Let me know your thoughts on my first article!

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In light of the recent events with Liquid Bitcoin (L-BTC) losing some of its reserves to hackers, as well as other scandals in the Bitcoin community, I feel it is necessary for an investigation to be done into the different variations of Bitcoin and how they apply to the theory of money and credit as espoused by Ludwig von Mises.

Glossary

Money in the narrower sense - Money proper used in circulation as a medium of exchange (MoE). Consists of commodity money, credit money, and fiat money.

Commodity money - Money valued for some purpose prior to being used as a MoE.

Credit money - Claims to present goods for future goods.

Fiat money - Money backed by decree.

Money in the broader sense - Consists of the narrower sense plus money-substitutes, such as money certificates and fiduciary media.

Money-substitutes - Claims to money. Important note: The status of whether a claim is backed or not is irrelevant to its catallactic character, meaning the same consequence occurs from them - Changes in the purchasing power of BTC!

Money certificates - Money-substitutes backed at 100% and fully redeemable.

Fiduciary media - Money-substitutes unbacked (below 100%) and thus irredeemable.

Mapping of Misesian Framework for Money and Credit to Bitcoin

BTC in the broader sense

Bitcoin-substitutes

L2 solutions i.e Lightning, Liquid, etc.

Lightning (LN-BTC) is strictly Bitcoin certificates due to the limits imposed on issuance and its peer-to-peer nature, which mean the LN is full reserves rather than fractional reserves, preventing concerns regarding fiduciary coins. LN-BTC is merely for transaction purposes, not artificial expansion.

On the other hand, L-BTC is run by a federation, making it trusted in contrast to LN-BTC. This places Liquid is a category similar to banks and other financial institutions when it comes to fiat. Recently, L-BTC has been shown to exhibit the same properties as fractional reserve banking due to inflation bugs leading to the formation of fiduciary media. The federation gets the final say in whether to create more claims or not, meaning Liquid is much more fitting of free banking than full reserve banking.

L3 and above i.e Ark, Chaumian ecash mints, etc.

Ark is non-custodial, allows unilateral exits, and the Ark Service Provider (ASP) is barred from spending funds or creating virtual UTXOs (vTXOs), which act as BTC-substitutes, without BTC, meaning Ark acts as BTC certificates. Much like LN-BTC, Ark focused on transactions as more of a clearinghouse rather than a bank.

Much like L-BTC, Ecash mints are also capable of fractional BTC reserves. Unbacked tokens can also be created, making it prone to fiduciary media, although this is easy to discover.

Bitcoin tokens i.e wBTC, tBTC, etc.

BTC tokens are the closest to being fiduciary media in my opinion due to the fact that they rely on the protection of other blockchains rather than sidechains as the aforementioned protocols have.

Wrapped Bitcoin (wBTC) is an ERC-20 token that allows for BTC to be used on other blockchains such as Ethereum (ETH). It does not have a fixed supply, and is thus prone to inflation. Furthermore, it requires the trust of merchants and custodians who may potentially freeze wBTC, preventing withdrawals similar to bank runs.

BTC in the narrower sense

L1/on-chain Bitcoin

On-chain BTC is likely the sole type within this category, as it would fall under the category of commodity BTC. The most important thing, however, is to use non-custodial services whenever possible to prevent harm.

Different address types (Taproot, Silent Payment, etc.) are merely different designs of on-chain BTC, akin to how gold can be shaped into bullion, coins, etc. Therefore, it isn't anything too serious to focus on.

While L1 has the advantage of stability, it comes at the disadvantage of a lack of privacy. It is up to each holder to decide which risks to take with L1.

Bitcoin loans

As credit BTC, you must take caution when it comes to where you take loans from, especially from centralized exchanges (CEX). CEXs can and have issued way more Bitcoin IOUs than they actually have, preventing all customers from retrieving their funds in time ex. FTX. There has been a proposed Proof-of-Reserves (PoR) requirement, but it doesn't include off-balance-sheet liabilities, such as leases.

General Rules

From the instances mentioned above of different services regarding BTC, here are a few common rules I have noticed:

1. The more farther the type is from commodity BTC, the more likely it can be fiduciary media, as more trust becomes required each time.

2. Non-custodial solutions are the best for ensuring protection of funds. Not your keys, not your coins.

3. The less actors needed, the better.

4. Always do your own research before deciding on Bitcoin-substitutes. Different elements of the code can give away whether the service is more likely to be backed (Bitcoin certificate) or unbacked (fiduciary media)

5. Don't trust! Verify!

I wrote this article to be useful as a guide when it comes to which decisions you plan to make when it comes to your coins. Keep in mind that while I didn't cover every single service or protocol, I'm hoping you can at least notice the patterns the next time you plan to invest in something new.

The advantage of knowing the kinds of money and credit is that it provides a simple explanation for whenever a new controversy in the BTC community (and crypto community in general) occurs: Artificial demand via lack of reserves!