Stone Ridge Founder: Understanding Bitcoin, My Four Personal Epiphanies

This article is from Chain News, authored by Ross L. Stevens, the founder and CEO of Stone Ridge Asset Management, a $15 billion asset management company.

Bitcoin is a journey, not a destination; everyone walks their own path. Every morning, as I study Bitcoin, I find myself filled with awe because the power and potential of Bitcoin's unstructured simplicity teach me humility. The more I learn about Bitcoin, the clearer it becomes how much there is to learn and how much I want to understand. Bitcoin embodies beauty.

On the right is Ross L. Stevens

I study Bitcoin standing on the shoulders of giants, those pioneers who explored Bitcoin knowledge before me and illuminated the path. Over the past eight years, during my morning studies, there have been dozens of moments when I had to put down the book or pause the podcast and sit quietly for a while after reading or hearing something that I felt would forever change my worldview. If you approach the study of Bitcoin with humility and keep in mind Wallace's profound saying: sometimes "the most obvious and important realities are the hardest to discover," you will see many things that cannot be ignored. I certainly have. Below are some of the most significant epiphanies I've had during my studies of Bitcoin.

The list is very long, and I’ve tried to condense it into four.

1. Saleability Across Time

Due to its scarcity and a historical annual supply growth rate of only 1-2%, gold has always been a reliable store of value. There has never been "hyperinflation of gold." Indeed, gold has maintained its value for centuries, while hundreds of other currencies have come and gone, becoming worthless. However, the supply of gold cannot sustain its demand. If we assume that tomorrow the price of gold rises to $100,000 per ounce (a more than 50-fold increase overnight), we can be sure that vast resources will immediately shift to the gold mining industry, and miners will find ways to accelerate their supply growth, causing its value to decline.

In contrast, the supply cap of Bitcoin will forever be 21 million coins. The annual supply growth of Bitcoin will gradually approach zero over time, with the current annual supply growth rate down to about 1%, on par with the historical annual growth of gold supply.

Although this is far from a perfect analogy, gold is the closest analogy to Bitcoin in the real world. The ultimate supply of Bitcoin is fundamentally limited by the design of the protocol itself, regardless of its value or demand level, it cannot be increased. Bitcoin is the first value store in history whose supply is completely unaffected by increases in demand.

From this perspective, Bitcoin is more like gold than gold itself—Bitcoin has better saleability across time.

2. Saleability Across Space

As humanity has transitioned from walking and horseback travel to the rapid development of affordable commercial air travel, especially during the Cambrian explosion of internet power, even the most ardent gold "enthusiasts" cannot ignore the serious flaw of gold's saleability across space.

Gold is difficult to transport. In this respect, fiat currency surpasses gold significantly. Although the cyclical and artificially induced hyperinflation characteristics of fiat currency greatly diminish its saleability across time, its saleability across space has made tremendous leaps.

Contrary to common misconceptions, Bitcoin moves through space much faster than fiat currency, with the capacity for long-distance international settlements increasing to about 500,000 transactions per day, and settlements can be completed in about an hour, rather than the current 3-5 days or longer required for international fiat settlements.

The protocol and network topology of Bitcoin render borders irrelevant, and this power is especially strong for those in the most vulnerable and hyperinflated fiat regions of the world (think of today's Venezuela, Turkey, and Lebanon).

Even in countries like the United States, do not confuse the speed at which you pay with Visa with its ultimate settlement speed. When you buy coffee at Starbucks, the final actual settlement does not occur immediately. Instead, your bank and the bank where Starbucks has its account typically finalize the settlement 2-3 days later, with each bank bearing credit risk in the process, which can sometimes lead to disastrous consequences, even if the specific amounts may be small.

Bitcoin can settle in almost an hour, as an anonymous tool, with no credit risk involved. From this perspective, Bitcoin is more like fiat currency than fiat currency itself—Bitcoin has stronger saleability across space than fiat currency, and it does not create liabilities like fiat currency, so there is no credit risk.

3. Mining Difficulty Adjustment

Everything Satoshi Nakamoto used to create Bitcoin, except for the mining difficulty adjustment, was not original—his genius lay in the insight of how to combine a set of previously solved means to address certain unsolved problems.

I believe that the mining difficulty adjustment is entirely Satoshi's original idea, his most underrated breakthrough contribution, a true genius application of game theory, and the fundamental reason why the Bitcoin network remains secure.

What is mining difficulty adjustment?

Suppose the price of Bitcoin rises, stimulating more Bitcoin miners to engage in Bitcoin mining (remember, successful mining yields Bitcoin rewards, so there is a continuous link between the price of Bitcoin and the total incentives for mining globally). In this case, the Bitcoin protocol will automatically increase the mining difficulty, ensuring that the creation of new Bitcoin and the time for transaction verification will not be shorter than its preset schedule (approximately one Bitcoin mined every 10 minutes). Similarly, if the price of Bitcoin falls, the higher marginal cost Bitcoin miners will rationally shut down their mining machines. The Bitcoin protocol will automatically lower the mining difficulty, ensuring that the creation of new Bitcoin and transaction verification will not be shorter than its preset schedule.

Why does the Bitcoin protocol make such adjustments? If I tell you that the product of two prime numbers is a specific three-digit number and then ask you to guess the two primes (I also remind you that one property of primes is that the product of two primes is unique, and no other two primes multiplied together will equal it). My question has no closed solution, meaning you must guess randomly until you find the answer. Since I told you that the product of these two primes is only a three-digit number, you might be able to guess the two primes quickly. But what if I told you the product is a five-digit, ten-digit number? Twenty digits? You understand that it becomes increasingly difficult, and random guessing becomes harder.

Mining difficulty adjustment is akin to adjusting the number of digits in the product of primes, a function of the online mining capacity at any given time. The more miners there are, the greater the number of digits in the prime product. The fewer miners there are, the fewer digits there are. Even if all commercial Bitcoin miners and their supercomputing pools suddenly go offline overnight, hobbyists mining with laptops in Starbucks can still ensure the security of the entire global Bitcoin network remains unchanged.

In summary: mining difficulty adjustment is the " gem" of decentralized electronic currency attempts made over the past few decades. The mining difficulty adjustment ensures that the Bitcoin network generates a new Bitcoin block every 10 minutes and accurately and immutably verifies all transactions during this time.

It is the above factors that drive Bitcoin's saleability across time: even during periods of surging demand for Bitcoin, Bitcoin miners cannot mine Bitcoin faster, and if the number of Bitcoins generated surges, it would cause unexpected inflation. This design ensures that such inflation will never occur.

In keeping with Satoshi's consistent low-key style, the mining difficulty adjustment is described in just two sentences in his original Bitcoin white paper: "The mining difficulty depends on the moving average of the number of blocks produced per hour. If they are generated too quickly, the difficulty will increase."

By the way, "mining difficulty adjustment" can also limit the waste of mining energy, further incentivizing miners to mine, but this benefit seems trivial compared to its role in enabling Bitcoin to resist inflation.

The mining difficulty adjustment has now been tested for twelve years, with the total power level of the global network growing from just a few laptops at the beginning to consuming energy equivalent to that of New York City's power supply, during which the total power level of the network has fluctuated greatly. The volatility of the total network power requires the Bitcoin protocol to continuously adjust the mining difficulty, similar to constantly adjusting the number of digits in the product of two primes. And astonishingly, just as Satoshi designed, regardless of how global mining capacity or its variability changes, the Bitcoin network has consistently maintained validating a new block every 10 minutes… every 10 minutes… every 10 minutes.

4. Bitcoin's Energy Consumption

Bitcoin's energy consumption refers to the total energy consumed by all mining machines that ensure the security of the Bitcoin network. Although it is difficult to determine specific numbers, a relatively reliable estimate is that Bitcoin's global energy consumption is equivalent to that of 8-10 million people. Indeed, it is a very large number. In the era of global warming, can this be a good thing?

First, the principle is: compared to the current government's monopoly on central banking, Bitcoin is a technology that can better perform central banking functions. Cars consume far more energy than the bicycles and horse-drawn carriages they replace, electric lights replaced candles, central heating systems replaced chimneys, computers replaced typewriters, and Bitcoin is a superior monetary system, albeit consuming much more energy than the current central banking system. Throughout history, as long as free people make free choices and believe that the extra energy cost of the new technology they desire is worth it, energy usage will grow. Today, 24/7 nonstop Bitcoin mining, Bitcoin enthusiasts around the world believe that the energy cost of Bitcoin usage is worth paying because Bitcoin is a better monetary technology.

Secondly, in practice: Bitcoin mining is the only energy usage method in human history that can operate profitably without being near human gathering points. In the long run, this will quietly change the world under the public eye.

Before Bitcoin emerged, energy issues were never related to its scarcity, but rather needed to be directed to the places where it was geographically most needed. Before Bitcoin mining was born, the primary destination for energy was human living spaces. The energy consumed by Bitcoin mining needs to solve a completely different problem. With satellites and wireless internet connections, Bitcoin mining can operate anywhere.

For example, remote barren areas with abundant water sources can produce clean hydropower and use it for Bitcoin mining, thereby monetizing their natural resources. Thus, Bitcoin can monetize isolated energy sources around the world (such as waterfalls, flowing rivers, or buildable dams) that are currently undeveloped because their development costs are high and they cannot access the power grid close enough to residential or industrial areas.

In this way, Bitcoin can fundamentally change the energy economy by introducing location-independent, high-profit electricity. There has never been a case of profitable energy use that is location-independent. Now it can become a reality. And since fossil fuels have become too expensive to be a reliable energy source for profitable Bitcoin mining, I believe the only long-term profitable Bitcoin mining operations will rely on hydropower.

Imagine the future of Bitcoin mining enterprises in uninhabited areas without subsidies—imagine waterfalls in impoverished African countries in sparsely populated areas—easily connecting to the Bitcoin network, establishing a complete energy infrastructure, and using local clean energy for power generation to support Bitcoin mining. Once this industrial-grade capability and profitable infrastructure are in place, it can be scaled up. Let's build roads, housing, schools, and hospitals. Human living areas will emerge.

The end result may be that people settle around new, Bitcoin-driven hydropower infrastructures, with more and more humans gathering near cheap clean energy. Historically, our energy challenge has always been delivering energy to people. With Bitcoin, we can bring people closer to energy.

Consider the major population centers of the current world—New York, London, Paris, Tokyo—each city originated from its geographical location, adjacent to natural harbors, waterways, and trade routes. The formation of these cities did not include energy factors, as they were formed before the energy era (for example, before the fossil fuel era).

As Bitcoin provides profitable development for large-scale cheap clean energy infrastructure, it can usher in an era where more and more people live near abundant energy, producing at very low marginal costs. This is crucial because cheap energy equals human prosperity. That is an equation. Cheap energy = human thriving.

Beyond the monetary policy revolution that Bitcoin has already demonstrated, Bitcoin may also mean the world's largest catalyst for developing abundant, clean, cheap energy. It could become one of the greatest catalysts for global human flourishing.

Do you understand why I am all-in on Bitcoin?