What are the ramifications of an infinitely divisible currency like Bitcoin?

One of the singular features of Bitcoin is that it is the first widespread currency that is effectively infinitely divisible.  From Wikipedia (http://en.wikipedia.org/wiki/Bit...

"The total number of bitcoins is programmed to approach 21 million over time.[7] The money supply is programmed to grow as a geometric series every 210,000 blocks (roughly every 4 years); by 2013 half of the total supply will have been generated, and by 2017, 3/4 will have been generated. To ensure sufficient granularity of the money supply, bitcoins are divisible down to eight decimal places (a total of 2.1 × 10^15 or 2.1 quadrillion units).[10]"

Further, the eight decimal places are only an artifact of the datatype used in current implementations.  Should the need ever arise, this can be changed in the code to enable even more granularity (probably not without the attendant pains of making such a large change to a complex system, but technically possible).

Even further, every participant in the BTC network can subdivide their transactions at will, in real-time, in response to changing financial needs and conditions.  As BTC rises in price against goods and services, more precise units can be used to purchase the now-cheaper goods.  Conversely, as BTC falls in price against goods and services, participants can revert to less precise units.

So, what are the ramifications of this feature, especially regarding the debate over the deflationary nature of BTC?  E.g., does it matter if BTC is deflationary since owners can continue spending smaller and smaller units of it as the currency's value increases relative to the same goods and services?

Sean Lynch, Worked at Linden Lab, and have writte... (more)

14 votes by Byron Gibson, Dustin Sallings, J.C. Hewitt, (more)

The primary ramification is that it makes it possible for BTC to be deflationary forever without becoming inconvenient to transfer. We'll have to figure out how to write prices, but I imagine the likely outcome is that we'll all become intimately familiar with metric prefixes such as m (10^-3), µ (10^-6), n (10^-9), p (10^-12), and f (10^-15). We probably won't need smaller than nBTC for quite a while, since that'd be the equivalent of having 21 quadrillion dollars in circulation, which would imply a pretty huge economy.

This question seems mostly about Bitcoin's deflationary nature, however, and that's a question of human psychology. Given the increasing prevalence of electronic price displays at stores and fast food chains and the popularity of online shopping, it's fairly easy to imagine a world where prices adjusted automatically. Even restaurant menus will probably soon be flexible e-ink displays with flexible computers driving them.

We're already used to adjustable rate loans, and the legal framework for them is quite solid. Why not adjustable salaries? If Bitcoin becomes popular enough that people's salaries start being denominated in it, there will likely be public indices that salaries could be linked to along the lines of the CPI (Consumer Price Index).

Indexing salaries would be more honest than the current situation, where your salary automatically goes *down* in real terms by some amount that the government falls all over itself to try to lie about by removing the things that really matter from the CPI or through arbitrary adjustments pulled out of creative government accountants' asses to satisfy political ends. Obviously this would depend on the specific index used, but employers could compete on the basis of what index they used, with people preferring indices that more accurately reflected their cost of living, or even better overstated it.