Bitcoin’s Failure and the Return of the Messiah: Satoshi Nakamoto
“Bitcoin was an experiment that failed”, wrote Mike Hearn, one of the top developers a couple of days ago in Medium. In his long post, he explains that the growth of the bitcoin ecosystem and user adoption requires a number of technical adjustments on the block size. But the community of core developers couldn’t agree on it, putting the network on the verge of collapse.
Following Hearn’s decision, the price of bitcoin dropped 15%. Some accused him of being a hitman serving the CEV R3 bank consortium that is building a private blockchain. We have all seen a lot of denial in the bitcoin ecosystem, both among entrepreneurs and investors (“This cannot be happening. Hence, it is not happening”).
The technical aspects of the block size have been widely debated already. Nor will I comment on the small politics on whether Hearn is a double agent working for the big banks. Let’s zoom out and see the big picture of the bitcoin experiment to reflect about the governance and strategic issues at stake.
Cryptocurrencies in the Gartner curve
In 2008, Satoshi Nakamoto proposed the blockchain as a new distributed ledge technology. Blockchain technology may have applications in several industries. One of them is cryptocurrencies. Bitcoin was the first cryptocurrency “brand”.
It is widely known that the adoption of new technologies tend to follow the Gartner curve.
Bitcoin entered into hyperdrive growth in 2013 and 2014. There were of course some down moments such as the shut down of Silk Road in October 2013 and the $460 million Mt.gox market collapse in February 2014. Eventually, bitcoin started to be adopted by the mainstream. Venture capitalists poured millions into bitcoin startups, in a gold rush that reminds us of the late 1990s Internet bubble. Andreessen & Horowitz backed Coinbase in December 2013. Peter Thiel placed some small bets on bitcoin such as BitGo. But he always was somewhat skeptical.
The explosive growth led to the peak of inflated expectations on cryptocurrencies (“The bitcoin is worth $1,200. We’ll all be millionaires, and bitcoin will change the world”). Then the price collapsed into the trough of disillusionment (“Bitcoin dropped to $400. Damn it!”). Maybe, Hearn’s post is the rock bottom of the trough of disillusionment (“Cryptocurrencies are dead”). If cryptocurrencies are to follow the Gartner pattern, then at some point we’ll reach the slope of enlightenment (“Oh, so this is what the cryptocurrencies were good for… Now I get it”). And finally, the plateau of productivity, with realistic expectations of what cryptocurrencies can do for us.
Is Bitcoin Suffering the Liability of Newness?
Those of us who have followed the bitcoin project from a relatively early stage know that the core developers (such as Hearn himself and Gavin Andresen) where always very humble (even skeptical) when speaking about bitcoin potential. They always reminded the community that bitcoin was an experiment. And, as such, it could fail. I even remember seeing Xapo founder Wences Casares speak on these lines at a conference in Chile in 2014: “Bitcoin is an experiment that may fail. But I think the chances success are greater than the chances of failure”.
Being the first mover in a disruptive technology market has some advantages. But it also has what strategy scholars call the liability of newness. There were several automakers before Ford and several search engines before Google. The Altair 8080, introduced in 1975, was the first affordable personal computer. But users had to assemble it themselves. A couple of years later, Jobs and Wozniak launched Apple II, a preassembled and easy to use computer, and conquered the market.
The first mover makes all the rookie mistakes and bears all the costs of user evangelization. The second mover finds a paved road. It starts later but moves faster. Often, it ends winning the race.
Key questions at this moment are: is bitcoin the Altair of the cryptocurrency industry? The Altavista of search engines?
Satoshi, the School’s Nerd?
Somewhere else I have entertained the idea that Satoshi Nakamoto may be a group of cryptographers, instead of an individual. But let’s swim into the rough waters of speculation and assume that Satoshi is indeed an individual. I picture him as a lonely genius scientist. Only a beautiful mind comparable to John Nash could come up with the perfect game theoretic balance of incentives underlying the bitcoin. However, I’m inclined to think that Satoshi lacked the people’s skills required by a good startup CEO. He came up with this brilliant idea, but chose poorly the people to implement it.
Starting a company with the wrong partner is a mistake that usually can’t be fixed. Accelerators and venture capitalists tend to put the team before the idea. A great team can turn a bad idea into a good business. A bad team can ruin a revolutionary idea. Maybe Satoshi triumphed as a scientist but failed as an entrepreneur?
So, what’s in our future?
To those who asked in the last week what to do with their bitcoin, I give them the same answer as I always have. It’s the same investment advice by the people more intimately connected with the bitcoin ecosystem: “Do not bet on bitcoin more than you can afford to lose”. I never had more than a few hundred dollars of bitcoin in my portfolio. I bought them mainly to learn about the technology and never really saw them as an investment.
There is not doubt that the blockchain technology will change the world and that cryptocurrencies will eat the financial industry. The future of bitcoin is less clear. It is not a problem with the technology, but with the governance of the Bitcoin Startup.
It came with the promise of democratizing currency: isn’t it ironic that is ends up with its code controlled by just five people that nobody voted? The Politburo of the Communist Party of China has 25 members. Can the currency that promised the decentralization of finance end up more centralized government than China?
The Return of the Messiah?
It seems clear that bitcoin cannot scale with this governance structure. Either it changes or the industry leadership will end up in the hands of some other competitor. Apple was on the verge of bankruptcy and was only saved by the return of the Messiah, Steve Jobs.
My wish is that the bitcoin community will figure out and agree on a new governance scheme. But if things are so rotten as Hearn think, there is still an option: the return of Satoshi the Savior, the only one with enough credibility to push for a reform of bitcoin governance.
I wouldn’t be as surprised if this happened as I would be disappointed. Blockchain’s real innovation isn’t about technology but about people collaborating in new distributed ways. If this p2p community needs to be bailed out by a benevolent dictator, this would be, I believe, the ultimate failure of the bitcoin experiment.
