicly on a global ledger and using that ledger to track all future transfers of ownership, it could simply issue the shares privately and pass to the buyers the right to further transfer them. Then, the right to transfer ownership can be passed on to each new owner as if it were an amendment to the original issuance contract. In this way, each owner can independently verify that the shares he or she received are genuine by reading the original contract and validating that all the history of amendments that moved the shares conform to the rules set forth in the original contract.

This is actually nothing new, it is indeed the same mechanism that was used to transfer property before public registers became popular. In the U.K., for example, it was not compulsory to register a property when its ownership was transferred until the ‘90s. This means that still today over 15% of land in England and Wales is unregistered. If you are buying an unregistered property, instead of checking on a registry if the seller is the true owner, you would have to verify an unbroken chain of ownership going back at least 15 years (a period considered long enough to assume that the seller has sufficient title to the property). In doing so, you must ensure that any transfer of ownership has been carried out correctly and that any mortgages used for previous transactions have been paid off in full. This model has the advantage of improved privacy over ownership, and you do not have to rely on the maintainer of the public land register. On the other hand, it makes the verification of the seller’s ownership much more complicated for the buyer.

Title deed of unregistered real estate propriety

Source: Title deed of unregistered real estate propriety

How can the transfer of unregistered properties be improved? First of all, by making it a digitized process. If there is code that can be run by a computer to verify that all the history of ownership transfers is in compliance with the original contract rules, buying and selling becomes much faster and cheaper.

Secondly, to avoid the risk of the seller double-spending their asset, a system of proof of publication must be implemented. For example, we could implement a rule that every transfer of ownership must be committed on a predefined spot of a well-known newspaper (e.g. put the hash of the transfer of ownership in the upper-right corner of the first page of the New York Times). Since you cannot place the hash of a transfer in the same place twice, this prevents double-spending attempts. However, using a famous newspaper for this purpose has some disadvantages:

  1. You have to buy a lot of newspapers for the verification process. Not very practical.
  2. Each contract needs its own space in the newspaper. Not very scalable.
  3. The newspaper editor can easily censor or, even worse, simulate double-spending by putting a random hash in your slot, making any potential buyer of your asset think it has been sold before, and discouraging them from buying it. Not very trustless.

For these reasons, a better place to post proof of ownership transfers needs to be found. And what better option than the Bitcoin blockchain, an already established trusted public ledger with strong incentives to keep it censorship-resistant and decentralized?

If we use Bitcoin, we should not specify a fixed place in the block where the commitment to transfer ownership must occur (e.g. in the first transaction) because, just like with the editor of the New York Times, the miner could mess with it. A better approach is to place the commitment in a predefined Bitcoin transaction, more specifically in a transaction that originates from an unspent transaction output (UTXO) to which the ownership of the asset to be issued is linked. The link between an asset and a bitcoin UTXO can occur either in the contract that issues the asset or in a subsequent transfer of ownership, each time making the target UTXO the controller of the transferred asset. In this way, we have clearly defined where the obligation to transfer ownership should be (i.e in the Bitcoin transaction originating from a particular UTXO). Anyone running a Bitcoin node can independently verify the commitments and neither the miners nor any other entity are able to censor or interfere with the asset transfer in any way.

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transfer of ownership of utxo

Since on the Bitcoin blockchain we only publish a commitment of an ownership transfer, not the content of the transfer itself, the seller needs a dedicated communication channel to provide the buyer with all the proofs that the ownership transfer is valid. This could be done in a number of ways, potentially even by printing out the proofs and shipping them with a carrier pigeon, which, while a bit impractical, would still do the job. But the best option to avoid the censorship and privacy violations is establish a direct peer-to-peer encrypted communication, which compared to the pigeons also has the advantage of being easy to integrate with a software to verify the proofs received from the counterparty.

This model just described for client-side validated contracts and ownership transfers is exactly what has been implemented with the RGB protocol. With RGB, it is possible to create a contract that defines rights, assigns them to one or more existing bitcoin UTXO and specifies how their ownership can be transferred. The contract can be created starting from a template, called a “schema,” in which the creator of the contract only adjusts the parameters and ownership rights, as is done with traditional legal contracts. Currently, there are two types of schemas in RGB: one for issuing fungible tokens (RGB20) and a second for issuing collectibles (RGB21), but in the future, more schemas can be developed by anyone in a permissionless fashion without requiring changes at the protocol level.

To use a more practical example, an issuer of fungible assets (e.g. company shares, stablecoins, etc.) can use the RGB20 schema template and create a contract defining how many tokens it will issue, the name of the asset and some additional metadata associated with it. It can then define which bitcoin UTXO has the right to transfer ownership of the created tokens and assign other rights to other UTXOs, such as the right to make a secondary issuance or to renominate the asset. Each client receiving tokens created by this contract will be able to verify the content of the Genesis contract and validate that any transfer of ownership in the history of the token received has complied with the rules set out therein.

So what can we do with RGB in practice today? First and foremost, it enables the issuance and the transfer of tokenized assets with better scalability and privacy compared to any existing alternative. On the privacy side, RGB benefits from the fact that all transfer-related data is kept client-side, so a blockchain observer cannot extract any information about the user’s financial activities (it is not even possible to distinguish a bitcoin transaction containing an RGB commitment from a regular one), moreover, the receiver shares with the sender only blinded UTXO (i. e. the hash of the concatenation between the UTXO in which she wish to receive the assets and a random number) instead of the UTXO itself, so it is not possible for the payer to monitor future activities of the receiver. To further increase the privacy of users, RGB also adopts the bulletproof cryptographic mechanism to hide the amounts in the history of asset transfers, so that even future owners of assets have an obfuscated view of the financial behavior of previous holders.

In terms of scalability, RGB offers some advantages as well. First of all, most of the data is kept off-chain, as the blockchain is only used as a commitment layer, reducing the fees that need to be paid and meaning that each client only validates the transfers it is interested in instead of all the activity of a global network. Since an RGB transfer still requires a Bitcoin transaction, the fee saving may seem minimal, but when you start introducing transaction batching they can quickly become massive. Indeed, it is possible to transfer all the tokens (or, more generally, “rights”) associated with a UTXO towards an arbitrary amount of recipients with a single commitment in a single bitcoin transaction. Let’s assume you are a service provider making payouts to several users at once. With RGB, you can commit in a single Bitcoin transaction thousands of transfers to thousands of users requesting different types of assets, making the marginal cost of each single payout absolutely negligible.

Another fee-saving mechanism for issuers of low value assets is that in RGB the issuance of an asset does not require paying fees. This happens because the creation of an issuance contract does not need to be committed on the blockchain. A contract simply defines to which already existing UTXO the newly issued assets will be allocated to. So if you are an artist interested in creating collectible tokens, you can issue as many as you want for free and then only pay the bitcoin transaction fee when a buyer shows up and requests the token to be assigned to their UTXO.

Furthermore, because RGB is built on top of bitcoin transactions, it is also compatible with the Lightning Network. While it is not yet implemented at the time of writing, it will be possible to create asset-specific Lightning channels and route payments through them, similar to how it works with normal Lightning transactions.


RGB is a groundbreaking innovation that opens up to new use cases using a completely new paradigm, but which tools are available to use it? If you want to experiment with the core of the technology itself, you should directly try out the RGB node. If you want to build applications on top of RGB without having to deep dive into the complexity of the protocol, you can use the rgb-lib library, which provides a simple interface for developers. If you just want to try to issue and transfer assets, you can play with Iris Wallet for Android, whose code is also open source on GitHub. If you just want to learn more about RGB you can check out this list of resources.

This is a guest post by Federico Tenga. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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