8 Reasons Ethereum is a Less-Good Investment than Bitcoin
Bitcoin vs Ethereum
The hack of TheDAO has renewed interest in Ethereum vs Bitcoin. Balaji Srinivasan praises the Ethereum team for its efforts, but lays out four concerns:
- Ethereum is orders of magnitude more complex than bitcoin. This means its attack surface is correspondingly larger and it is correspondingly more fragile, as exemplified by the recent debacle with TheDAO. Ethereum is also less stress-tested than bitcoin, which has been a million-dollar target for six years and a billion-dollar target for three years. If Ethereum’s market cap grows, attacks against it will become increasingly vigorous and creative.
- Ethereum’s scaling plan requires changing its code and fundamental security model from proof of work to proof of stake. Whether this can be done successfully is far-from-certain, or as Balaji puts it: “an open question.”
- Bitcoin has a modest goal of doing decentralized wire transfers, yet it has taken seven years of engineering refinements to begin to begin to realize this goal on a global scale. Ethereum’s goal of decentralizing complex applications and companies is a Herculean task that, if possible, will take a lot longer. (More on engineering improvements in bitcoin below.)
- Much of the potential value of decentralized applications relies on the existence of a decentralized oracle. (An oracle is an arbiter of truth. Examples of centralized oracles include The Weather Network and ESPN.) Whether a decentralized oracle can be built is also an open question, although Paul Sztorc claims he has succeeded with bitcoinhivemind.com, which supposedly works with bitcoin, anyway.)
I would add to Balaji’s analysis:
5. The networks effects of money are super-charged. Consider 50 VHS users and 50 Betamax users. If one Betamax user converts, there is little-to-no effect on the other 49 Betamax users. But if there are 50 Peso users and 50 Rupee users and one Rupee user converts to Pesos, everyone is affected by an increase in Peso demand and decrease in Rupee demand. All else being equal the power of Peso-to-Rupees will increase, prompting more converts in a positive-feedback loop.
The fact that bitcoin has been able to gain on the US dollar in five of the last seven years, despite its network disadvantage, is testament to its objective superiority. Ethereum faces a similar uphill climb if it wants to challenge bitcoin as money.
6. My elevator pitch for bitcoin is that unlike dollars, rupees, and pesos, it is capped at 21 million units. However, the issuance of ETH will continue forever. Five year olds should understand why bitcoin is a superior store of value.
7. It is plausible that bitcoin ownership roughly follows a power or Pareto distribution in which Satoshi owns the most coins, some other early investor or miner owns about half what Satoshi owns, another owns half of that… ending with a long tail of people who own $5 to $20 worth. Pareto distributions are found all over natural systems emerging from another and are relatively stable.
It is entirely implausible that ethereum ownership follows a power distribution. ETH did not emerge from nothing. 72 million ETH tokens were created with the stroke of a keyboard and either sold for fiat or kept by the developers in a private fund. As ETH gets older, it distribution will evolve towards a power distribution, but this will surely involve large sells and big price drops.
8. Ethereum is controlled from the top down, as evidenced by The DAO fiasco. Top-down control blocks antifragility. Nassim Taleb:
Bitcoin Engineering
Bitcoin Core engineers are taking a move slowly and maintain trust approach to improving bitcoin. This approach includes three upcoming code changes:
- Compact Blocks will reduce the bandwidth necessary to propagate new blocks to full nodes. This development will help bitcoin remain decentralized.
- Segregated Witness “segwit” will fix an issue with transaction malleability.
- Checksequenceverify “CSV” will allow money to be locked at an address for a specified time period.
CSV and segwit are the pre-requisites for building the Lightning Network: trust-minimized payment channels that promise to scale bitcoin far, far beyond its current 3 transactions per second.
The Machine Payable Web
Engineers are also developing bitcoin on the application layer. Balaji and his team at 21.co are building what they believe will become the third web: the machine payable web. Smart power grids distribute energy on the basis of supply, demand, and of course price. Bitcoin is probably the main missing link that will allow us to create smart compute grids, in which computers all over the world, collaborate and compete in a voluntary and profitable network.
Mainstream News
The recent vote to Brexit accompanied by price gains has pushed bitcoin into the spotlight. Any volatility and uncertainty in traditional currencies and banks is good for bitcoin, since it becomes relatively stable. Stronger borders are also good for bitcoin, because it becomes relatively more useful. Here is ARK Invest analyst, Chris Burniske calling bitcoin a “disaster hedge:”
