What is Hard Cap? Can Bitcoin’s Limited Supply Be Changed?

Bitcoin is a digital currency that was created after the financial crisis of 2008 with the aim of creating a revolution in the world’s monetary system. Satoshi Nakamoto is the pseudonym of the person or group who created the technology in January 2009, whose real identity remains unknown.

Unlike fiat currencies, Bitcoin is created, distributed, traded and stored using a decentralized system called the blockchain, and is not issued or supported by any bank or government. Although this digital currency is not recognized as a legal currency in most parts of the world, it is very popular, and hundreds of other digital currencies have been created under the name of “altcoin”.

Currently, Bitcoin is the largest digital currency in the market, and its history as an expression of store of value has been very turbulent, going through several boom and bust cycles in its relatively short life.

Some digital currencies such as Bitcoin have a limited amount. Bitcoin supply is limited to 21 million units. Bitcoin Cash, Dash, Litecoin, ZCash, Solana, and Olench are digital currencies that have a supply limit of millions, and Cardano, Algorand, UniSwap, Chainlink, and Iota are also digital currencies that have a supply limit of billions. On the other hand, there are digital currencies such as Ethereum, Dogecoin, and Monero, which do not have such restrictions.

The limitation of Bitcoin supply is due to a special feature called “Hardcap”. Hardcap is a parameter specified in the code of a blockchain to determine the supply limit of a digital currency. In this article, we will talk about the hardcap and the reasons for its importance and examine the Bitcoin hardcap. So stay with us until the end.

What is a hardcap?

Hardcap is a parameter that is closely monitored by digital currency analysis websites and the community. A hard cap is a limit set in the code of a blockchain for the absolute maximum supply of a digital currency. This parameter prevents the production of more units of a digital currency.

Determining the hard cap has positive effects; Because it causes it to become rare and increase the value of the token. For example, Satoshi Nakamoto set a hard cap of 21 million units for Bitcoin from the beginning, and this is one of the reasons why Bitcoin is valuable.

The existence of a hard cap somehow leads to “absolute scarcity”. Absolute scarcity refers to the fixed and limited supply of a product. In this case, when the demand for a commodity increases, there is no additional supply to meet this increased demand. Therefore, regardless of growth in demand, you cannot produce more, and the price is the only output that can change.

This is also true for Bitcoin. The rate of issuance of Bitcoin and its supply is fixed regardless of how much energy is used to mine it. However, to circumvent this limitation, a digital currency must change its basic characteristics and thereby reinvent itself.

While many other assets do not have absolute scarcity. For example, the limitation of gold supply is not related to natural gold resources; Rather, this precious metal is scarce in terms of the energy required to extract it. If we give all humans a shovel and ask them to start digging, a lot of gold will flood the market and drive down the price.

Hardcap in initial coin offering (ICO)

In the continuation of the article, we must mention that the hard cap has another application and that is in the initial coin offering or ICO. In an initial coin offering, the term hardcap refers to the number of tokens that can be sold. In other words, the hardcap of an ICO is the maximum amount of capital that the development team wants to raise in exchange for their tokens during the early stages of financing.

Therefore, if we reach the hard cap in an IPO’s fundraising campaign, the tokens for that particular round are considered sold. This means that the maximum goal of this IPO has been met and the developers will not receive more capital in exchange for project tokens.

The decision on the amount of hardcap is entirely up to the development team. They can decide on the hard cap by considering the balance between the large number of fundraising targets and the economic scarcity of the related tokens and their perceived value.

That being said, you must have noticed that the term “hardcap” is somewhat controversial. Some sources use hardcap only to refer to the initial supply ceiling and use the term “Maximum Supply” for the maximum number of available units of a digital currency; But the truth is that the hard cap can be used for both cases and using the hard cap for the maximum number of available units of a digital currency is not wrong at all.

What is soft cap and how is it different from hard cap?

While the hard cap specifies the maximum number of tokens that can be sold in an initial coin offering, the soft cap refers to the minimum capital required to begin development of a particular project.

Hardcaps are usually significantly higher than softcaps; Because it indicates the ultimate goal of investment rather than a minimal goal that is possible to achieve.

At times, if a team fails to raise funds beyond the soft cap, it will return the funds raised to its investors; But others continue to develop the project with the money they have earned. Also, it’s worth noting that soft caps are usually not an exact amount; Rather, they are a general idea of ​​the amount that each digital currency startup expects to attract for its project. This work is usually considered a positive action for teams to inform investors of the reasons for the need for this amount and its uses.

Analyzing ICO benchmarks like Softcap is a way to gauge a team’s experience and understand what they’re trying to do. For example, investors should be wary of softcap values ​​that are unusually high or low; Because they show the inexperience of the team or are a warning about its legitimacy. Additionally, well-defined and properly justified softcaps demonstrate the team’s experience and legitimacy. However, defining a soft cap is not a necessary step, and there are many teams that have raised capital without defining a soft cap.

Why do digital currencies have a hard cap?

It is useful to have a suitable hard cap for digital currencies; Because it leads to the scarcity of project tokens. The world’s first digital currency, Bitcoin, is valuable; Because its supply is limited and only 21 million units are extracted. One of the basic principles of economics is that the more the supply of a product exceeds the demand for it, the lower its value and vice versa. Any project that attempts to have a fixed hardcap like Bitcoin must follow the same supply and demand principles.

Also, having a hardcap is useful for ICOs; Because it defines their roadmap. Finally, the team must determine how the capital raised will be used; Because there have been examples in which some projects have attracted more capital than expected due to the fact that they did not set a hard cap.

Can Bitcoin’s Limited Supply Be Changed?

The truth is that it is not impossible to change the Bitcoin hardcap. Bitcoin is a decentralized and blockchain-based digital currency, and new changes can be implemented if they reach a consensus of more than 50% of members.

This is one of the criticisms that the opponents of Bitcoin bring to it. They say that because Bitcoin is just software, its network rules can be easily changed. Also, since the number of new bitcoins created per block decreases every four years due to halving and eventually reaches zero, miners will increase the supply of bitcoins beyond 21 million units in order to maintain their income stream.

In theory, changing the maximum supply is achievable, and several entities must work together to change the maximum supply of Bitcoin. First, developers have to propose a change and then code it for implementation. After that, a public discussion will be formed in this field, which will definitely be noisy. Developers must agree on it before making such changes to Bitcoin Core or the Bitcoin client.

Then, the community must agree on an activation path to ensure that the network fully adapts to the new ruleset. For example, changing the maximum supply requires a hard fork that requires all nodes in the network to accept the change and reboot.

Miners and nodes can declare their support for the change as part of the activation process, and after most of the network has shown their support, the change can be implemented. If the changes are not accepted, the nodes and miners will execute a minority fork and while maintaining the main Bitcoin network, these two networks will compete for market share and hash rate.

Therefore, we realized that changing the Bitcoin hardcap is theoretically possible, and the appearance of the story is that miners are tempted to change the maximum supply and generate new Bitcoins; But there are reasons that prove that this is not practical and will not happen.

Why Bitcoin’s Limited Supply Won’t Change?

Bitcoin has a special incentive structure and governance mechanism that prevents the hardcap from changing. The improbability of Bitcoin’s hardcap change can be examined from two aspects: “Motives” and “Bitcoin’s Dominance”.

motivations

Miners are the people most motivated to change the Bitcoin hardcap. Changing the Bitcoin hardcap can increase miners’ income for a short period of time; But this negates one of the main reasons to invest in Bitcoin, its scarcity. The reason Bitcoin is attractive to many investors is its predictable and stable supply, and removing the fundamental driver of Bitcoin’s value does not benefit miners.

Although this change increases the miners’ income in units of Bitcoin, it causes a catastrophic and sustained drop in the price and, as a result, reduces the value of the miners’ income in units of fiat currency. Miners are more worried about their fiat income than Bitcoin income; Because in practice, they pay all salaries, equipment and energy bills with fiat currency. So if the price of Bitcoin falls, the miners lose their money.

Bitcoin governance

Experience has shown that making changes and especially radical changes to Bitcoin is usually not successful; Because it is difficult to convince tens of thousands to agree to these changes. There are many members and nodes of Bitcoin who do not consider only financial incentives and adhere to the values ​​of Bitcoin are more important to them.

In 2017, with the aim of trying to increase the scalability of Bitcoin, the theory of removing the Bitcoin block size limit was proposed; But nodes and users resisted this change and forced miners to choose another method for scaling.

While many nodes are running the latest version of Bitcoin Core, some are still using older versions. Although it is simple to change the source code of Bitcoin Kor, it is much more difficult to convince tens of thousands of nodes to implement these changes.

Conclusion

Some digital currencies, including Bitcoin, are available in limited quantities. This limit is called hard cap. Having a hard cap for digital currency has many advantages; But its most important advantage is that by limiting the supply, it makes the asset scarce and, as a result, increases its value.

Bitcoin is one of the digital currencies that has a hard cap. Some believe that after all bitcoins are mined, bitcoin miners may change its source code and remove or move its hardcap; But in this article, we pointed out that this seems unlikely for two reasons:

1. This reduces the value of Bitcoin, and although it increases miners’ income in Bitcoin units, it leads to a decrease in the value of their income in fiat currency units; 2. It is very difficult to convince more than 50% of Bitcoin nodes to agree to such a change.

Supply and demand management has always been one of the basic economic principles that plays an important role in determining the value of assets. Hardcap is one of the criteria to consider when considering new projects and making investment decisions.