Opinion: Why there will never be another Bitcoin

19 avr. 2024 10 min de lecture
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The views and opinions expressed in this article are those of the author and does not necessarily reflect the views of Kraken or its management. This opinion is not investment advice.

Bitcoin – a computer science invention – is a world first that will never repeat

Bitcoin wasn’t created out of thin air. Decades of prior electronic cash projects failed, but each one built on the incremental progress the others had made. Bitcoin was the culmination of this process, a triumph shared by an entire scientific community.

Some predecessors, like DigiCash, were too reliant on trusted authorities and so never gained market acceptance. Others, like HashCash, created working currencies backed by computer networks, but couldn’t hold value over time.

Finally, there were horror stories like Liberty Reserve, where the operators of working e-currencies were outright arrested and jailed for their work.

All of these projects shared a common aim – to disrupt the government’s monetary monopoly and create a viable internet currency free from central control.

Here are 5 ways Bitcoin succeeded where these projects failed

  • Issuing its asset, BTC, in a fair and transparent way, without a central issuer

  • Allowing users to join in and benefit from the operation of its network

  • Providing strong property rights guarantees via cryptography

  • Adopting a fixed monetary policy that can’t be altered

  • Giving users the tools to continually improve Bitcoin

Many in the digital assets space agree that Bitcoin has achieved all of the above – and this makes it incredibly unlikely Bitcoin will ever be outcompeted by a government or private market alternative.

Together, these accomplishments represent a value proposition that exceeds the sum of its parts. Even among thousands of cryptocurrencies, Bitcoin remains unique.

A fair launch

Satoshi’s stroke of genius was the decision to use a prior invention called proof-of-work (PoW) to distribute bitcoin to any user willing to secure the network with computing power.

To issue new bitcoins, Bitcoin users compete to solve mathematical puzzles using computer equipment, validating their work by expending electricity and resources. In return, they receive newly minted BTC in a process referred to as mining.

This distribution created a level playing field and fostered a global community.

Crucially, this system meant Nakamoto didn’t need to sell, issue or market bitcoins. In 2011, he even turned over the operation of Bitcoin’s software to an open-source developer community, none of whom he paid directly, or that received any form of financial compensation.

Users earned bitcoins by offering a service to the protocol, trading energy for ownership, or by trading with each other directly. This design ensured that work was required to receive Bitcoin.

Bitcoin’s success was about more than creating a new money; it was about creating a system to distribute value in a way that couldn’t be gamed and that didn’t unfairly advantage any user. Even Satoshi mined all the Bitcoin he received, just like everyone else.

Today Bitcoin’s issuance remains a fair contest, but that is not the case for the many alternative cryptocurrencies circulating, which are still searching for an alternative to PoW.

Many of them allocate the scarce data within their networks disproportionately, often via insider sales. This provides these advantaged users the ability to accrue more of the currency or to have a direct say in both the network’s development and economic policies.

Bitcoin is free from these fairness and manipulation concerns.

An open network

At its core, Bitcoin is a system of rules for governing a global, distributed database that tracks the ownership of the data within its economy.

For the network to operate effectively, many participants must retain and sync their copies of the database and agree that those copies are without discrepancies. Otherwise, like the electronic currencies of old, there is a risk that a user might be able to allocate data they don’t own or didn’t earn – fraudulently creating new coins and issuing them into circulation.

Every Bitcoin competitor faces a problem: There is a direct relationship between the size of the database and the ability of network users to maintain their own copy of that database.

Bitcoin makes thoughtful tradeoffs to keep this critical functionality accessible. You can think of every blockchain network as consisting of three types of actors:

  • Miners, who receive rewards for helping to secure the network by discovering new blocks and chaining them to previous ones (building the blockchain)

  • Nodes, who keep the process honest by tracking transaction history and verifying new transactions

  • Users, who make transactions based on confidence in these checks and balances

As with any cryptocurrency, these essential functions have barriers to entry. Crucially, however, Bitcoin’s barriers are not the product of the protocol, but of market forces. Any user who wants to secure the database can do so by finding access to electricity and computing power. Any user who wants to verify the database can do so by downloading and storing its ledger.

Both activities are influenced only by the market for computing resources.

Other cryptocurrencies add features that increase the cost of executing these functions. Some allocate the ability to determine their cost to specific users, allowing the users that secure the database to dictate that their peers hold a certain amount of the cryptocurrency, or to meet some other criteria they dictate in order to receive the cryptocurrency.

These sacrifices tend to reward wealth and influence – similar to government-run economies where the supply and distribution of money is not governed by market forces, but by a small number of individuals. Bitcoin, again, is free of these compromises.

Strong property rights

Property rights are defined as the exclusive right of an individual or organization to use, manage and dispose of a resource that they earned through their labor at their own discretion.

While this may be intuitive to anyone living in a country that protects these rights, not everyone around the world is entitled to them. In some countries, even democratic ones, governments can freeze the bank accounts of individuals by using (or abusing) the legal system.

This is another dilemma common to other cryptocurrencies. It is possible to add features to any cryptocurrency, or to change the rules, altering the allocations of ownership by forcing users to download a new, incompatible software.

Bitcoin relies on making backwards-compatible upgrades to its software. This means that its developers prioritize changes that do not force users to upgrade. Users can run any software that is compatible with the Bitcoin network without sacrificing functionality (though this may come at the cost of security).

Other cryptocurrencies often introduce incompatible changes to their software, where those who dissent from the change may no longer be able to enjoy the same benefits as others. Should you choose to reject the upgrade, your coins may not be accepted within the economy.

Developers may measure user opinion when proposing incompatible softwares, but, ultimately, every user is at the mercy of the majority of other users.

With Bitcoin, minority groups can stick with the older version, keeping their Bitcoin and its value intact, though they face security trade-offs. This allowance for differing opinions sets Bitcoin apart as a champion of property rights.

As long as you hold the private keys to your Bitcoin, you are guaranteed ownership over these coins. As long as you are running any Bitcoin-compatible software, you can be sure you will be able to transact with those keys within the Bitcoin economy. Likewise, you can be sure there will never be more than 21 million Bitcoins.

Fixed monetary policy

All money is based on a social contract. Users agree to exchange their labor for a medium that they can use to freely acquire products and services at a later date.

Monetary history has been dominated by two types of systems, both with different kinds of social contracts.

  • Market-based monies, like gold, which are based on a limited-quantity asset which can’t be created by man

  • Government-based monies, which are prone to inflation because these currencies can be printed at will as governments use them to pay for expenses

Bitcoin is a market-based money, and it has all the characteristics that determine money:

  • It is durable: as long as there is internet and electricity, there will be bitcoin

  • It is portable: you can access your funds from anywhere in the world

  • It is scarce: all users can know, with certainty, there will only ever be 21 million bitcoins

Because of its fair launch, open network, and strong property rights, Bitcoin’s monetary policy isn’t just fixed, it’s credible. Users can be assured it will remain unchanged, unless all of its millions of users agree on the change, however unlikely.

Other cryptocurrencies, by contrast, offer variable monetary policies, with less credibility.

Some change so often they are not dissimilar from government-managed monies, whose value can be subject to the whims of politics. Like central banks, they control the money supply and take actions that aim for price stability and economic growth.

Others have no limits on their issuance, undermining their credibility.

Likewise, global central banks use monetary policy tools to control the supply of their national currencies. As the Federal Reserve has shown, these institutions are vague about when and why these rates change. Often only insiders aid in the decision making.

Those using stablecoins, dollar-backed crypto assets, or some formal form of central bank digital currency (CBDC), similarly, are only opting into this existing system.

Limitless improvement

While the above qualities lay a strong foundation for Bitcoin, these attributes alone aren’t enough to ensure it will never be replaced by an alternative. This is why its last attribute is perhaps the most important: Bitcoin’s ability to change and improve.

It appears unlikely Bitcoin can scale to provide its benefits to the world’s eight billion people as constructed. Work needs to be done to develop additional, transactional layers that can expand Bitcoin’s foundational capacity – without sacrificing its core value propositions.

In the past year alone, Bitcoin developers have achieved feats never before thought possible, without changing the core code, unlocking Turing-complete smart contracts as well as new ways to transform bitcoins into non-fungible tokens.

The ability of Bitcoin users to successfully implement compelling new features makes existing crypto networks that offer similar functionalities redundant.

In an expanding sea of competing cryptocurrencies and government-managed monies, with diverse and ever-changing policies, Bitcoin stands alone.

Get started with Kraken

Investing in crypto assets is risky and each token can have its own set of risks. Below is a list of risks that generally apply to all crypto assets:

Volatility: The performance of crypto assets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in crypto assets.

Lack of protections: Crypto asset investments are unregulated and neither the Financial Services Compensation Scheme (FSCS) nor the Financial Ombudsman Service (FOS) will assist or protect you in the event that something goes wrong with your crypto asset investments.

Liquidity: Some crypto asset markets may suffer from low liquidity, which could prevent you buying or selling your crypto assets at the price that you want or expect.

Complexity: Specific crypto assets may carry with them specific complex risks that are hard to understand. Do your own research, and if something sounds too good to be true, it probably is.

Don’t put all your eggs in one basket: Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.

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