More than eight years ago, Satoshi Nakamoto introduced to the world his “peer-to-peer electronic cash system,” Bitcoin. From this description, Satoshi’s obvious intention was to replace cash by creating a new way of making payments. Whether it was to purchase a yacht or a latte, Bitcoin was created to be a frictionless and decentralized means of transferring any amount of value between two people without the need for a middle man.
Beyond a Cash System
But Bitcoin is not simply a payments system. Satoshi purposefully set up Bitcoin with many of the characteristics of gold, including its limited supply and the requirement that energy is needed to increase that supply. This makes Bitcoin supremely qualified to be a long-term store of value. A government can increase the money supply of its currency at the whim of those in charge. Bitcoin’s supply, however, cannot be manipulated, allowing its value to remain strong for years, even decades. Thus Satoshi created both a strong cash system and an excellent store of value.
Not long after Bitcoin was released, people began to realize that the underlying technology behind Bitcoin — often referred to as “blockchain technology” — could have many other real-world, non-financial, applications. For example, contracts could be stored on the blockchain, voting could be managed via the blockchain, and other aspects of modern life could become a part of Bitcoin.
Bitcoin, therefore, developed three use cases: an electronic cash system, a store of value, and various blockchain-based non-financial applications. These are the legs on which Bitcoin stands or falls.
However, in recent years two of those use cases — an electronic cash system and non-financial applications — have become increasingly difficult to justify with Bitcoin. Transaction fees, which originally were minuscule, have grown over time and recently topped $1 on average. While such a fee is nothing if you are transferring thousands of dollars, it is prohibitive if you wish to make small payments using Bitcoin. Who would pay $1 to buy a $3 cup of coffee?
The reason for the higher transaction fees — congested blocks — has also had another impact: decreased use of the Bitcoin blockchain for non-financial applications. For example, the Australian political party Flux hopes to use the Bitcoin blockchain to give people a direct say in the political process. The party recently announced it was performing a “stress test” on the Bitcoin blockchain before going live with its voting system. The reaction from a good deal of the Bitcoin community was surprisingly negative. Users were worried it would further increase transaction fees and would delay confirmations for other payments. Luke Dashjr, an influential Bitcoin core developer, even reported the organization to the Australian cyber-crime agency on the grounds that the stress test was spam!
Thus, two of Bitcoin’s legs have become diseased. In such a situation, three things can happen: the diseased legs can be healed, they can be amputated, or the disease spreads to the rest of the body and Bitcoin dies.
The underlying reason for the disease that impacts both the cash system use case and non-financial applications is the congested block size. No one disputes this. However, there are two different solutions for this problem, and advocates of each one in general strongly oppose the other. One proposed solution is for Bitcoin to deploy Segwit to manipulate transactions such that blocks can handle more than 1MB of data. In addition to Segwit, a 2nd-layer network such as Lightning Network would be created so that most transactions would happen off-chain, thus relieving pressure on the blockchain itself. The other solution is simply to increase the block size to meet current demand. Of course, it’s possible to implement both solutions concurrently, but, as I mentioned, most advocates for each idea have demonized the proponents of the other solution to an extent that such a reasonable compromise no longer appears possible.
Simply put, if Bitcoin is to be fully restored to health, then the block size will have to be increased. Originally, Satoshi implemented the 1MB block size limit as a temporary anti-spam measure. It is ludicrous to believe that such a limit placed years ago must remain as fixed as Bitcoin’s 21 million coin supply. How much the block size limit should be increased — and at what pace it increases — is a legitimate discussion, but keeping it at 1MB is refusing to recognize the cause of the disease.
And the block size isn’t the only issue. The sickness that infects Bitcoin right now isn’t simply technical, it’s also economic and social. The developers of Bitcoin — whether that is Core or Unlimited or some other group going forward — must humble themselves and recognize their limitations. Bitcoin is a social experiment that requires multiple areas of expertise, and also requires a cohesive community. For example, programmers are not economists and economists are not programmers. Trying to mandate that certain uses — which abide by all the rules of the Bitcoin blockchain — are “spam” and therefore undesirable is central planning at its finest. Further, alienating vast numbers of users by demonizing and censoring any who disagree is not a path to long-term success. Unless the stewards of Bitcoin recognize these issues, the prognosis for a full recovery is doubtful.
Healing isn’t the only option, however. Another possibility — one that is becoming increasingly more likely — is amputation, i.e., simply removing use cases from the Bitcoin ecosystem. As already noted, the current impasse that Bitcoin is facing has made two of the use cases of Bitcoin — a peer-to-peer electronic cash system and non-financial applications — increasingly less feasible. But instead of trying to heal Bitcoin by restoring those two use cases to health, the stewards of Bitcoin could simply allow the cryptocurrency to become only a store of value, with no other real world usage. After all, high transaction fees and slow confirmation times don’t impact this particular use case, as gold — the most traditional store of value — has far higher barriers for use in transactions. Thus, Bitcoin no longer is used as a cash system or for non-financial applications and learns to live with one leg as “digital gold.”
Of course, this doesn’t mean that the need for those other use cases simply disappears. And if Bitcoin will not embrace those use cases, then other cryptocurrencies will. We can see in the market that this is already happening. Look at the two highest market cap cryptocurrencies after Bitcoin: Ethereum ($2.5 billion market cap) and Dash ($500 million market cap). Ethereum is primarily intended for smart contracts, and Dash is primarily intended to be a peer-to-peer electronic cash system. As the market has begun to recognize that two of Bitcoin’s legs might be amputated, it has looked to find other legs to stand on. This might be bad for Bitcoin, but it’s not bad for users, who just want solutions, no matter where they come from.
But healing or amputation are not the only possible outcomes. There is also…
Can Bitcoin die? I can already hear the response: Bitcoin has been declared dead over 100 times! Of course, I’m not declaring Bitcoin dead, I’m just arguing that it could die at some point in the future. Only arrogance would claim this is not possible. How could Bitcoin’s death happen? Let’s say that Bitcoin does not resolve its current issues, and amputates two of its three use cases. At that point, other cryptocurrencies, such as Ethereum and Dash, fill the hole in the market and become the standard for those missing use cases. Bitcoin is now only a store of value. However, why should it remain so? What use would it truly have? Why would investors see Bitcoin as a safe store of value if it has no other use? It’s possible that this could happen, but it’s also possible that the market sees Ethereum and Dash (and possibly other cryptocurrencies) as better stores of value due to their greater utility. In this situation, Bitcoin’s remaining usage withers away and it becomes an interesting footnote in the history of cryptocurrencies.
Currently, Bitcoin has a powerful network effect which makes it valuable. But if there is no network to serve, will that effect remain?