This is an op-ed by Paolo Tasca, professor, economist and founder of the Center for Blockchain Technologies at University College London and the Distributed Ledger Technology Science Foundation.
Bitcoin has held its position as the preeminent, robust, and impenetrable digital store of value for nearly a decade. However, the debate continues every year about whether bitcoin should evolve into something more. Could “digital” gold be the global currency too? Can the Bitcoin blockchain be used to record assets of value? Should?
This conversation came to a head with the launch of the Bitcoin Ordinals and BRC-20 Tokens, which fueled the demand for the Bitcoin blockchain. And this is understandable – Bitcoin’s unrivaled security and stability have made it known as the blockchain of value. Now that it’s possible to store an ever-growing array of assets there, people want it. This is welcome news for store-of-value supporters, as demand for bitcoin should drive the price higher.
But more transactions also mean more competition, and if you want your transaction to take place, that means more fees and longer confirmation times. This is not ideal for backers who prefer bitcoin as a currency and the increasing competition for block space is already affecting the ability to register the asset.
The Economist’s Theory of Evolution
This dilemma is not new to Bitcoin. Its deliberate restriction of block size and transaction capacity has spawned brilliant technology, such as the Lightning Network, and sparked debates about adopting colored coins, SegWit, and other fundamental changes.
And Bitcoin is no exception. When other blockchains hit the market, their ability to transact with ERC-20 tokens, NFTs, and other operations limited their popularity. Ethereum has faced similar limitations, but has resolved them to some extent through technical upgrades. However, this has led DApps to find shelter in alternate threads. This led to severe interoperability issues, but the economist’s “evolutionary theory” was proven correct: the market moves in the direction of the maximum possible opportunity.
Looking from an economist’s point of view, it is important to note that the usefulness of bitcoin as a store of value is still not widely adopted outside of our sector. During the early phase of the COVID-19 pandemic, for example, we were curious as to how a crisis (of the kind Bitcoin was designed for) would stimulate demand for the cryptocurrency. What emerged instead was that while some people did buy and HODL, others clearly still preferred saving with their fiat currency and happily accepting fiat support payments. Although these mandatory payments have, unfortunately, been severely devalued due to inflation, widespread global investment and adoption of Bitcoin has not materialised.
But what happens behind closed doors? Bitcoin enters the treasury reserves of many institutions, banks and countries. They realize its value, and are already using it as a hedge against the next financial or global crisis.
When thinking about the future, the pandemic is really an example of why we are optimistic about the point Bitcoin has reached. Although not the world’s reserve (yet), it worked. It took Google about 17 years from its founding, and 11 years from its initial public offering, to get there. 500 billion dollars market value. Bitcoin did this in less than 12 years, and did not sell our data to advertisers to do so. Not only that, but it has advanced significantly while still being a proof-of-work blockchain. There are many other chains that iterate continuously, expensively, and face diminishing returns. Not bitcoin.
However, we know that it is impossible for Bitcoin to evolve into what everyone wants. There is no way (yet) to create a blockchain that can be a store of value, a method for transactions, and a home for NFTs, tokens, and other valuable assets. But if the market is looking for a one-stop blockchain for all these uses, Bitcoin will either become it or it will become another blockchain.
Bitcoin race to lose
Of course, the thinking of “one blockchain to rule them all” has led many people to Ethereum, and its dominance has yet to be achieved. Bitcoin can learn from the mistakes of Ethereum and use this time to redefine its identity and purpose in the market. Certainly, it will remain the first and most successful example of a widespread digital currency that also solves the problem of trust. A truly decentralized and sovereign monetary system needs trust. Bitcoin provides that trust – and does it brilliantly without trust. Whatever it develops into, that is the core of its value as a system.
And Bitcoin, being the freest market ever, will indeed continue to evolve. Its autonomy is driven by its ability to adapt to changing market conditions, and this is what makes it, and still is, the preferred blockchain for many.
Of course, as a free market, we can only influence it through our daily actions. This is not a flaw in Bitcoin. This is its best feature, and the surest prediction of its continued successful development.
This is a guest post by Paolo Tasca. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.