Bitcoin, not crypto

In Proof-of-Work vs. Proof-of-Stake, we discussed why PoW is the new innovation, while PoS is effectively an extension, or evolution, of the current fiat financial system, subject to capture, manipulation, and the Cantillon Effect.

Bitcoin’s proof-of-work consensus mechanism alone gives it an unassailable competitive advantage over any proof-of-stake cryptocurrencies competing as money, but it is also different from “crypto” in many other ways. Moreover, there are other proof-of-work imitators that fall short of bitcoin’s monetary qualities.

Let’s drill into a few of the qualities that differentiate bitcoin from the rest of crypto, in order to better understand why bitcoin is unique.

Bitcoin cannot be replicated

Bitcoin solved the problem of digital scarcity. For purposes of a global, digital monetary good, this problem only needs to be solved once. But because Bitcoin is open-source, it can, in a technical sense, be copied infinitely and costlessly. And it has been.

That is what “crypto,” largely, is – all the bitcoin imitators that came after bitcoin. But what none of them can recreate is being first. Since they are not first, they need to differentiate themselves from bitcoin in some way in order to hope to compete as money. Some of the vectors on which other cryptocurrencies attempt to compete are privacy, monetary policy, programmability, and the speed and cost of transacting on the network.

But to do that, they make trade-offs in other, more crucial attributes for a sound money to be sound in. In order to be faster and cheaper, they must be centralized. To enhance programmability, they compromise on security. To reverse security breaches, they give up their claims to be credibly neutral. And in a quest to discover better monetary policy, they forfeit any notions of fairness, immutability, predictability or stability.

So, while the bitcoin code can be “copied,” Bitcoin cannot be replicated. Any copycat does not bring with it 15 years of history of doing what it promises and as designed to do, the vast network of nodes and miners securing it, nor the core development team working on it.

As Lyn Alden eloquently puts it:¹

“Trying to copy Bitcoin would be like if I copied the content from Wikipedia and hosted it on my website. Technically it could be done, but it wouldn’t do much. It wouldn’t gain the real Wikipedia’s traffic, because it wouldn’t have the hundreds of millions of links pointing to it from other websites. And it wouldn’t be updated like the real Wikipedia, because there’s no way I could convince the majority of those volunteer editors to come work on my version instead. Unless I could somehow succeed in the herculean task of convincing the majority of the network to move over to my version, it would always just be a shadow of the real one with a tiny fraction of the value.”

Indeed, this is precisely what has happened with Bitcoin Cash and Bitcoin Satoshi’s Vision, two hard-forks of the Bitcoin network. They still exist, but at tiny fractions of the value of bitcoin. They serve as empirical evidence of what happens when you try to replicate the Bitcoin network.

Bitcoin is decentralized, credibly neutral, and censorship resistant

Bitcoin is the only cryptocurrency that is robust to network capture.

Having an anonymous and disappeared creator means there is nobody for the government to investigate, or coerce or threaten into using their influence to change the network or attempt to shut it down.

Being truly decentralized means that the rules of the network cannot be changed unless everyone agrees on changing them, as we discussed in 21 million.

This means that miners can think long-term and build for the future without the fear that a small group of network stakeholders are going to have the latitude to change the consensus model from proof-of-work to proof-of-stake. They can invest in growing their mining capacity and in research and development to invent new and ever more powerful bitcoin mining ASICs, seeking a profit and making the bitcoin network more secure as a consequence.

Said otherwise, they can invest in bitcoin’s inherent stability and predictability.

Being credibly neutral and censorship resistant means that bitcoin is an open network, available for anyone to opt-in to and use on the same terms as anyone else. Bitcoin cannot freeze any addresses, reverse any transactions, nor stop any transactions from occurring. This is an incredibly important feature for global, nation-state level adoption of Apolitical Money.

Like gold, bitcoin is a commodity – an asset without an issuer – and a bearer asset.

Unlike gold, it is absolutely scarce.

Which is important because…

Money tends towards one medium

The competition to be adopted as money is a relative one. That’s because there is only the need for one money – the best.

So I don’t mean to imply that all other cryptocurrencies are necessarily “bad” monies, in a vacuum. Maybe some are even better than fiat or gold. They’re just not as good as bitcoin.

The best money retains its value over time better than all the other monies, so why would anyone want the second best money in exchange for their goods and services?

Since everyone wants the best money, it is the most salable good in an economy. Since it is the most salable good, everyone must carry it, if they want to be able to transact. A network effect is born.

This doesn’t happen overnight. Money and saving is a long-term game.

Gold won its place as globally accepted money over thousands of years. Then a technological invention in the 1830s (the telegraph, and the ability to send information around the world at the speed of light via a communications network) made it obsolete, but it still took over 100 years for something to be invented that outcompeted it, when it was, literally, “papered over” and replaced by fiat.

Now another technological invention (digital scarcity) has arrived on the scene, and with it, a new form of money – cryptocurrencies.

But go ask 100 people on the street what the best cryptocurrency is.

Better yet, go tell 100 people on the street that you just asked 100 people on the street what the best cryptocurrency is, and ask them to guess what was the most common answer.

Bitcoin is a Schelling point.

And that is the game theory of money.