Feedback Loops: Tell Me Why

When a system reacts to its environment and the resultant output gets re-incorporated as an input, a feedback loop is created.

The fiat system is an attempt to centrally plan and manage what is a naturally emerging complex adaptive system by way of committee. Each time an ‘undesirable’ economic outcome occurs, this feedback is used to justify making adjustments, which are then added back into the system’s design. Besides introducing unknowable personal biases and moral hazard into decisions, the process is entirely manual and subject to change.

Over time, these adjustments accumulate, causing spasms with increasing frequency and volatility. Like a car being repeatedly steered in opposing directions—eventually, all control is lost.

Contrast this with a monetary system that, by design, cannot respond to external economic feedback. Twenty-one million bitcoin, no matter the environment.

Bitcoin simply functions as outlined by its code (by way of thousands of independent node operators), driving confidence in the likelihood of its continued operations. Given bitcoin’s fixed terminal supply, any and all external economic feedback can only be reflected in changes in demand to hold it, driving multiple reinforcing feedback loops across variables such as hashrate(EH/s), price($USD), and adoption(%).

"Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes. As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up" —Satoshi Nakamoto

A system's success depends first on its ability to survive. Survival means responding appropriately and in a timely manner to changes in the environment. In some cases, that means not responding at all (i.e., bitcoin's monetary policy).

Remember, incentives drive everything.

While violent feedback loops in both directions drive bitcoin in the short term, the long-term trend is one of continued reliability for moving hard value, with high settlement assurance, in a permissionless and global way. And that is something that will only grow in attractiveness as the fiat system begins to fish-tail while hurtling down the highway.

“Time and the free market will decide which ideas align with reality. Bad ideas will vanish, and good ideas will be absorbed.” —Gigi