Ten Years In, Why Bitcoin (Still) Matters
Part II: Reputation Building
(Part I is available here)
I’m among the diminishing few who, in spite of ongoing market capitulation, ardently believe in Bitcoin’s potential to be a profoundly superior alternative to both fiat money and our legacy financial system. But even if you don’t share this sentiment or know enough to have an opinion, emerging competition in this space should be a welcome development for literally anyone with a bank account, and even more so for the two billion unbanked who are completely excluded from the global economy.
The good news for Bitcoin is that the bar in this competition isn’t set too high…anyone who’s old enough to remember the economic meltdown of 2008 has reservations about the integrity of the politicians, bankers and regulators who manage our financial system. Centralized control of monetary supply engenders political corruption, inflation, and currency devaluation, so it’s no wonder there’s such low confidence in our economic leaders. The bad news for Bitcoin is that humans are fundamentally resistant to change and it will take a whole lot of convincing for the world to truly embrace Bitcoin’s long term value proposition. For mass adoption to eventually take hold, and notwithstanding Bitcoin’s price volatility, the world has to be categorically persuaded that it has merit in three realms:
- Sound Money — bitcoin as a currency must be more resistant to long-term devaluation than fiat money
- Security — Bitcoin as a payment network must be more secure than the technology used by banks
- Reliability — Bitcoin as a payment network must be more reliable, cheaper and more efficient than our current financial system
With nearly ten years of performance behind us, it’s increasingly evident that Bitcoin — the best performing asset class over the past decade — has successfully positioned itself to outperform the competition where it counts:
Unlike any other currency used in the history of civilization, the number of bitcoins that will ever exist is capped at 21 million. By design, there will never be more than 21 million bitcoins in circulation. A fixed quantity is released in small batches every ten minutes, and every four years the amount of bitcoins included in these batches gets reduced by half. This core feature transforms bitcoins into increasingly scarce assets with an inflation schedule that diminishes at a predictable rate over time, until reaching zero when the last fraction of a bitcoin is brought into existence. The decentralized consensus mechanisms that govern Bitcoin’s monetary policy (some of which are mentioned in the section that follows) make it extremely difficult for any one party to change these rules.
Bottom line — The economic scarcity principle suggests that high-demand scarce resources increase in value as the supply diminishes. This means that over time, and as demand increases, bitcoins will be far more resistant to devaluation than fiat money which is unlimited in supply and freely printed by potentially unscrupulous central bankers.
Bitcoin’s software code has a number of built-in features that keep it extremely secure and tamper-proof — critical attributes of any payment system. These security features are manifested in a highly decentralized environment using advanced cryptography.
Decentralization: Bitcoin doesn’t have a central point of failure because there is no single company or entity behind it. Rather, the Bitcoin network is comprised of many independent and globally distributed actors who are financially incentivized to cooperate and behave according to a common set of rigid rules.
- Miners — these tens of thousands of globally dispersed high-capacity computers are the backbone of Bitcoin’s blockchain — a publicly-accessible, digital ledger (or balance sheet) that records every bitcoin transaction ever authorized. Miners compete in an ongoing contest (every ten minutes) that rewards one participant with a fixed amount of bitcoins each time newly authorized transactions are grouped into a data block and then added to the blockchain. The individuals and companies who own mining computers stake significant financial resources (paid in computing power and electricity costs) for the opportunity to generate blocks and win bitcoins. Miners can either save the reward in hopes it will accrue value over time or to sell it back to the market for a profit.
- Developers — miners depend on hundreds of volunteer developers who maintain the software code that mining rigs use. These coders (who presumably hold some of their wealth in Bitcoin), provide the latest software features and improvements which give Bitcoin sustained value in the free market. Mining operations are incentivized to routinely update to new software releases or risk running an old implementation that becomes obsolete or contains unpatched vulnerabilities.
- Nodes — miners are also reliant on a majority consensus formed among thousands of geographically distributed nodes or computers whose sole purpose is to validate the legitimacy of newly-mined blocks. Nodes are owned and operated by private users and businesses (mining companies, cryptocurrency exchanges, wallet developers and crypto payment service providers) — without their confirmations, a miner’s block reward isn’t guaranteed.
- Investors and Traders — these are the early adopters, high net-worth individuals, speculators and institutions who pay market value price for the Bitcoins that cycle back through the market when sold off by miners. If they weren’t interested in owning Bitcoin, there wouldn’t be any purpose in expending real-world resources to mine them.
While centralized pockets of influence within the constituencies mentioned above exist, it turns out that Bitcoin’s game theory-based economics incentivizes cooperation among distributed stakeholders to maintain a highly transparent, apolitical and secure monetary policy.
Bottom line — As Bitcoin gains adoption, its decentralized power structure will become far more resistant to corruption and manipulation, particularly when compared with the concentration of power that exists in the central banking system.
Encryption: Another critical security feature involves the use of encryption to identify fraudulent activity and protect the integrity of the transactions that are recorded in Bitcoin’s public ledger. Those blocks I mentioned above — they’re individually sealed with a unique hash, or cryptographically-generated digital fingerprint, that is derived from all the data contained within the block, as well as the hash from the preceding block (each block’s hash is linked to the previous block’s hash, forming a chain that dates back to the genesis block). If a bad actor tries to alter transactions contained in any data set within the chain, the nodes on the network would easily detect malicious activity and reject or discard the unverified change.
Bottom line — Bitcoin’s blockchain gets less fragile and more resilient over time, making it practically immutable, censorship resistant and far more immune to attack than any other network in the world.
Ever since the first Bitcoins were mined into existence, the network has functioned nearly flawlessly with an uptime of 99.99%. It’s blockchain has never been hacked (most of the attacks you’ve likely read about happened to privately-held cryptocurrency exchanges or other, less secure blockchains), and Bitcoin has thrived even in the face of ongoing efforts by nation-states like China and India to restrict usage. The pace of block production — or the rate at which Bitcoin’s publicly distributed ledger updates with new transactions — has been largely kept to ten minute intervals. It has now maintained this schedule, almost without pause, 24/7, for nearly ten years. For the overwhelming majority of this time, transaction fees, regardless of the value transferred, have consistently been less than a dollar, and the median time for transaction confirmation has been under an hour. Moving bitcoins on the network isn’t always a swift process — transactions can be sluggish and costly when there’s a lot of congestion or high trade volume — but layer two scaling solutions like Lightning, which are already being rolled out, promise to dramatically increase efficiency (as well as privacy) on the network.
Bottom Line — Once a transaction has been written into and confirmed in a block, there’s a permanent, undisputed record that your money has safely arrived at its intended destination.
Advocates define Bitcoin, in its ideal form, as both sound money and a trust-minimized, frictionless payment network that embraces open-source, decentralized and cryptographically secure technology to facilitate peer-to-peer transactions without reliance on an intermediary or exposure to counterparty risk. In reality, however, Bitcoin’s ability to fully live up to this definition is largely dependent upon the integration and adoption of new technologies that are still being built and tested. Solutions for decentralized exchange protocols, scaling and privacy, as well as better user interfaces, are all critical for overcoming Bitcoin’s current price volatility and gaining mainstream trust. It might take another decade to get there, but based on a stellar performance during its first ten boot-strapped years, Bitcoin has earned its status as a serious contender in the currency arena, and the battle has only just begun.