In a post on the Ethereum blog, Vitalik Buterin recently challenged the idea of “Bitcoin dominance maximalism,” the school of thought that holds that Bitcoin should be the only cryptocurrency.
The idea says basically that cryptocurrencies should use a working paradigm similar to that of fiat currencies, in that there should be only one within any given area.
Buterin is best known as the brainchild of Ethereum, for which he won the 2014 World Technology Award. He is also one of the co-founders of Bitcoin Magazine.
No one can question Vitalik’s passion for the blockchain. In an article in Wired Magazine last January he was credited with “transforming the Web into one giant Bitcoin network.” The accomplishments of the 19-year-old programmer, at the very least, should make us pay attention to his conclusions.
Buterin begins his treatise by separating people who simply want to improve Bitcoin from those who can be called “Bitcoin domination maximalists.” The latter, he explains, are interested in using the blockchain only to extend cryptocurrencies. Further, Bitcoin maximalists usually only use “network effects” to justify their arguments. They also claim that adverse network effects due to multiple coins are a challenge that cannot be overcome. This argument is eerily similar to the one that says the problem of “double spending” could not be overcome, until, of course, Satoshi Nakamoto overcame it in 2009.
There are currently three ways to create a new crypto protocol, according to Buterin. You can build on the blockchain, you can build on Bitcoin itself, or you can create a standalone. This is accomplished in one of two ways: either through meta protocols or through sidechains. Meta protocols are quick and they build upon the security of the blockchain, but they are not compatible with light protocols, which require a “trusted” third party intermediary. Counterparty is an example of a meta protocol. Sidechains, on the other hand, eliminate the need for a third party intermediary, but they use a “parent chain” such as Bitcoin for a common currency base, and they convert back and forth with sidechains using a “two-way pegging” mechanism.
Each of these approaches has both benefits and flaws, according to Buterin. The problem lies with the Bitcoin protocol itself. Nearly all meta coins require complex conditions to move and many of these conditions cannot be met by the Bitcoin protocol. An entirely new coin is needed, as can be seen with both Mastercoin and Counterparty. Buterin uses Counterparty's forking of Ethereum, which maximalists love to use in their arguments, but in truth, Ethereum smart contracts cannot manipulate BTC.
Adverse Network Effects: A Valid Argument?
Adverse network effects are not a valid argument for Bitcoin maximalism, according to Buterin. Network effects are properties that add value to the system. He used the Esperanto language as an example. Esperanto is in many ways superior to English, but because so few people actually take the time to learn it, the value of the language is greatly reduced. Maximalists argue that a single road—or a single cryptocurrency—will have more value because more people will have to use it.
Buterin describes thirteen network effects that come into play in the crypto-economic system and then divides them into four general categories: Blockchain specific, platform specific, currency specific, and general network effects. He explains that these are generally confused when discussing Bitcoin because “Bitcoin” can be defined as a currency, as the blockchain, and as a platform. This means that Bitcoin is subject to several different network effects, sometimes simultaneously.
Anyone who has traveled extensively knows that you cannot spend US dollars in Mexico, but if you have a credit or debit card from an American bank you are able to use the card to make purchases at accepting merchants. This is the difference between a currency and a platform. The government provides the currency. The bank provides the platform.
What this means to network effects is simple. Metacoins, for example, are built on the blockchain, but not on the Bitcoin platform, or the currency. If users want to see the blockchain, they must download a wallet with a software package that enables them to process Bitcoin transactions. This means that while metacoins benefit from some aspects of the blockchain that are platform specific, they do not benefit from the currency-specific network effects.
The opposite seems to be true of sidechains. Sidechains are not built on the Bitcoin platform, even if they use Bitcoin as their parent coin, but are instead built directly on Bitcoin the currency. However, this leaves the sidechains without the security benefits of the blockchain, and with sidechains you must also download specific software to allow interaction with a particular sidechain.
Buterin points out that even Blockstream employees have complained that converting sidechain coins back into Bitcoins can be inefficient. Finally, sidechains are not able to use proof of stake. Andreas Antonopoulos said on Twitter that he felt that the solution was to create more altcoins with better security, instead of using altchains.
Sidechains could unleash even more innovation from bitcoin’s blockchain, in turn making bitcoin more valuable too.— AndreasMAntonopoulos (@aantonop) 24th october 2014
This basically means that there is no “universal and scalable” approach that will allow users to benefit from Bitcoin platform effects. But there are also currency network effects to consider. When we consider both sidechains and currency network effects, there are four effects: size scalability, unit of account, market depth, and single currency preference.
Bitcoin is certainly large enough to benefit from the first effect, but will likely never be stable enough to benefit from the second, and market depth is only legitimate up to a certain point. The last effect, however, is important to consider for several reasons.
People are conservative by nature, especially when it comes to financial issues. Consider international travel and the troubles and expense of exchanging one currency for another. There is little doubt that travelers from one country would prefer to use their own national currency when traveling, rather than be forced to convert upon arrival—and then when making purchases they must perform math gymnastics in their head to keep track of their spending in terms that they can relate too.
Using this argument to support Bitcoin maximalism will not work, however, and for a very simple reason. Humans became accustomed to using physical currency over thousands of years. Yet when credit (and later debit cards) was first introduced to the masses in the late 1960s, people quickly adapted and embraced the new technology, which led to new innovations, such as draft capture PoS and widespread ATM machines.
There are now many different ways to spend our assets. Cash is still an option, along with checks, bank transfers, ATMs, in-store cards and online purchases. Bitcoin dominance is equivalent to suggesting that we return to the days of exclusive currency acceptance.
Exclusivity Breeds Stagnation
Bitcoin maximalists seldom consider that their suggestion is anathema to the very idea of cryptocurrencies. Cryptocurrencies were developed for two reasons: To break free of a centralized financial system controlled by those with vested interests, and to give the majority greater options and control over their personal financial lives.
If Bitcoin were the only coin available, it would add to the possibility that those with vested interests could invest heavily, thereby controlling Bitcoin and leaving the rest of us with only two options.
The more important argument against Bitcoin maximalism, though, is that with only one coin to build upon—and as Buterin points out, a protocol that is not robust enough—innovation will stagnate.
Bitcoin simply does not have the strength to grow on its own. If computer users today were forced to learn MS-DOS, there would be far fewer computers, and the internet would still be locked away in a university to be used only by techies. Bitcoin is the MS-DOS of cryptocurrencies, and while it has opened many doors, it cannot grow to its full potential without innovation.
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