Bitcoin and its clones. Where is the catch?
In the last article, we discussed how the takeover of Bitcoin by banks led to its split in 2017 into two main branches. One of these branches is deprived of the ability to be a mass means of payment due to restrictions on the number of transactions, but is popularized by propaganda as “digital gold” and therefore known to everyone. The other branch continues Satoshi Nakamoto's idea of bank-independent electronic cash, but was hushed up and censored by propaganda for a long time, and therefore is known to a few today.
https://bitcoin.org/bitcoin.pdf
Today we will analyze both of these branches according to all our criteria for selecting cryptocurrencies in order to draw well-founded conclusions. At the same time, let's compare them with a Bitcoin clone launched in 2011, in which just a couple of simple parameters have been changed, that is, with Litecoin. And also compare them with another clone, this time a clone of Litecoin, or, one might say, with a clone of a clone of Bitcoin, that is, with Dogecoin. This coin was created as a joke, programmers just love to play around. A frivolous attitude to this coin as a toy has led to the accumulation of bugs (that is, errors in the code), some of which are today presented as features (that is, useful properties).
So, let's see how these cryptocurrencies meet our criteria.
Our first criterion is a limited number of coins. Both branches of Bitcoin satisfy this criterion, since the protocol provides for a limit on the maximum number of coins issued at 21 million. Of these, approximately 19 million have already been issued. And also Litecoin satisfies this criterion, because Litecoin differs from Bitcoin only in the hashing algorithm and the speed of finding a block by miners, instead of 10 minutes on average for Bitcoin, 2.5 minutes on average for Litecoin. The result of a fourfold reduction in the time between blocks was an increase in the maximum number of coins also by a factor of 4, i.e. up to 84 million. Of these, 70 million have already been issued. Thus, for three cryptocurrencies, namely both branches of Bitcoin - BTC and BCH, as well as Litecoin, that is, LTC, we can put a plus on this criterion. Although we can note in our minds that, due to the fact that Litecoin was launched two years later, it is issuing new coins today faster than both branches of Bitcoin. That is, Litecoin's inflation is currently higher than that of Bitcoin.
But Dogecoin does not satisfy our first criterion. Because one of the bugs introduced when playing with the code was the unlimited emission of coins, although the rate of this emission is limited by the protocol. The Dogecoin community liked this bug, apparently they liked the idea that anyone can become a miner and print Dogecoins, which ordinary people could never do. And so this bug was smoothly turned into a feature in the perception of freebie lovers. But we all know that there are no freebies, and inflation is a hidden tax. Therefore, we put a minus for Dogecoin on this very important criterion.
The second criterion is a relatively even distribution of coins among users. To evaluate the distribution of coins among users, we will use blockchain transparency as a property that is useful for us, and look at the statistics on the bitinfocharts website.
As we can see, Dogecoin has the worst coin distribution. The concentration of coins in just a few addresses of the rich is off scale. What happens to the price if, for example, they want to “take profits”? This concentration of coins makes the owners of these addresses the equivalent of a central bank that holds most of the money and therefore can implement any monetary policy. Although not forever, because gradually they will lose their coins, and printing new ones is not so easy. Therefore, according to this criterion, we again put a big minus on Dogecoin.
Litecoin has a better distribution of coins, however, such a distribution for a coin that has been around for 11 years, indicates a serious lag in the adoption of this coin by real users compared to Bitcoin users. Therefore, we will have to put a minus on Litecoin too.
And we have the best distribution of coins in both branches of Bitcoin. If we take into account that some large addresses belong to exchanges, then such a distribution already indicates a fairly wide acceptance of these cryptocurrencies by a wide variety of users, and there is no narrow group of owners of most of the coins. But let's remember that the price of BTC is over 100 times the price of BCH.
And the distribution of coins is not so much different. This roughly means that the number of BTC users is not so much larger, but these are richer users. That is, it turns out that BTC is a cryptocurrency for the rich and for their large transactions. This also logically follows from the limited number of transactions in the BTC branch, which makes this branch interesting only for large transactions of the rich. Therefore, we put a plus on this point for both branches, but we keep this nuance in mind.
Our third criterion is a high degree of decentralization. In terms of transaction processing, all four cryptocurrencies have a fairly high degree of decentralization. That is, the mining of these cryptocurrencies is carried out by a variety of people in various places on the Earth. And in principle, anyone can squeeze into this mining by obtaining the appropriate equipment. But from the point of view of further development, improvement of these cryptocurrencies as payment systems, it is not so simple. The fact is that in order for miners to somehow show their power by supporting this or that path of cryptocurrency development, they must have a choice of these different paths. Indeed, any programmer, having studied the open source code, can offer his own version of development, and his own code for this development. But if main communication channels through which these proposals are considered by the developers, are under the control of any one group of people, this forms a centralization of these communication channels, and as a result, censorship is possible. This is exactly the kind of centralization that happened with Bitcoin. The development of the BTC branch is now carried out by Blockstream, which is controlled by bankers. We talked about this in the last article. Therefore, it is impossible to talk about the full decentralization of the BTC branch. At the same time, the other branch, i.e. Bitcoin Cash, has several independent development teams, and any of these teams are happy to consider all worthwhile development proposals. In this regard, Bitcoin Cash is unique in the entire world of cryptocurrencies. Therefore, given this ambiguity, we will not put any plus or minus on the BTC branch. And the BCH branch can be given two pluses, since the issue of decentralization has been resolved there at all levels. In addition, today, thanks to the price that is more than 100 times lower than that of BTC, for efficient mining of Bitcoin Cash, it is also enough to have 100 times less power, which makes it easier for smaller users to enter the mining. Two other cryptocurrencies, that is, Litecoin and Dogecoin, can simply be given a plus, if we assume that the centralization of developers has not yet formed there.
Our fourth criterion is fast transactions for pennies or for free. “Golden Bitcoin”, that is, BTC, is not capable of such transactions. As we saw in the last article, when the attempt to mass use of BTC for payments began, the fees skyrocketed, and if the fee of a particular transaction was not enough, the transaction would simply get stuck. This led to the refusal of major retailers to accept BTC. Therefore, the “golden Bitcoin” according to this very important criterion receives a fat minus. The situation is completely different with the other branch, that is, with BCH. Bitcoin Cash is now ready for mass use as payments, while fees will remain low, and transactions will be reliably included in the next block. Therefore, Bitcoin Cash transactions are accepted by sellers immediately after they are sent to the network, without waiting for confirmations. By the way, bank card payments work the same way. Merchants accept a transaction that has not yet been confirmed, and confirmation may even take a few days. Merchants are forced to take these risks. Meanwhile, Bitcoin Cash transactions are confirmed after 10 minutes, and the risk of double spending is extremely low even without confirmations. Therefore, Bitcoin Cash gets a fat plus.
Dogecoin also cannot be used as a mass means of payment, and again, it’s about bugs that no one cares about. The fact is that the minimum commission is 1 DOGE, which is a lot even at today's price. It's just that no one thought that a joke, toy coin could cost so much. Therefore, Dogecoin also gets a minus.
Litecoin is working very well today, transactions are included in the next block in 2.5 minutes, fees are extremely low. Everything seems to be great. But all this is possible until mass use begins. That's when the same limit on the number of transactions will manifest itself, as in BTC, with the only difference being that since Litecoin blocks are 4 times more frequent, the maximum number of transactions in Litecoin is 4 times more than in BTC. In addition, to reliably process a large number of transactions, it is not enough just to remove the restrictions. Various other optimizations are needed, which Bitcoin Cash has already passed and will continue to pass, while the other three cryptocurrencies do not have such a task as a priority at all. Therefore, we will also have to put a minus on Litecoin. Even though it is working well now, it is not ready for mass use for payments.
The fifth criterion is absence of geographical restrictions. Here, all four cryptocurrencies are doing well. Miners are scattered all over the Earth, not affiliated with each other, there is no central authority that could impose geographical restrictions. Therefore, we put pluses for all four cryptocurrencies.
The sixth criterion is censorship resistance. Here, too, everything is ok. All four cryptocurrencies use the same censorship-resistant mining mechanism invented by Satoshi Nakamoto. Therefore, we put a plus for all four cryptocurrencies according to this criterion. There is, however, a nuance that censorship can be imposed on centralized exchanges, you can force them to reject “tainted” coins, which, as it is now customary to say, were involved in “money laundering and terrorist financing”. That is why cryptocurrencies should be used directly for payments, and not be a means of speculation, in order to “withdraw profits” through centralized exchanges that become new banks.
The seventh criterion is that they allow you to transfer money directly without the participation of banks. Here, too, everything is in order. Private keys are stored only by users, and without a private key, no one is able to send cryptocurrency from one address to another. In this sense, users are their own bank. Therefore, we put a plus on all cryptocurrencies. But if a cryptocurrency like BTC cannot be used as a means of payment for small payments, and we have to first exchange it to something else on an exchange, then the exchange becomes such a bank with corresponding consequences.
Our eighth criterion is that security is guaranteed by the blockchain. It is impossible to delete a record from the blockchain. Here, all cryptocurrencies are doing well. All of them use mining, as Satoshi Nakamoto intended. To rewrite a record in the blockchain, you need to collect huge mining power from somewhere, but since this requires specialized equipment, there is simply nowhere to get it, and besides, huge energy costs are required. All this makes such an undertaking meaningless. Therefore, we put pluses for each.
Our ninth criterion is that you can create a wallet without bureaucracy, without providing documents. Yes, this is easy to do in all networks considered, no documents are required and cannot be required. Each gets a plus. But in order to “withdraw profits” into fiat through a centralized exchange, documents will be required. Therefore, cryptocurrencies should not depend on centralized exchanges, but should be used directly in payments. And BTC is the most vulnerable here.
And the tenth criterion is Adoption in the world for making payments. Litecoin, thanks to its long lifespan and early launch, has managed to gain merchants who accept it. And since, unlike BTC, Litecoin has so far coped with the flow of transactions, merchants have not yet had time to refuse it. But nevertheless, Litecoin has always been in the shadow of Bitcoin, therefore it was inferior to it in terms of adoption. Merchants who accepted Bitcoin began to accept Bitcoin Cash.
Because it's technically easy to do. Today, almost everything that is sold on Amazon can be bought with Bitcoin or Bitcoin Cash through the purse.io website, and even at a discount. Bitcoin Cash is also accepted in many offline stores around the world, due to the reliability of transactions even without confirmation: https://map.bitcoin.com/
Well, Doge is still not taken seriously, but rightly so. Therefore, we put a plus for Litecoin and Bitcoin, Bitcoin Cash gets two pluses for being accepted in offline stores, and Doge gets a minus.
And what conclusions will we have to draw?
As we can see, only Bitcoin Cash satisfies all our criteria. And this means that we can start using it as a suitable cryptocurrency. And all the rest do not satisfy some important criteria, and therefore, if we use them, then temporarily and carefully. Better yet, just throw them in the trash and don't mess with them. Doge shows itself to be the most worthless cryptocurrency, and therefore, despite the hype from Elon Musk, it deserves to be sent to the trash immediately!
