Over the past few months, the Bitcoin community has been debating about the purpose of the Bitcoin network. Is it supposed to serve its global network of users as a settlement network? Or should it perform as digital gold for investors using it as a safe haven asset and to process large sums of money?
Bitcoin is best described as a peer-to-peer digital currency. Bitcoin creator Satoshi Nakamoto described the Bitcoin network in its official white paper as an electronic cash system designed to facilitate payments from one party to another without the presence of a mediator or financial institution.
Processing transactions within a peer-to-peer network with a complete absence of mediators, network administrators and third-party participants is difficult, expensive and technologically challenging, which is the reason why Bitcoin needs an open source community of developers to maintain its codebase.
Bitcoin is still at its early stage of development and adoption. Anonymity is yet to be introduced to Bitcoin users and scalability is an urgent problem still to be dealt with by Bitcoin developers within the open source community.
Currently, Bitcoin operates as digital gold. Average transaction fees are valued at $0.32 per transaction and the network requires at least one hour for a transaction to be verified. As of late, the traditional system of transaction approval based on six confirmations from miners has been delayed due to the Bitcoin network’s limited block size and growing mempool of transactions.
Need for consensus
For Bitcoin to become a major currency, like any other technologies, it needs to grow past this development stage where scalability, flexibility and anonymity issues are already addressed. As mentioned before, the complexity of the Bitcoin network requires Bitcoin developers to plan out a cautious approach towards scaling the network, as a reckless solution could either split the Bitcoin network into two or lead to severe security issues that may be difficult to deal with in the future.
When cash was first introduced in the US, it was pegged to the value of gold. The initial commodity which was used as the basis of the entire monetary system of the US was gold and based on that commodity, a cash system was deployed for convenience.
The first layer of the Bitcoin network can be seen as what gold was to the American cash system. It provides an infrastructure for a settlement network to be deployed for users to be able to conveniently and efficiently process transactions.
Processing transactions on the first layer of Bitcoin can be difficult and expensive. However, as the first layer starts to scale and two-layer solutions like Lightning are introduced, cheaper payments will be enabled and microtransactions will also be introduced to the Bitcoin network.
Prominent Bitcoin investor Roger Ver continues to emphasize that if “Bitcoin’s usefulness as cash is undermined, its value will be undermined” and thus, the community and industry should not consider Bitcoin as digital gold but a settlement system.
The truth is, the Bitcoin network as of current resembles the structure of digital gold. However, as the technology which underpins Bitcoin advances and evolves, it will be utilized as both a settlement network and digital gold.
Experts and other active investors in the digital currency industry including Capital One Healthcare Senior Vice President Alan Silbert and the CEO of Bitcoin-to-gold exchange Vaultoro, Joshua Scigala, argue that Bitcoin can be both digital gold and a settlement network depending on users’ usability. If an investor would like to purchase Bitcoin in order to protect his wealth and obtain an asset which increases in value over time with stability, Bitcoin can be used as digital gold.
Some users on e-commerce platforms like Purse may utilize Bitcoin to purchase items such as electronics or foods like coffee in local stores, utilizing the Bitcoin network as a settlement system.
Once this technological issue of Bitcoin is solved, then the rest will follow. The volatility rate of Bitcoin will decrease and mainstream users will begin to treat Bitcoin like cash, utilizing it to finance their daily operations, thus viewing bitcoin as a major digital currency.