This is an opinion editorial by Paolo Tasca, a professor, economist and founder of the University College London’s Centre For Blockchain Technologies and the Distributed Ledger Technology Science Foundation.
Bitcoin has held its place as the preeminent digital, robust and unhackable store of value for nearly a decade. Yet, every year, the debate continues about whether bitcoin should evolve to become something more. Can “digital” gold also be the world’s currency? Could Bitcoin’s blockchain be used to register assets of value? Should it?
This conversation has peaked with the launch of Bitcoin Ordinals and BRC-20 tokens, driving even more demand to the Bitcoin blockchain. And understandably so — Bitcoin’s peerless security and stability made it known as the blockchain of value. Now that it is possible to store a growing range of assets there, people want to. This is welcome news for the store-of-value proponents, as demand for bitcoin should drive up the price.
But more transactions also mean more competition, and if you want your transaction to go through, that means more fees and longer confirmation times. This is not ideal for the supporters that prefer bitcoin as a currency and the growing competition for block space is already affecting the ability to register assets.
The Economist’s Evolutionary Theory
This dilemma isn’t new for Bitcoin. Its intentional restriction of the block size and transaction capacity has pioneered great tech, like the Lightning Network, and instigated debates over adopting colored coins, SegWit and other Core changes.
And Bitcoin is not an exception. When other blockchains came into the market, their ability to handle ERC-20 tokens, NFTs and other operations restricted their popularity. Ethereum was faced with similar limitations, but somewhat resolved them with technical upgrades. However, this led DApps to find shelter in alternative chains. This led to severe interoperability issues, but the economist’s “evolutionary theory” held true: The market moves in the direction of maximum opportunity.
Looking from an economist’s perspective, it’s crucial to note that bitcoin’s utility as a store of value is still not widely adopted beyond our sector. During the early phase of the COVID-19 pandemic, for instance, we were curious to see how the crisis (the very kind that Bitcoin was designed for) would stimulate demand for the cryptocurrency. What surfaced instead was that, while some people did buy and HODL, others clearly still preferred to save in their fiat currency and happily accepted fiat currency support payments. Even as these fiat payments, unfortunately, have been severely depreciated due to inflation, widespread global investment and adoption of bitcoin didn’t materialize.
But what is happening behind closed doors? Bitcoin is entering 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 considering the future, the pandemic is really an example of why we should be optimistic about the point that Bitcoin has reached. Although it is not the global reserve (yet), it has succeeded. It took Google around 17 years from its founding, and 11 years from its IPO, to reach a $500 billion market cap. Bitcoin did this in less than 12 years, and didn’t sell our data to advertisers to do it. Not only that, but it has advanced significantly while still being a proof-of-work blockchain. There are many other chains that have continuously and expensively iterated, facing diminished returns. Not Bitcoin.
However, we know it is impossible for Bitcoin to evolve into what everyone wants it to be. There is no way (yet) to create a blockchain that can be a store of value, a mode of transaction and a home for NFTs, tokens and other valuable assets. But if the market seeks a one-stop blockchain for all of these uses, then either Bitcoin will become it or another blockchain will.
Bitcoin’s Race To Lose
Of course, this “one blockchain to rule them all” thinking drove many people to Ethereum, and its domination has yet to materialize. Bitcoin could learn from Ethereum’s mistakes and use this time to re-define its identity and purpose in the market. For certain, it will remain the first and still most successful example of widespread digital currency that also solves the problem of trust. A truly decentralized, self-sovereign monetary system needs trust. Bitcoin provides that trust — and brilliantly does so with trustlessness. Whatever it evolves into, this is core to its value as a system.
And Bitcoin, being the freest market that has ever existed, will indeed continue to evolve. Its independence drives its adaptability to changing market conditions, and that is what makes it, still, the blockchain of choice for many.
Of course, as a free market, we can only influence it through our daily actions. That is not a flaw of Bitcoin. This is its best feature, and the surest predictor of its ongoing successful evolution.
This is a guest post by Paolo Tasca. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.