What is Bitcoin’s Value Proposition?

Bitcoin is different things to different people. Part of the reason for the conflict over the proposed block-size fork is due to the variety of positions on what Bitcoin should do and what it’s value proposition is.

Sound Money

Bitcoin’s principles are based heavily on that of sound money. Satoshi was not shy about this inspiration, especially with the genesis block message:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

Satoshi created Bitcoin not with a set inflation rate for eternity, but with a fixed supply. The value proposition of having a fixed supply is a defining characteristic and sets it apart from fiat. Bitcoin represents the value of gold but with the power of the internet.

Censorship Resistance

Bitcoin by its nature is quite censorship resistant. Satoshi talked about this quite extensively. It can be summed up best in his quote:

Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.
It’s very attractive to the libertarian viewpoint if we can explain it properly. I’m better with code than with words though.

The essential nature of the P2P network in Bitcoin was done explicitly to allow censorship resistance, such that even governmental agencies would be unable to stop the network and stop its payments.

Irrevocability

Payments are not subject to the whims of a third party to overrule the transaction. This allows for greater fraud protection for the receiver. In transactions where the payer is unknown and the merchant is well-known and trustworthy, this works well. It also works well when the transaction can be handled directly and clearly.

Cheap Payments

One of the draws of many to Bitcoin is the value proposition of cheap payments. Bitpay and Coinbase are prominent in pushing this as the value proposition to merchants. Accepting Bitcoin is cheaper than accepting a Credit Card.

Fundamental Values

While the first two value propositions do exist fundamentally within Bitcoin and encoded in the protocol, the final one is not one that can be guaranteed. Users should not be surprised when this value proposition changes. Distributed consensus is expensive to maintain, and while this is paid through by inflation and diluting existing supply, it is partially offset by transaction fees. This is guaranteed to change with time, where the network security will be provided more and more by transaction fees.

The Myth of the Cheap Transaction

While higher fees would certainly make Bitcoin less desirable in some use cases, these use cases are not particularly well served by Bitcoin. Centralized solutions will almost always be cheaper and for small transactions of value, the risk is much less. This already exists today through services like ChangeTip, where it would be economically unfeasible to send tiny amounts of Bitcoin on the blockchain. If the transaction fees were to rise, you would see the most marginal use cases driven away from the blockchain, just as Dice sites and tipping services have done so. However, Bitcoin’s sound money and censorship resistant properties make it so advantageous, users would be willing to pay a premium for such value rather than requiring a discount.

Bitpay’s abysmal statistics for the merchant battle shows how terrible the cheap transaction value is. Merchant adoption of Bitcoin is also partially due to reduced fraud risk, and even then, very few merchants are able to save any significant money. This is apparent due to the lack of discounts for Bitcoin transactions, barring sites that rely on selling illiquid items such as gift cards or rely on fraud from selling stolen credit card purchases.

These Times are a Changing

The knee-jerk reaction from most of the armchair enthusiasts is to just immediately want to increase the blockchain without regard for consequences. This is in large part due to a nostalgia for the Bitcoin of the past. As Bitcoin grows, we cannot guarantee which parts of the accidental benefits will still be present. However, the fundamental properties must remain. Without it, Bitcoin offers nothing that isn’t already offered.