Metascarcity and Bitcoin’s future

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The problem with writing about Bitcoin is that the subject has become so emotional. The very name inspires triumph, greed, resentment, or fury. Triumph from those handful of hodlers (yes, really) who are watching the destiny they long foretold actually come true before their eyes. Greed from those hundreds of thousands of newbies who just bought in. Those two groups are, of course, bitcoin believers.

Resentment from those who wish they were hodlers, or who had what would be millions of dollars’ worth today pass through their hands back in the early days. (As someone enmeshed in the outskirts of the San Francisco hacker scene I know more than a few of those.) And fury from those for whom Bitcoin represents tech bros busy fiddling with some kind of bullshit libertarian Internet money while all around us Rome is burning:

Those people are, to understate, bitcoin skeptics. But wait, it gets worse! Bitcoin doesn’t just inspire strong emotions, it also seems to attract vast hordes of EDPs. (Emotionally Disturbed Persons; a term of art among the NYPD, according to an ex-cop friend.) The bad faith, and (generally correct) assumption of bad faith, among bitcoin conversationalists on Reddit is really something even for Reddit. Even many of the cryptorati are, shall we say, not always exactly redolent of good faith.

But let’s at least try to take a step back from the emotional minefield of day-to-day valuations, and difficult personalities, and take a long-view look at Bitcoin and other cryptocurrencies. Even their most vicious critic would have to admit that they have had a truly extraordinary run over the last eight years. A good question to ask is: where will Bitcoin be a decade from now?

The usual answers are “worth trillions, taking over the world’s entire financial system”; “a disused, half-forgotten, especially wasteful fad, the Pet Rock meets Ponzi scheme of the twenty-teens”; “banned, illegal, used only by criminals and in rogue nations, hence mostly worthless”; and “basically entirely replaced by some better, more efficient, 2.0 cryptocurrency.”

So let’s ask a few more interesting questions:

Is permissionless programmable money a fad which will go away? I really don’t think so. Programmable money is too useful for people to give up on entirely, and permissionless money would now be very, very difficult to ban. (Transactions can be fully anonymous, and while you could ban exchanges, exchanges are not actually necessary any more.) It might possibly settle into a relatively minor niche, but it’s not going away.

Is Bitcoin going to become the dominant global currency for daily transactions? I really, really don’t think that’s going to happen either, for numerous reasons, some of which I can’t believe I actually have to spell out to Bitcoin true believers, such as: Bitcoin is deflationary and a little inflation is actually not a bad thing; fiat may technically be a four-letter word but only libertarians think it’s an obscenity, and fiat currencies are not “backed by nothing,” they’re backed by the strength of the economies they denominate; governments are extremely powerful entities who get to dictate much of the future within their borders; most people don’t actually want to use Bitcoin, and there’s no real reason for them to start; credit and cryptocurrencies are, as noted bear and former blockchain COO Preston Byrne points out, currently a very bad and dangerous combination, and will never be the best of bedfellows; etc etc etc.

Will financial institutions make more and more use of blockchains and programmable money? Well, yeah. To pick a single very simple example: a credit card transaction involves five different parties, most of whom maintain their own separate copy of the transaction in their own database; it would be more efficient in many ways to use a shared database; a blockchain is actually quite a good type of shared database to use for this kind of transactional behavior; blockchain technology is now widely available.

Will financial institutions around the world wind up using Bitcoin as the global settlement currency? Almost certainly not. Why would they? The big selling point of Bitcoin compared to another distributed system is that it’s permissionless. Major financial institutions are quite comfortable with requiring permission; in fact they very much prefer it. (This is why the “intranet vs. Internet” analogy does not apply, unless Bitcoin becomes everyone’s day-to-day currency, which, again, nuh-uh.)

Will Bitcoin be replaced by a better cryptocurrency? This, if you ask me, is the most interesting question here, the one whose answer is not obvious. What Bitcoin has introduced to the world is, essentially, digital scarcity — but you’ll notice that there are a whole lot of blockchains and cryptocurrencies out there now … in short, ironically, we are seeing something of a glut of scarcity. Other chains can do things which Bitcoin can’t; ZCash’s powerful cryptographic anonymity, Ethereum’s Turing-complete scripting language. More chains are coming online every month. Is it really so unlikely that Bitcoin will be supplanted?

…Actually, yes, is my answer, but with a caveat.

First, Bitcoin is a complete, complex, highly engineered cryptographic, economic, and software system and network, now thoroughly battle- and time-tested, with enormous mindshare and a thriving ecosystem. Betting on some new idea with a whitepaper is a bit like deciding that a dude folding paper airplanes for kids will one day beat Boeing; maybe, but awfully unlikely. Second, thanks to the immense — horrifyingly immense — number of watts poured into it by miners every hour, it is, by far, the scarcest of all our digital scarcities.

That second point is a little wobbly, though. First, Bitcoin’s power consumption is a big and growing problem, and any true believer who pretends it isn’t is delusional. Yes, the estimate that made the rounds recently is probably wildly off, but as its valuation grows, its power consumption will grow too, as miners are more and more incentivized. This is very bad PR, and new initiatives like the Lightning Network won’t help (though the halving of block rewards will.) Second, even if Bitcoin succeeds, as Rusty Russell points out, people will want to change it e.g. to add a little inflation to its limit of 21 million coins, and I think it’s much more likely that they’ll succeed than he does.

On the gripping hand, though, if Ethereum’s mooted move to Proof-of-Stake (which essentially replaces the cryptographic number-crunching those miners perform with game theory) proves that PoS actually works, or if Bram Cohen’s Chia takes off … well, then I can certainly imagine a future in which Bitcoin’s pre-eminence is threatened. (I don’t usually write about vaporware but Cohen’s previous paper airplane was responsible for about a quarter of all Internet traffic for a decade, so I’m willing to make an exception here.)

So what are we left with? Permissionless cryptocurrencies, of which Bitcoin will possibly-to-likely remain the most prominent, aren’t going away, but will be used in limited albeit significant circumstances: as digital gold; as an international transfer currency for individuals and small businesses; to skirt and avoid the law and the taxman; but not really on an everyday basis, except in nations whose own currencies have been seriously debased. Does that mean its current valuation is justified in the long term? I can give you a very firm answer for that: ¯\_(ツ)_/¯.


Disclosure, since it seems requisite: I mostly avoid any financial interest, implicit or explicit, long or short, in any cryptocurrency, so that I can write about them sans bias. I do own precisely one bitcoin, though, which I purchased a couple of years ago because I felt silly not owning any while I was advising a (since defunct) Bitcoin-based company. Furthermore I am the CTO of the consultancy HappyFunCorp, and we are building a nonzero number of blockchain projects, so I suppose there’s some implicit indirect interest there, if you squint.