Bitcoin for skeptics — Part II
Some time ago I wrote the article “Bitcoin for skeptics” where I tried to talk to the skeptic that we all have by reviewing the most common criticisms or questions that are made to this new form of money.
As it was expected, because luckily there are many criticisms of Bitcoin, I could only cover a few and many were left out. My intention with this second part is to address some more. Without further introduction (for that there is my Part I), feel free to read everything or go directly to those reasons that most resonate with your point of view.
Nobody uses Bitcoin
“Nobody” would not be the appropriate word, but “very few” on a global scale for sure. Bitcoin is a new money that is still growing. Although 10 years (at the time of writing this article) seems like a lot for the evolution of a technology, it is practically insignificant for the evolution of money. Even so, in its short life the trend has always been growing.
Another aspect to analyze is the term “uses”. Since money should function as a “store of value”, “unit of account” and “medium of exchange” it is unfair to think of the latter as its only use, which is what most people do. Acquiring bitcoins as a long-term value storage (since short-term can be affected by its current volatility) is a valid use case as well.
Still, I understand the argument that if nobody (or very few people) see Bitcoin as useful, what is the point of it at all? And it really is a valid reasoning. However, we must not lose sight of the fact that the “bet” on Bitcoin is (very?) long term. Acceptance is growing, and the differentiating attributes that Bitcoin provides against other forms of money (open, global, non-permissioned, censorship-resistant, hard on monetary policy) is not something that is easily valued by all, especially in regions of the first world. Even without global adoption, the market exists today and I personally believe that it will exist for many more decades at least. And that’s enough, “what is money” is a decision made by those who use it.
It is not private nor anonymous since in order to buy it I need to give all my data
I will take this opportunity to make an initial clarification: Bitcoin is not in itself anonymous, but a pseudonymous. This is because no data associated with the identity of the participants of a transaction is recorded, but the transactions with their amounts are registered in a public and open manner.
Now, to the point. This confusion is very common when talking about Bitcoin, and the explanation is very simple. Bitcoin is pseudonymous (and as anonymous as the practices that everyone uses to that end) and permissionless, which means that anyone can have bitcoins and operate with them without needing to identify themselves in any way, much less ask permission or authorization to no one. That’s how it was designed.
However, if one wants to exchange goods or services for bitcoins and vice versa, one must deal with that other person or company that provides or purchases said goods and services. In these cases, that person or company may request personal data if they have the liberty to do so, and one may refuse to give them … if one has the liberty to do so. Being other currencies such as USD or EUR also goods, all this applies to companies that operate as “Exchanges” or “Brokers”, which usually request personal data according to the regulations to which they are submitted. But this does not mean that Bitcoin is like that. In the same way that an Internet provider is not the Internet, nor a furniture factory is a table. The exchanges or people who operate with Bitcoin (and who may or may not request more information or even charge for their services) are not Bitcoin.
Bitcoin is obsolete, the technology evolved
It is important to keep in mind that Bitcoin is not only technology (software, networks, etc.), but also the network (people, consensus, etc.) and the money itself.
From a purely technological point of view, naturally evolution and innovation are usually sought after. Bitcoin has evolved and continues to do so in this aspect, in fact improvements and advances are constantly being made. What has happened over the years is that, due to the nature of the project and its purpose (although not formally defined but mostly agreed upon by the entire global community), these advances were less visible or abrupt. Even some of them of less impact for the average end user without much technical knowledge. There is a very good reason for this and it is that Bitcoin is, among other things, a technological protocol (*) for storage and exchange of value (money) and as such every alteration to it requires a lot of analysis, debate and great final consensus. We are not dealing with an “app” developed by a company. And since the Bitcoin community grew a lot over the years, that consensus increasingly takes time to become a reality.
(* A protocol would be the set of basic rules that allow a coordinated operation between all the members of a system. Internet, for example, is full of those protocols, such as the well-known HTTP that appears in the addresses and serves to define how the communications with a web service is going to happen, these protocols don’t change very often.)
Apart from the mechanism with which Bitcoin evolves, there are other technological experiments with the same or similar technologies derived from it. Each one of those advances may seem better or worse in some aspects, but it will always depend on the perspective with which you look at them based on the objective you want to achieve. In the case of Bitcoin: a digital system of storage and transfer of value (money), open, neutral, permissionless, censorship-resistant, global and without borders.
In addition to that, Bitcoin already has a network of people and payments that cannot be replicated simply by copying its programming code. The same network that gives life to money. For this reason it is important to measure Bitcoin and other projects that seem to be the evolution by the same standards.
The capacity for transactions is too low
One issue that is often debated is the ability of Bitcoin to process transactions. And by “processing” transactions, we mean that these transactions can be confirmed (included in a block of the chain) and get finality.
The number that sometimes appears is 7 TPS (transactions per second), although with the changes that the system underwent in 2017 (SegWit) that number could practically go up to 14 TPS. Still, it may seem little to process transactions around the world if we think about mass adoption or compare it with VISA or PayPal for example.
The decentralized nature of Bitcoin implies that every member of the network must verify every transaction that is made, its confirmation and also store the necessary historical data to do all of that independently, in a timely manner, and without trusting or relying on third parties. The cost of doing so increases as more transactions are processed by the network. Therefore, it is not easy to find a balance between the desired scalability and the practical capabilities of each participant if the objective is that being a participant in the network does not remain in the hands of a very few (centralization).
This debate existed for years and it is not worth digging much deeper here. What we can say is that Bitcoin opted for a more conservative approach trying to preserve the decentralization of the network and making more accessible the possibility of independently verifying each transaction for whoever wants to do it (one of the pillars for which Bitcoin was created).
The solution to this dilemma today is given by what are called “second layer” solutions. These solutions try to enhance Bitcoin without modifying it, but using its characteristics as a source of integrity and truth of information but adding functionality and capacity in linked systems. This is still in the experimental phase and in the future we may see other types of solutions to this problem.
Too much energy is wasted in Bitcoin mining and it’s affecting the environment
This argument is very common as a criticism of “mining” in Bitcoin, and we can start by agreeing that Bitcoin is a system that is characterized by consuming large amounts of energy. But to that we can add that thanks to this high demand is that the system can maintain high levels of security, robustness and resilience.
A metric that is usually used is “energy consumed per transaction”, for which I want to make some comments. This metric is usually obtained by calculating the energy consumed per Bitcoin block (every 10 minutes approx.) and then dividing it by the number of average transactions per block. One of the problems with this calculation is that it omits the very important fact that each block not only confirms the transactions included in it, but also cements all the transactions that already exist in the registry (the blockchain). This mechanism is the one that provides immutability to the registry/ledger.
Another problem with this metric is that it may imply that more transactions consume more energy, and this is not true because that is not how Bitcoin works. The relationship between the use of the network and the energy consumed by it is not a direct relationship at all. However, it is true that there is an indirect relationship that has to do with the incentives of the network, the Bitcoin valuation and other factors that can make the “mining” industry grow in Bitcoin. In the same way that, for example, adding more viewers in front of a TV will not make that TV consume more energy, but will surely generate incentives to install more TVs that do consume more energy than a single one. This example does not reflect the operation of Bitcoin, it only tries to illustrate the nature not directly related between use and consumption of energy.
Regarding “affecting the environment” it should be said that the mining industry in Bitcoin has a high percentage of renewable energy use according to some studies. The main reason may be that, on the one hand, the production of renewable energy often depends on the geographical location (eg, hydro, wind, etc), and on the other hand that Bitcoin mining is a very “mobile” in the sense that, unlike the supply of an urban center, it can move to be close to the production of energy without affecting its operation. All this added to the fact that a miner will always seek for the economic benefit, and finding an equation that allows him to obtain more energy at lower costs is a great incentive.
Finally, regarding “too much energy is wasted” we must stop at “too much” to know what are we comparing it against. But more importantly we must stop at “wasted”, which leads us to question the usefulness that we give to Bitcoin.
If we want to do comparisons, we can analyze how much energy uses or how much pollution the current financial system generates, or at least those parts that Bitcoin could replace (cards and other means of payment, international remittances, settlement of transactions, paper currency printing, metal mining, etc.). Or we could also compare it with the amount of energy used by all electronic devices when they are in “standby” mode (unused), or the carbon emissions that are estimated to be indirectly generated by the video streaming. Many of those numbers have been studied and I invite you to look for them online.
If we want to measure by importance, let us ask ourselves how important it is to have a global and distributed system, permissionless and resistant to censorship, that allows for economic transactions without intermediaries, and that allows us to have a new form of money that we can store and control in an autonomous way if we want to. In short, what importance are we giving to a (for many) superior form of money, with all that implies for humanity.
In the end, this importance will be determined by the millions of decisions made by millions of people in the world and who will or will not be willing to give value to that system. In short, what we call “Market”.
Always verify
As in the previous opportunity, I do not pretend that you believe everything I say but invite you to question those truths (or opinions?) that generate skepticism about Bitcoin. And in those cases where it is possible, correlate it with information from various sources. In this post I made some very superficial references to data about transactional capacity, energy consumption and others. I would like that, before discarding what I said or agreeing with it immediately, you do the corresponding verification to see if what I said is supported by real data.
We can not escape subjectivity, even when we believe that something is objective. It will not be more than objective enough because our whole perception of the world is through us, and that is where objectivity finds its limit. But without becoming more philosophical than necessary, I will close this piece with a phrase that resonates a lot in the Bitcoin ecosystem and represents a principle that, although sometimes difficult or impractical to implement, is still important:
Do not trust, verify
Some sources
If you still didn’t ready it, don’t forget to visit the Part I (link) and leave me your comments.
