1.Hard market cap: what is it?
The hard cap is a parameter that crypto analytics websites and the project’s community pay close attention to.
The code of a blockchain defines a hard cap as the absolute maximum supply of a cryptocurrency. The hard cap prevents a cryptocurrency’s units from being produced or circulated further. The fact that it promotes scarcity, which increases the value of each token, has been widely regarded as a good thing. For instance, Satoshi Nakamoto, an anonymous creator of Bitcoin, set the hard cap at 21 million for the world’s first cryptocurrency.
Absolute scarcity refers to the fixed, finite supply of a good. When demand for an item rises, there is no additional supply response. This leads to an entirely inelastic supply. It does not matter how much demand grows, you can’t produce more. Prices are the only outputs that fluctuate. Bitcoin’s issuance rate and hard-capped supply remain constant regardless of how much energy is put into mining it. In order to get around this constraint, a cryptocurrency must re-invent itself by changing its basic specifications.
Gold, however, is scarce only in the sense that it must be mined with a great deal of energy. We could lower the price of gold by handing out shovels and urging everyone to dig.
Initial coin offerings (ICOs) are also evaluated based on the hard cap parameter. When evaluating a project or protocol, investors and users must consider a variety of factors. The hard and soft caps of an ICO are among the most well-known parameters among them. A soft cap is a minimum amount that developers must raise to launch their product. In contrast, a hard cap is a total amount they hope to raise through an ICO.
During an ICO, the hard cap refers to the maximum number of tokens to be sold, while the soft cap refers to the minimum amount of money that a project can raise in order to begin development. Thus, the hard cap is generally set much higher than the soft cap, since it is more of a fundraising goal than a minimum realistic target.
2.Why is there a hard cap on cryptocurrencies?
Due to the scarcity of the project’s tokens and the roadmap of the project under consideration, an adequate hard cap is essential for both reasons.
Token scarcity is the first factor. Bitcoin is the first cryptocurrency in the world, but it is valuable because it is limited in supply; there will be only 21 million Bitcoins ever produced. The same principles of supply and demand must apply to any project that imposes a hard cap. Additionally, the integrity and value of the underlying project will be protected. Business leaders and team members, on the other hand, must strike a delicate balance to get this number right. The value of tokens decreases as the number of tokens increases, and vice versa.
Second, a hard cap is intimately linked to the underlying project’s roadmap. Finally, the team should clarify how the money raised will be used, as there have been cases where initiatives have raised more money than they expected because they didn’t establish a strict cap.
3.What is the hard cap on Bitcoin?
Bitcoin’s anonymous creator has set a hard cap of 21 million, meaning that it has a limited supply.
Bitcoin was invented by Satoshi Nakamoto, who placed a hard cap on the amount of BTC that could ever exist. There will never be more than 21 million BTC. Bitcoin’s hard cap is written in its source code and enforced by the network nodes.
The hard cap on Bitcoin is critical to its value proposition as a currency and an investment tool. Bitcoin, like gold and real estate, is a successful store of value because its quantity is difficult to expand. Every four years, due to halving, producing Bitcoin becomes more complex and finally impossible.
4.Is it possible to change Bitcoin’s hard cap?
Modifying the Bitcoin network’s rules can modify its hard cap. In theory at least.
According to Bitcoin skeptics, BTC is merely software and its rules can be easily changed. Increasing the supply cap beyond 21 million bitcoins would protect miners’ revenue stream since block subsidy – the amount of new Bitcoin created in each block – gradually decreases every four years.
On the surface, miners would be enticed to modify the supply cap and allow themselves to generate more new Bitcoin. This adjustment, however, will not take place for a variety of reasons, as explained in the section below.
5.The main reason behind the Bitcoin hard cap not changing
Due to its incentive structure and governance mechanism, Bitcoin’s hard cap is protected from being altered. Because of the network’s architecture, Bitcoin’s ruleset’s authors have a significant incentive to fight any change to the hard cap. However, those who wish to change it have no power to do so.
Cryptocurrency miners have the greatest incentive to change the hard cap on Bitcoin. Miners could gain profits for a short time if Bitcoin’s hard cap is changed. In this case, however, one of the major arguments against investing in Bitcoin would be negated: its scarcity.
Many investors find BTC attractive because of its predictable, fixed supply. Nevertheless, removing Bitcoin’s value proposition’s fundamental driver is not in miners’ long-term interests. In fiat terms, even though the modification increases miner revenue in BTC terms, it leads to a catastrophic and permanent price drop. This results in a net loss of miner revenue.
Since virtually all of their expenses – salaries, equipment costs, and energy bills – are in fiat, mining companies are more interested in their fiat-denominated earnings than their bitcoin-denominated earnings. Because of this, miners will lose money if Bitcoin’s price falls.
Governance of Bitcoin
There are two misconceptions regarding Bitcoin as a distributed, consensus-based network that could lead to it changing its hard cap. The Bitcoin source code comes in dozens, if not hundreds, of different versions. The Bitcoin network, for example, runs software that rejects any blocks that are incorrect.
While many nodes are running the most recent version of Bitcoin Core, some are still using older versions and implementations. As a result, while changing BTC Core’s source code is simple, convincing tens of thousands of nodes to implement these modifications is significantly more challenging.
Moreover, miners have no control over the network’s rules. Instead, miners are responsible for creating new blocks and validating transactions. When miners submit a new block to the network, tens of thousands of nodes independently verify it, ensuring that it generates a suitable amount of new BTC, has legitimate proof-of-work and contains valid transactions. All blocks that break these criteria will be rejected by nodes, implying that miners have no control over Bitcoin’s ruleset.
When 95% of miners agreed to lift the block size limit in 2017 in an attempt to allow Bitcoin to scale, this theory was confirmed by reality. On the other hand, nodes and users resisted the shift and successfully forced miners to switch to a different scaling method.
6.Is it even possible to modify Bitcoin’s hard cap?
In order to ensure that the entire network switches to the new ruleset, the community would then have to agree on an activation path. A change in supply cap, for example, would call for a hard fork, and all nodes would need to accept the changes or be terminated.
Both miners and nodes can express their support for the change as part of the activation path, and after a majority of the network has signaled support, the change can be activated. Refusing the modification, nodes and miners would operate a minority fork, keeping the original Bitcoin network, with the two networks competing for market share and hash rate.