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If people ask me what they should invest in, my answer, right now, is always: gold and silver.
But not Bitcoin, and not Bitcoin Cash, nor any other cryptocurrency.
We’ve already had 11 years of Bitcoin, yet it and its forks by no means is a viable replacement of the best money ever created—the USD.
For non-tech savvy people, the USD is
faster, with credit cards and PayPal feeling instant,
cheaper, SEPA payments are literally free, for customers credit card and PayPal payments also feel free
and more reliable, as it’s backed by the government, quite stable, it’s basically accepted everywhere and there’s always someone you can call to get your transaction handled.
Bitcoin could have easily out-competed the existing traditional financial services, as the technology is vastly superior (UTXO based chains are actually really scalable), the big question though is: Why hasn’t it?
The answer, for me, is profit.
Or rather the lack thereof.
There simply is no money to be made directly from replacing the USD with Bitcoin.
So far, the OG “business model” for that has been: Buy Bitcoin, adopt/develop for Bitcoin, Bitcoin increases in value, profit.
Roger Ver, the first investor into Bitcoin startups and the most prominent supporter of Bitcoin Cash, is a proponent of this model. And that’s understandable, because this business model drove initial Bitcoin adoption.
But this is a really, really terrible business model. It doesn’t work. It suffers from the free-rider problem, it turns Bitcoin adoption into a public good. It’s basically the same model as one of those Marxist cooperatives, which always eventually fail.
It doesn’t matter whether you work hard or slack off in that model, you get the same reward. Even worse, for Bitcoin, if you were not an early bird and didn’t get in early, you will profit much less than people who did get in early. So this way we basically remove all the future talent from the pool of people who would help replace the USD.
I will talk more on models that actually work in a future post, because I believe we can replace the USD quite quickly if we just adopt an incentive aligned model, but first let’s examine this one in more detail.
If we use the OG “Buy Bitcoin, Adopt Bitcoin, Profit” model, we artificially turn Bitcoin adoption/development into a public good. Right now, adoption/development is mostly done by people who selflessly approach businesses/write code (or are paid by selfless people, in form of donations). In return, the price of Bitcoin increases, and every holder, including them, profits. But other than that marginal increase in Bitcoin’s price, they get nothing in return.
That’s the mechanics of a public good.
There’s actually a way to make public goods work. Nobel prize winner Elinor Ostrom guides us on how to “govern the commons” with her 8 principles:
Define clear group boundaries.
Match rules governing use of common goods to local needs and conditions.
Ensure that those affected by the rules can participate in modifying the rules.
Make sure the rule-making rights of community members are respected by outside authorities.
Develop a system, carried out by community members, for monitoring members’ behavior.
Use graduated sanctions for rule violators.
Provide accessible, low-cost means for dispute resolution.
Build responsibility for governing the common resource in nested tiers from the lowest level up to the entire interconnected system.
If we go through that list, we quickly realize that none of them work for the OG Bitcoin business model, because it is a permissionless system. Just look at the first principle: Define clear group boundaries. How on earth should be we define group boundaries for Bitcoin? By definition, we can’t exclude anyone, because everyone is free to participate and there’s nothing we can do to stop them. And don’t get me started on the 6th principle.
It seems like the Global Network Council proposed by Bitcoin ABC to solve the funding problem of the public good “infrastructure development” is a good attempt at “governing the commons”, and the people designing the rules there should pay close attention to those 8 principles by Ostrom. It definitely fulfills some of those principles already, especially principle 1.
But back to the OG Bitcoin business model.
It means there will always be exactly two outcomes, after sufficient time:
Selfless people will continue adoption/development or donate for it exactly until they feel exploited or burnt out and then leave in frustration
Someone else comes along with a sound business model and “takes over”
And we’re seeing this over and over again:
Small blockers appeared on the scene in Bitcoin, presented a viable business model, Liquid, and eventually took over the entire chain while big blockers went onto their own chain, Bitcoin Cash.
In 2014, Dash came along with a viable business model, the Treasury, and took a lot of the peer-to-peer electronic cash people.
In 2015, Vitalik came up with Ethereum which presented a viable business model, the Ethereum Foundation, and took basically all of the people focused on smart contracts.
In 2018, Bitcoin SV came along and presented a viable business model, direct funding from miners, and took a good portion of the “data-on-chain” people.
In 2019-2020, AVAX is coming along and is presenting a viable business model, Ava Labs, and is taking a lot of people from the current Bitcoin Cash community which are focused on fast and reliable payments.
In 2020, Bitcoin ABC, the lead implementation of Bitcoin Cash, is coming along with a viable business model, the Global Network Council, funded by the Coinbase Rule. They aim to take all the people focused on peer-to-peer electronic cash. You can read my thoughts on their initial proposal here.
A lot of people in Bitcoin Cash currently are unhappy with Bitcoin ABC and the Global Network Council, and want to continue with the OG Bitcoin business model, with a new node called BCHN. And it will be very easy to predict the outcome of that effort, given economic reasoning and historical precedent: People will either be burnt out and leave, or someone will come along with a viable business model and “take over”.
To make matters worse, a lot of prominent people supporting the OG Bitcoin business model are actively hostile to the very idea of profiting off the protocol:
Collin Enstad, host of the “Collin’ It Like It Is” show, in a recent video said “After November [...] Bitcoin Cash will continue its quest to peer-to-peer cash for the world as it sheds yet another team who wants to use the protocol for their own profit”.
Imaginary Username, author of Reusable Addresses, in a recent tweet said about Amaury Sechet, the lead developer of Bitcoin ABC: “How about ‘who wants to loot the protocol’?”
A similar sentiment is shared by many people who unironically call the Coinbase Rule a tax, proposing it is theft.
In other words, the very idea of replacing the OG Bitcoin business model is to be opposed.
This, of course, will end very badly. Either people will leave in frustration or people with a sound business model will take over.
How long will the wheel of death of the OG Bitcoin business model continue spinning?
Instead, we need to embrace the profit motive, and come up with business models that actually work, models that incentivize participants correctly.
Stay tuned for a future post about my thoughts on that.