Nick Szabo  🔑

Transacting in Bitcoin may be cheaper than transacting in actual gold coins or bullion. But it isn't cheaper than transacting with bank-issued IOUs denominated in an redeemable in gold, particularly when those IOUs can be transferred electronically for next to nothing.

One simple solution to Bitcoin's transaction-cost problem would be to build a banking system on a bitcoin standard. But then the bank-money transactions would not possess the same security and "pseudonymity" as ones conducted in bitcoin itself.

Indeed, Hal Finney & I proposed this kind of thing, inspired by your and Lawrence White's historical research about free banking. We now have more trust-minimized versions of this "layer 2" technology, e.g. Lightning, which is fully & more securely collateralized than mere IOUs.

Exactly, why would anybody hold BTC IOUs at par when they are riskier than the real thing. BTC credit will exist, but I don’t see it circulating as money, it’s economically irrational. This was only possible with gold because of its greater friction.

Gold's biggest flaw was difficulty of validation. That's why we ended up substituting coins for jewelry, and eventually bank note IOUs for coins. Coins were a semi-reliable way to outsource validation, and when it became too easy to counterfeit coins we switched to bank notes.

And note that coins only made validation cheaper at the cost of introducing trust. This trust was often violated with debasement as a legal form of counterfeit.

Debasement was "legal" when the mint was a state monopoly with sovereign immunity from prosecution for fraud. Competitive private silver and gold mints, where allowed, were subject to common law and were highly trustworthy. Like Engelhard, etc., are today.

Still vulnerable when used at retail to counterfeiting, though, taking advantage of the difficulties involved in assaying metals during retail transactions.