Understanding coin scarcity: Bitcoin, DMD, and Binance Coin

Both Bitcoin and DMD Diamond have a limited supply, and both are scarce. However, the two terms don’t mean exactly the same thing, and the scarcity of DMDv4 is determined by its high utility more than by its supply cap. In this post, we’ll explore what scarcity means, how it affected Bitcoin’s price in the past, and how it will impact the price dynamics of DMDv4 in the future.

Bitcoin: it’s not about the finite supply

As you may know, the maximum supply of Bitcoins is fixed at 21 million. Once the 21-millionth coin has been generated, mining will stop forever. Of course, the network’s everyday functioning will continue: miners will add transactions to blocks and collect transaction fees, which will become their main source of income. If the fees will rise to compensate for the loss of block rewards is a different matter, and we won’t delve into it here.

As of February 2021, there are already over 18,360,00 BTC in circulation, meaning that 87.4% of the maximum supply has already been created. But since the block reward is cut by half every 4 years (known as the halving, or halvening), the inflation rate will keep slowing down, so the very last coin won’t be mined until 2140.

If we still have over 100 years of Bitcoins continuously flowing into the market, why are we talking about scarcity? Most people think that Bitcoin is scarce because its supply is finite, but this isn’t exactly correct. Every asset that has a price is scarce to a certain degree, meaning that there are people who can’t buy it at that price, leaving some unsatisfied demand. The maximum supply can be infinite or undefined (for example, we don’t know how much gold there is on Earth, and yet it is scarce). On the other hand, an asset that nobody wants isn’t scarce, no matter how small its total supply.

Bitcoin isn’t scarce because there can be only 21 millions of it. It is scarce because people know that its supply isn’t flexible (lost BTC are lost forever) and because they know that there will come a point when the demand will consistently exceed supply. They believe that BTC has great utility and that it will become more and more scarce with time, and that makes it scarcer in the present, causing the price to rise.

Bitcoin’s perceived scarcity as reflected by halving events

Every four years, we are reminded that Bitcoin is scarce when a halving happens. The price climbs for a few weeks before the event as miners stash their BTC instead of selling them, waiting for a rally. Then BTC drops temporarily and trades flat for a few months, just to be followed by a massive climb several months after the halving. As we’ve said, the effect is mostly psychological, because of course new BTC aren’t going to dry up suddenly.

Before the first halving in November 2012, the price grew by over 34%, then grew to an ATH of $1100 in 2013. Some months before the second event in July 2016, the price rose from $240 to $660, pulled back, and then rose all the way to $20,000 in December 2017.

Finally, ahead of the third halving in 2020 BTC grew from $7,000 to $9,800, pulled back, traded in a channel until October, and finally started rising to reach $50,000.

One more example: Binance Coin

BNB has a capped supply of 200 million, plus a buyback-and-burn mechanism that keeps reducing the number of coins in circulation. However, this in itself failed to generate serious growth. What skyrocketed BNB to $300 in February 2021 was a massive growth in the use of Binance Chain and Smart Chain as fast and cheap alternatives to Ethereum. As ETH gas fees reached $20, users realized they’d be better off with BSC: the trading volume on Pancake Swap even exceeded that of Uniswap.

How will DMDv4’s scarcity reflect on the price?

The total supply of DMDv4 coins is 4.38 million — almost 5 times less than Bitcoin. However, as we’ve seen, it’s not the sheer number of coins that ultimately matters but their utility.

In this sense, Binance Coin could be a better analogy. Arguably, DMDv4 has more utility than the two Binance chains, for several reasons:

• Very high throughput (over 400 tps);
• Native support for smart contracts written in Solidity (Binance Chain doesn’t support smart contracts, so you have to use BSC for dApps);
• EVM support: it’s very easy to migrate Ethereum dApps to DMDv4;
• Instant transaction finality;
• Dynamic block times: the creation of a new block can start 1 second after the previous one;
• Improved consensus (HBBFT + dPoS), a more decentralized validator pool, and more efficient distribution of rewards.

In its 8-year history the coin has had its highs and lows. However, we are convinced that with the launch of DMDv4, one of the oldest continuously running blockchain projects in the industry will enter a completely new stage. With the new consensus, new staking and node election mechanics, a unique system for reinserting unused coins into circulation, and a fairer distribution of rewards, DMD’s perceived and actual utility will be higher than ever. And that, as we’ve seen, will make it much more scarce and valuable in the eyes of the users.

To learn more about DMDv4 and its innovative technology, check out our Light Paper.