If you listen to some fervent bitcoin advocates you might hear some pretty utopian thinking. Bitcoin will end the banking industry. Bitcoin will stop wars. Bitcoin will end governments. In this post I examine utopian thinking versus likely realities.
People will manage their own keys
Bitcoin lets us be our own banks. If you have your private keys you have the ability to move your coins instantly and without any third party 24/7/365.
But what does it mean to own your own private keys? It means keeping a secure, redundant backup of what is usually a 24 word phrase. Anyone who gets their hands on it instantly can steal your life savings. And if you lose it? No recourse. Bitcoin is unforgiving.
The average person uses the same weak password on all websites and apps. And we want people to deal with secure redundant backup? Put it in a safe? Protect it from fire? Deal with inheritance if they suddenly get hit by a bus and neglect to tell their loved ones where they put the keys?
I don’t believe this can happen on any reasonable time frame. Even today’s digital native generations by and large don’t understand or think about password security and backups. The vast majority of people will store their coins in fully custodial or partially custodial solutions. Bitcoin gives us vast improvements in custodial options (like Casa or BitGo where they manage some of your keys for backup, or ChainFront which provides a custodial API) but it still requires custody for the most users. We’ll also see traditional banking infrastructure start to take notice of this space and provide something they actually are pretty good at: physical security.
Fractional reserve banking will cease to exist
Part of the mythology of everyone being their own bank is also the theory that the entire banking system is broken and/or evil. Perhaps it’s that many Bitcoiners are wealthy individuals with libertarian leanings that think that if only we had a hard money we could mange our own savings and live debt free, but again this is a far fetched reality.
The more likely reality is that most people still need debt, and will continue to live in debt even in a hard money system. We still occasionally need to borrow from our future to address for our present needs. Banks will continue to exist, and fractional reserve banking will continue to exist. But what may improve is our understanding and transparency of the entire economic system by forcing the settlement between these institutions to occur on a transparent, hard money layer (Bitcoin).
Credit card companies will be destroyed
It’s tempting to think that Lightning Network or other second layer solutions will completely replace our existing merchant networks. But I don’t think this is likely because the merchant networks do a lot more than just process payments. They deal with fraud, chargebacks, consumer protection, loyalty points, the list goes on and on. Furthermore, the existing networks are extremely entrenched with millions of merchants and billions of consumers already on board.
In order to bootstrap LN to replace this, we would need to port all of those people over, establish new POS systems in physical and online retailers, get people to buy Bitcoin with on chain fees, or be paid Bitcoin from their employer (circular economy). This is a gigantic ask, so gigantic that it may actually never happen. And then, we’ll have to reproduce decades of fraud and consumer protection infrastructure that sits on top.
What will become of LN then? I think it creates interesting new use cases that we haven’t even fully explored. Micropayments for API usage, or machine to machine payments are ideal candidates for lightning network as they process tiny amounts, leave little at risk at any one time, and have the requirement for cheap, instantaneous transactions. I think LN ends up the Linux of this ecosystem, something that powers huge portions of transactions, but not the kind we normally think of. Just like some people originally thought Linux might replace Windows on the Desktop, but instead it became the backbone of the Internet and Android devices.
It may be cars that pay toll roads over LN, rather than you buying coffee.
My gut says that in the near term, users will continue to use credit cards and start using Bitcoin to pay their bills or take crypto-collateralized loans as their primary way of interfacing the traditional fiat world to Bitcoin.
Mining will be decentralized
Mining is an extremely competitive industry. You have to be on the latest technology, leading to leaders establishing their own silicon manufacturing. You have to be on the cheapest energy which drives miners to become their own energy producers as well. We already have billion dollar operations like Bitmain. The only way to compete with such economies of scale is to scale up.
How many cloud providers do we have? Aws, google cloud, azure, maybe a handful of others. The number of people who can build out a massive scale cloud data center and make it hyper efficient is limited even given unlimited capital. Therefore we will also see a limited number of giant mining operations scattered across the globe. I’m ok with this. I covered why centralized mining isn’t a big deal in another post.
Bitcoin will bank the unbanked
I got into Bitcoin because of the promise that we could bring truly free money to economies that have suffered from currency controls, wealth seizure, and bail-ins. And it is amazing that we can offer Venezuelans a glimmer of hope by allowing them to exit their broken economic system onto Bitcoin and move their wealth out by carrying a phrase in their head.
But due to both the custody complications I outlined above as well as the inevitable rise in cost of on-chain transactions due to block space scarcity, the base layer of Bitcoin likely will be reserved for very large settlement transactions. How then, will we bank the unbanked?
Most likely, we will see the emergence of a thriving off-chain Bitcoin-reserve based economy. This may take the form of Lightning Network or something similar in the form of a circular economy: people will get paid on LN and then spend on LN. The vast majority of people in the world only have a small amount of money on hand at any one time and LN is perfect for that. The people who have needs to store and secure large amounts of coins will likely be ok paying the one time tx fee to commit them to the chain.
In the prior section, I stated that I don’t think LN would be used for consumer payments, but this is one place that it might — places that don’t already have entrenched “second layer” networks like visa/mastercard and have limited or nonexistent banking and government systems. It’s possible that in these places some usage of LN will take off, but we would need to see giant leaps in UX improvements including key management for this to happen.
Strong opinions, loosely held
I’ll finish this off to say that all of this is speculation. It’s a realistic view to temper my own optimistic tendencies. I sure hope I’m wrong about some of these things and we see hyperbitcoinization by 2020. But the realist in me says we’re a long way off. That’s ok, that’s why we HODL.