The future of Bitcoin
Updated: Apr 24
I'm not interested in the price of bitcoin. I became interested in Bitcoin because it had the potential to do much good. The idea of providing a stable currency in countries like Venezuela had great appeal, and use of Bitcoin for crime seemed to have abated.
So where are we now? Bitcoin has spawned hundreds of imitators, so called alt-coins. Some are clearly attempts to get-rich-quick, others have specific purposes such as enhanced privacy. I will generally not talk about coins that are not outside the top 10 by capitalisation.
Two World Views
There are two basic ways to view the purpose of cryptocurrencies: digital gold or digital cash.
Digital gold sees cryptocurrency as a store of value.
Digital cash see cryptocurrency as predominantly as electronic cash used to buy and sell things.
The two views of cryptocurrency create different demands on the underlying technology. Bitcoin is known for low transaction throughput (3-4 transactions per second) and high fees, but since Bitcoin see itself as digital gold, that does not matter. Bitcoin SV, probably the only cryptocurrency of note pursuing the digital cash vision, needs to be able to provide high throughput and low costs. Just to compete with Visa or Mastercard, Bitcoin SV needs to be able to process at least 50,000 transactions per second. To really pursue the digital cash dream, Bitcoin SV will probably have to process millions of transactions per second.
So which world view will win?
Both. Each world view creates its own market. If you want to speculate or retreat to an alternative asset class during a recession, then one of the digital gold coins is for you. Bitcoin (BTC) is the clear front-runner in this market and almost certain to remain so. On the other hand, if you want to buy stuff then a digital cash coin is for you. At the time of writing, only one coin, Bitcoin SV (BSV), is a serious contender for a digital currency, and it still falls short on a number of measures.
The digital cash, or electronic cash, market is a tough one. Any cryptocurrency will be up against non-cryptocurrency alternatives such as PayPal, Alipay, M-Pesa, Visa, MasterCard and even Western Union. It is not particularly clear what advantages cryptocurrencies have over their competitors. A farmer in Zambia or a factory worker in Shanghai doesn't really care whether the computers behind his transactions are running block-chains or not, and neither does a shopper in Oxford Street.
The digital cash market is high risk, however it potentially dwarfs the size of the digital gold market. It is well worth companies like nChain pursuing their vision.
Talking amongst themselves
How are the digital cash coins, especially BSV, addressing the challenge of the market?
There does not appears to be a consistent approach to the marketing of BSV. There does not appear to be an effective USP (unique selling point). BSV appears to believe that (1) restoring BSV to the original Satoshi vision is a selling point - it is not except to a few hard-core CSW disciples, (2) "stability" is unique to BSV - it is not, backward compatible is generally enough and (3) "scalability" means that BSV can do what no other coin can do. The last claim has the most weight but consumers of fiat products already expect the benefits that flow from scalability such as low fees and almost immediate processing of payments. Indeed BSV seems to have given up on its raison d'être, the digital cash market, and is now concentrating on a data-on-blockchain strategy, based largely on BSV scalability.
Is Data the answer?
BSV believe that the future will see everything stored on the blockchain, creating the so-called MetaNet. Data written to the blockchain will be immutable and last forever.
Does that even make economic sense? Computers cost money to run. A single micro-payment can only cover those costs for a certain period of time, after which time the node operator will lose money. There is an incentive to jettison data after a specific period of time, and there is no compulsion for node operators to keep the data.
So why are operators not currently pruning their UTXO sets and blockchains? The answer is that some already do, but large mining operators generally do not (it appears). Old, unused coins are currently mixed up with new, freshly minted coins, and the entire blockchain can still be downloaded in its entirety onto a single disk, even it it takes ages. It takes effort to remove old, dead coins and cost savings are minimal so for many it is not yet worth it. But that will change as data volumes grow..
Massive data volumes creates other problems. For example, how do you find your data transaction in a blockchain containing thousands of TB sized blocks? Download the blockchain and searching all the blocks in no longer an option. The BSV response is that they expect an ecosystem of trusted service providers to provide and charge for indexing services. Those services are not yet apparent, and it will takes many years for those services to approach sophistication comparable with that provided by current database vendors. It is also not obvious what data customers would be willing to pay for, and what they would not.