Bitcoin has now survived for 10 years without a single fraudulent transaction being validated on its blockchain. The legitimacy and value of Bitcoin is now – at least for those who care to understand it – beyond doubt. Over the last 10 years some of the most reputable technologists and investors have simply got Bitcoin wrong. From Warren Buffet to Bill Gates, the established elite have failed to understand – willingly or not – that Bitcoin offers a set of unique properties that no other monetary technology, from the gold ingot to the dollar bill, has been able to achieve.
Without a CEO and without a marketing budget, Bitcoin has gone from a handful of transactions per day to over 300,000 and the currency moves billions of dollars through exchanges every 24 hours. Bitcoin’s market cap now exceeds $70bn and the broader ecosystem, to which Bitcoin’s inception can be largely credited, is valued at over $130bn. Bitcoin has spent much of its time securing this value, and in the age of hacking and cyber theft, the absence of a fraudulent transaction or exploit in Bitcoin’s blockchain has been extremely telling.
Bitcoin’s success has followed a winding path. Originally proposed as “peer to peer electronic cash”, the cryptocurrency quickly moved from a medium of exchange into the realm of “digital gold” thanks to the currency’s 21 million coin supply cap and its associated scarcity. This move towards digital gold was rapidly embraced by the community, lining their pockets in the process and creating an entirely new paradigm of holding – and not spending – this now rapidly appreciating asset.
These forces have had an unintentional consequence of drawing Bitcoin’s development to a snail’s pace. The currency’s underlying technology stagnated from fear of introducing bugs, centralizing mining and risking Bitcoin’s lucrative future as digital gold. However this stagnation – for the purpose of digital gold – serves only as a boon to Bitcoin’s utility, providing better guarantees about the technology’s future by simply resisting any significant change.
As a result, Bitcoin has now become the world’s most secure and transparent currency, enabling public audits of its blockchain as well as strict guarantees about its future supply. To put this into perspective with the traditional system, the exact number of circulating dollar bills is unknown and the amount of digital gold sold exceeds the amount of physical gold mined. Dollars are printed by centralized authorities and the rate of printing is determined by economic clairvoyants. Gold is mined in unknown quantities and thousands are exploited in its extraction. In the case of Bitcoin, there are no workers to exploit and its issuance rules are guaranteed by code as opposed to self interested individuals. It would be possible to determine – to a high degree of accuracy – how many coins will exist 20 years from now. This would simply be impossible to do with any other asset.
Hence we derive Bitcoin’s value.
What Now For The Next 10 Years?
At the base layer, Bitcoin will continue to resist change and while it is possible that features such as MimbleWimble (privacy) and Schnorr Signatures (scaling) are implemented in the future, the chance of any significant upgrade to the protocol is minimal. Instead, developers have taken to building “layer 2” technology that sits atop Bitcoin, benefiting from the blockchain’s security guarantees while allowing users to untether from Bitcoin’s slow block times and 1mb block limit.
A Return To Digital Cash?
The Lightning Network is Bitcoin’s most anticipated layer 2 project, enabling peer to peer transfers that are fast, anonymous and feeless. Lightning has the potential to make Bitcoin a global settlement layer, creating a high speed payment network that could quite feasibly put an end to the likes of VISA, Mastercard and PayPal as we know them today.
There’s only one problem – Bitcoin is on track to becoming digital gold and not digital cash. The idea that individuals would opt to spend appreciating gold over inflating dollars is not something ever seen before in the history of economics. Gresham’s law states precisely this point – “bad money drives out good“. For all its technical brilliance, the Lightning Network is enabling something that users simply will not want at scale.
The Lightning Network will not get the adoption that Bitcoin advocates are hoping for. Instead, a similar network will be built that will allow users to instantly, anonymously and feelessly transact anything from Bitcoin, Ether and ERC20 tokens through to Mexican Pesos and Cryptokitties. It will be this network – likely built on Ethereum – that has the best chance at becoming a global settlement layer with Bitcoin’s Lightning Network being limited to the transaction of digital gold.
⚡️#Lightning payment channels will scale the # of transactions using digital gold.
🔥 #Ethereum payment channels will scale the # of transactions using digital gold, USD, tokens, securities, cryptokitties … [ad infinitum].
Which one are you most excited about?
— Nick (@Ether0x) December 29, 2018
Bitcoin Loses Dominance
The market once consisted solely of Bitcoin, but in its first 10 years the cryptocurrency’s dominance has fallen from 100% to as low as 32%. For this reason, many have speculated that Bitcoin’s advantage as a first mover will be short lived and that another coin will become the “new” Bitcoin, taking its place as the most valued cryptocurrency in the market. This fall from the top position has been dubbed the “flippening” and many see it as the beginning of the end for Bitcoin in what is considered a competitive world of cryptocurrencies. The reality however, is that Bitcoin does not compete against all other cryptocurrencies, it only competes against those which offer similar utility. In the case of Bitcoin, that utility is in its gold-like properties and no other cryptocurrency has come close to offering the level of security that’s needed for such an asset. While Bitcoin will lose dominance over the next 10 years, it will remain the dominant form of digital gold and its value could well reach into the trillions of dollars.
Instead, the most valued cryptocurrency in the market will likely be one that is more willing to take short-term risks for long-term functionality. Digital gold is an admirable vision, however it falls drastically short of the far broader potential that a public blockchain holds.
The Elephant In The Room
Over the next 10 years Bitcoin block rewards will be cut in half three times, dropping from 12.5 BTC issued every 10 minutes to 1.5 BTC. This drop will begin to raise questions over the viability of a cryptocurrency whose block reward trends towards zero (and ultimately stops once 21mn Bitcoins have been issued). Miners (those who secure the Bitcoin network) do so in return for this block reward and the accompanying transaction fees. Without a block reward, miners will be reliant on transaction fees alone, however transactions are increasingly being moved “off-chain” via the Lightning Network.
While the Lightning Network requires “on-chain” transactions to open and close payment channels, its existence will cannibalize the transaction fees collected by miners. For miners to continue mining the Bitcoin blockchain, the relatively few transactions that do occur on-chain will need to be paid with high fees.
The problem here is that the business model of paying money to move money is one that is fast becoming archaic. In 10 years time, an increasing number of users will demand that they can transfer value globally without any fees at all. It is therefore a monumental risk to assume that transaction fees alone will be enough to secure the network in the future – not least because users will not want to pay them.
The proverbial Elephant in the room then, is that of the block reward. Can Bitcoin really secure trillions of dollars in the form of “digital gold” on a blockchain whose miners are paid in scraps? Given the community’s resistance to change, will this stubbornness be the beginning of Bitcoin’s downfall? By subscribing to the idea that Bitcoin should never issue more than 21 million coins, an individual is essentially saying that Satoshi Nakamoto had enough foresight to predict the economic games that would play out 100 years on from when the supply limit was first created.
Over the next 10 years we can expect this issue to sow the seeds of yet another major Bitcoin split, with Bitcoin’s digital gold prospering wildly but falling behind to the broader and more ambitious goals of a broader platform, for which Ethereum is a strong contender.