Is Bitcoin the Myspace of Crypto?

“Let’s say Buffet is right. Bitcoin dies. So what? Myspace and Friend­ster both died, but they paved the way for other social media like Facebook and Twitter to completely overrun the planet. Crypto is out there, and it’s not going away.”

- Gilfoyle, Silicon Valley on HBO

After under­standing the basics of how Bitcoin works, the next logical question tends to be: “Blockchain tech sounds inter­esting. How do we know a better version won’t show up and turn Bitcoin into the Myspace of crypto?”

A moat is a compet­i­tive advan­tage a business builds that prevents new entrants from easily competing. For Myspace, that moat was a huge user base with friend relation­ships. People wouldn’t use competing services if their friends weren’t already there. But as large a moat as a well-connected social graph is, it wasn’t enough to stop Facebook from eating Myspace’s lunch in the span of only a few years.

Bitcoin’s moat is much, much larger than Myspace’s. To under­stand that, let’s examine what it would take for a Bitcoin Competitor to displace Bitcoin.

The first thing to under­stand is that the Myspace vs. Facebook compar­ison is poor because you can have an account on Myspace and Facebook simultaneously at no cost. Many people did this during the transi­tion phase from one to the other. Once enough critical mass was on Facebook, people stopped using Myspace.

This is not how money works, however. If you hold a dollar’s worth of Bitcoin, that’s a dollar’s worth of another coin that you’re not holding. You have to make a conscious decision to sell one currency for another. You cannot store the same value in both at the same time. Now ask yourself why you would hold anything but the most liquid, widely accepted currency?

The answer is only specu­la­tion. If you can’t shift the entire economy around you to also hold the other coin, there is no way that it can become dominant.

Bitcoin’s liquidity is far beyond any of its competi­tors. Today, the market cap of Bitcoin is about $160B, according to Messari. The next biggest competitor, Ethereum, has only $25B of market cap. This doesn’t even measure the true liquidity by looking at how much you could meaning­fully sell before the price slips signif­i­cantly. Liquidity drops exponen­tially as you go down the list of largest coins. The number 10 competitor to Bitcoin has 0.5% of its daily trading volume.

Liquidity is a snowball. Holding the most liquid money means other people want it, which begets more liquidity. By holding anything but the most liquid money, you actively punish yourself while waiting for everyone else to do the same. The economic incen­tives do not align in favor of liquidity shifting overnight to a competitor.

By circum­stance, Bitcoin was allowed to grow from a worth­less internet geek exper­i­ment that nobody cared about, to financing the purchase of a pizza for 10k BTC, to a peak price of $20k USD per bitcoin. It did all this relatively quietly, without anyone breathing down its neck. During this time, it built up a world-class immune system from years of attacks and grew the world’s largest network of hash power. For ten years, securing more than 100 billion dollars, it has been impos­sible to hack.

It is nearly impos­sible to launch a new cryptocur­rency today quietly. The cat is out of the bag, and all the tricks are well-known. Let’s look at an alter­na­tive blockchain, EOS, worth about ~$10 billion at launch and nearly $2 billion as of mid-2020. It experi­enced a freeze two days after launch due to bugs in the code. These bugs were patched within hours with minimal oversight or review. Will you put $100B of value on a network like that? 

EOS may be around in 10 years, but by then, Bitcoin will be 20 years old and securing trillions in value.

Given the thousands of coins out there using dozens of hashing algorithms, any new coins are threatened by a 51% attack from existing hash power. This has already happened to Bitcoin Gold and several other coins.

A new competitor has to survive attacks by existing hash power or use an algorithm with no special­ized ASICs. If there are no ASICs, the system can easily be attacked by renting commodity GPUs, which are widely avail­able. It also cannot start securing a large amount of value as EOS did on day one, which is reckless and a good way to get into central­ized patching behavior. So that means they can’t raise money either, but rather do a fair launch similar to Bitcoin and grow slowly in value to build up their security model propor­tion­ally. However, if they’re growing slowly, they cannot catch up to Bitcoin’s user base and liquidity due to the passage of time.

A large part of Bitcoin’s security model comes from a high degree of decen­tral­iza­tion. This means the protocol is hard to change and thus can be trusted to honor the proper­ties promised in its code (fixed supply, etc.). This property was proven when many businesses and miners got together and wanted to push a change to the block size to steer the protocol in a partic­ular direc­tion. Their fork was rejected by users and failed spectacularly.

A competitor that’s highly decen­tral­ized rules out any compa­nies or teams founded by known people, as that creates a central point of failure and coercion. It also rules out any coins willing to “move fast and break things” since you can only do that when you’re central­ized. Any competitor is either moving fast and gets central­ized or moving slow and can never catch up.

Much like Linux created a whirl­wind of activity that prevented other *Nix-like systems from competing, so has Bitcoin. Every day this commu­nity grows, and new compa­nies are built on top of Bitcoin, offering new services. A competitor has to steal devel­oper mindshare from an exponen­tially growing nucleus which includes dozens of compa­nies, educa­tional programs, and conferences.

Hundreds of exchanges world­wide, hundreds of hedge funds and trading desks, and a network of people who already use Bitcoin as an alter­na­tive to failed curren­cies like the Venezuelan Bolivar. All these things would have to be built for a Bitcoin competitor to displace it. 

Insti­tu­tions like the Chicago Mercan­tile Exchange, which trades in Bitcoin futures, aren’t going to list every new competitor without tons of existing exchange volume to back it. You’d have to convince hundreds of businesses to accept this new competitor instead of Bitcoin. A competitor that is likely less secure, less liquid, has less compe­tent devel­opers, and by defin­i­tion less adoption world­wide. That’s a steep hill to climb.

There is a gross misun­der­standing that Bitcoin is supposed to be a fast and cheap way to send money. It clearly cannot be that based on its funda­mental proper­ties involving a world­wide repli­cated ledger. However, Bitcoin’s primary and actual demon­strated use case as censor­ship-resis­tant sound money is growing.

Anything else, such as making remit­tances cheaper, is a cherry on top. Most would-be competi­tors still think they need to solve the fast payment use case, which is already solved by dozens of central­ized compa­nies world­wide and solved reason­ably well. And it’s also being solved by the quickly growing Light­ning Network on top of Bitcoin.

Competing on the sound money front requires an above-all commit­ment to decen­tral­iza­tion and proper­ties that are truly hard to change and attack. Unfor­tu­nately, coins cannot compete on this front by virtue of the fact that they are typically built by central­ized teams with a profit motive and not a happy accident of a slowly growing ecosystem that was created by cypherpunks.