Bitcoin, Ethereum, and USDT have consistently held the top three positions in the cryptocurrency market cap for a period of time since their emergence. This begs the question, what made the market choose them?
Before delving into this question, it is important to revisit the original goals of these three cryptocurrencies.
Bitcoin was the first cryptocurrency to achieve decentralization and prevent double-spending simultaneously. By enabling peer-to-peer transactions and eliminating the need for centralized institutions, it aimed to become a currency solution as an alternative to fiat money.
Ethereum was the first cryptocurrency to utilize Turing-complete smart contracts on the blockchain. It aimed to become a decentralized application platform that could replace the operation and control of large corporations. Its goal was to become a global computer and a platform for decentralized applications.
USDT was the first cryptocurrency backed and anchored by the U.S. dollar. By being pegged to a sovereign fiat currency, it sought to leverage the stability of its purchasing power. Its objective was to establish itself as a settlement unit within the crypto industry.
Since their inception, each of these cryptocurrencies has faced its own respective challenges, and the competition and challenges targeting them have never ceased.
Why has centralized USDT been able to stand out?
Taking USDT as an example, its reliance on a single institution for anchoring does not align with the core principle of decentralization in crypto.
As a result, the industry has made efforts to explore decentralized stablecoin systems, such as various algorithmic stablecoins. However, algorithmic stablecoins have proven to be unable to sustain long-term stability.
Algorithmic stablecoins struggle to simultaneously fulfill the requirements of large-scale liquidity, decentralization, and stable value. Therefore, the industry has ultimately leaned towards prioritizing stable value and liquidity, albeit at the expense of decentralization.
This has led to continuous concerns from users regarding USDT, especially during times when the industry witnesses numerous project failures and increased regulatory scrutiny.
However, the biggest risk for stablecoins like USDT, which are anchored to fiat currencies, lies in the fragility of the fiat money system. The crises of centralized finance and fiat currency systems are among the significant reasons for the birth of Bitcoin.
This is also a crucial reason why stablecoins anchored to fiat currencies, including USDT, cannot surpass Bitcoin. People need a high-quality asset that acts as a hedge against the collapse of the fiat money system.
Paradoxically, USDT, as another centralized currency system, contradicts the spirit of mathematics and code that defines the crypto world. Despite this contradiction, it has been able to maintain its position among the top three in terms of market cap.
This raises a thought-provoking question: Why has USDT been able to establish a firm foothold in the decentralized-focused crypto industry?
The lack of purchasing power stability in Bitcoin provides an opportunity for USDT to grow
To answer this question, we must examine a major issue that Bitcoin faces from the perspective of currency quality assessment: purchasing power stability.
Bitcoin OG and renowned economist Lawrence H. White pointed out that Bitcoin's price volatility makes it difficult for it to serve as a widely accepted medium of exchange, given its design to maintain purchasing power. He compared the purchasing power stability of gold and Bitcoin, highlighting the difference in their supply mechanisms.
Gold exhibits better purchasing power stability because its supply can adjust based on market demand. When demand increases, rising prices stimulate more gold mining activities, increasing the supply and stabilizing the price. The gold standard also demonstrated this stability, with only a 1% price difference when the United States rejoined in 1879 and left in 1914.
In contrast, Bitcoin's supply increases in a predetermined manner, without responding to demand. While a rise in BTC price may trigger more mining activities, it doesn't generate more Bitcoin, which becomes a significant drawback for it to serve as a widely used medium of exchange: prices will experience extreme volatility.
A similar viewpoint is shared by the cypherpunk pioneer and creator of B-Money, Wei Dai. In his own writings, Wei Dai recalls not paying attention to Satoshi Nakamoto's email at the time because Bitcoin's whitepaper didn't include any design for a stablecoin value. Wei Dai states,
'This may have been partially my fault because when Satoshi wrote to me asking for comments on his draft paper, I never got back to him. Otherwise perhaps I could have dissuaded him (or them) from the ‘fixed supply of money’ idea.'
Bitcoin relies on a simple model of limited total supply with halvings every four years, creating an expectation globally that this non-sovereign asset will become increasingly valuable. However, this also means that Bitcoin lacks any design for purchasing power stability, allowing centralized but USD-anchored USDT to survive and grow in the crypto world.
It's unlikely that users would willingly adopt an extremely unstable asset as their everyday settlement currency. Furthermore, the expectation of Bitcoin's appreciation leads users to prefer storing it rather than using it for daily consumption, limiting its circulation.
Modifying the Monetary Economic Model of Ethereum
If the lack of purchasing power stability design in Bitcoin allows centralized USDT to seize opportunities, then another flaw of Bitcoin, its technological immaturity and excessive conservatism, is a significant reason why Ethereum has been able to rise to the second position in terms of market cap.
Ethereum, as the world computer, has surpassed Bitcoin in terms of a decentralized application ecosystem, creating the DeFi and NFT ecosystems that lead and reshape the industry. This has even led most public chains attempting to challenge Ethereum to ultimately integrate compatibility with the Ethereum Virtual Machine (EVM) to sustain user acquisition.
The success of Ethereum's application ecosystem is undeniable. In addition to empowering the value of ETH through the application ecosystem, the Ethereum community has also undergone a significant upgrade to its economic model through EIP-1599. ETH can now be burned, creating a deflationary economic model.
The believers of Ethereum now promote the mechanism of deflation brought about by ETH burning and challenge Bitcoin by highlighting Ethereum's superior application ecosystem. They even refer to ETH as a "Ultra Sound Money."
However, they conveniently avoid discussing Ethereum's currency economic model, which can be altered at will, the significant impact on ETH from transitioning from PoW to PoS, and the growing centralization concerns surrounding the operation of Ethereum's network nodes.
Ethereum aims to replace Bitcoin's dominant position in the currency realm, but it lacks the fundamental values that Bitcoin possesses: decentralization, fairness, and immutability of the economic model.
The changes in ETH's monetary model and the attempts to align its currency value with that of Bitcoin indicate that the design of the current economic model is crucial for the long-term development of blockchain, and it is arguably the most important foundation.
Some Bitcoiners are leaning toward the Ethereum path
Despite Bitcoin's pioneering nature, extreme decentralization, immutable monetary economic model, and pure commodification through Proof-of-Work (PoW), which have enabled Bitcoin to maintain its position as the industry leader, certain members of the Bitcoin community have been exploring the expansion of Bitcoin's application ecosystem.
From the Taproot upgrade to the recent Ordinals, these developments have made it possible to extend the Bitcoin application system. The market excitement surrounding these developments reflects the user expectations for a thriving Bitcoin application ecosystem. Various scaling projects and upgrade proposals based on Bitcoin have started to emerge and gain momentum.
However, given the limitations of the current UTXO technology and the need to adhere to Bitcoin's decentralization and security features, achieving a Turing-complete application ecosystem like Ethereum is challenging. Bitcoin may have to rely on less decentralized layer 2 solutions.
Moreover, if Bitcoin undergoes application-oriented upgrades, it indirectly affirms Ethereum's path. For Bitcoin, this signifies a departure from its long-held narrative as "digital gold" and an inclination towards mimicking the development trajectory of Ethereum, driven by technology for application platforms, rather than simply ignoring it as before.
A crypto with comparable conditions in terms of core monetary principles, market value, and decentralization would benefit from a highly programmable application ecosystem. At present, the status quo of Bitcoin and Ethereum demonstrates that the monetary aspect serves as the absolute foundation, with the prosperity of the application ecosystem following suit.
While it is smooth and simple for a high-quality monetary core to accommodate application technologies, it is exceedingly difficult for a project that solely focuses on the application layer while neglecting the core monetary model to change its incentive rules, akin to changing its soul.
Their respective flaws have contributed to each other's prosperity
Looking back at the centralized management of USDT, the modification of Ethereum's monetary model, and the design limitations of Bitcoin in terms of purchasing power stability and application ecosystem, it is precisely because of these inherent flaws that they have fostered each other's prosperity.
If Bitcoin had a more stable purchasing power and achieved high programmability while maintaining decentralization, the glory would undoubtedly belong to Bitcoin, and USDT and ETH wouldn't have achieved the level of success they have today.
Imagine a currency system that is more stable in purchasing power than Bitcoin, while simultaneously realizing an application ecosystem similar to or surpassing Ethereum, based on all the advantages Bitcoin possesses and even going beyond them. This might be the ultimate form of the entire cryptocurrency industry, giving birth to a grand narrative and revolutionary projects that surpass the combined market value of USDT, Ethereum, and Bitcoin.
In the future, we may continue to witness a crypto world where Bitcoin, Ethereum, and USDT coexist, conflicting with each other for a considerable time. Alternatively, a cryptocurrency project that addresses the shortcomings of all three, inheriting the decentralization of Bitcoin, the purchasing power stability of USDT, and the high programmability and scalability of Ethereum, could emerge to lead the industry and realize the ideal world that crypto enthusiasts have long dreamed of.
Reference
[1]Insights, Ledger. “Swiss National Bank Keynote Explores If Bitcoin Could Oust Fiat Currencies.” Ledger Insights - Blockchain for Enterprise, 31 May 2023, www.ledgerinsights.com/swiss-national-bank-bitcoin-fiat-currencies/. Accessed 6 July 2023.
[2]Wirdum, Aaron van. “The Genesis Files: If Bitcoin Had a First Draft, Wei Dai’s B-Money Was It.” Bitcoin Magazine - Bitcoin News, Articles and Expert Insights, 14 June 2018, bitcoinmagazine.com/technical/genesis-files-if-bitcoin-had-first-draft-wei-dais-b-money-was-it. Accessed 6 July 2023.
