Bitcoin as the Trust Layer of the internet

In today’s era of ICOs, appcoins, and “permissioned blockchains”, I am often asked about what I think about the future of bitcoin. Will it still be relevant in 20 years? Will it ever be used as anything but “digital gold”? I believe the answer is “yes” to both of these questions.

Get you a blockchain that does both

First to answer the question “will bitcoin ever be used as anything but ‘digital gold’?” This idea of bitcoin as “digital gold” has been embedded in the minds of Bitcoiners since the beginning when bitcoin mining was first analogized to the process of gold mining, and the inflation curve was compared with the rate of gold production. Since then, however, this analogy has created what I see as an artificial and unnecessary debate about whether bitcoin is “digital gold” or “electronic cash”. The answer is that bitcoin is both.

Bitcoin the token is like a digital form of gold. The supply is limited, it gets harder to mine over time, and it’s valuable for monetary, industrial, and creative uses. At the same time, bitcoin transactions work a lot more like cash than a credit card payment. Transactions are expensive to reverse once confirmed, requiring a certain amount of computational “force” to pry coins out of the wallet of a recipient. And with the activation of Segregated Witness just weeks away, it will soon be possible to send bitcoin transactions worth fractions of a cent. Try that with the physical cash!

Beyond bitcoin as money

The feature that makes bitcoin valuable as both “digital gold” and “electronic cash” is the security or immutability of the blockchain. The computational guarantee that transactions are expensive to reverse provides a solid foundation upon which many useful applications and “Layer 2” protocols are being built. For example, enterprises are recording hashes in the blockchain to create verifiable timestamps for valuable datasets, and engineers are registering domain name records on the blockchain to create a more secure web architecture.

Despite snickers from veteran Bitcoiners over the “blockchain not bitcoin” rhetoric that dominated the FinTech press cycles in 2015, it turns out that both camps were off the mark. Permissioned blockchains are beginning to show real utility as auditable, cryptographically-secured, shared ledgers of record between disparate parties in given industries or business ecosystems. But to really gain the benefits of the blockchain, operators of these permissioned systems are realizing that they need a common “trust layer” that can be used to resolve disputes over conflicting transaction histories.

Thus we come full circle as “blockchain not bitcoin” becomes “blockchain with bitcoin”. The bitcoin blockchain is beginning to fill that need for a neutral “trust layer” upon which distributed applications and shared ledgers are being built. Developers are beginning to “anchor” snapshots of their databases into the bitcoin blockchain so that they can compare histories over time and catch any discrepancies in their records. They are also utilizing bitcoin’s Layer 2 protocols to create secure PKI and payment systems for their applications. It’s looking more and more like there will be many blockchains secured by bitcoin.

The bitcoin network of blockchains and applications

In the not-so-distant future we will see hundreds of blockchains processing trillions of transactions and thousands of applications with billions of users, all secured by bitcoin. There will be machines sending each other nanopayments for bits of information or joules of electricity, people transferring money overseas and across the internet, and applications anchoring data to and retrieving verifiable information from the blockchain.

These interactions will happen across layers of protocols that form fractal networks to enable robust and scalable application ecosystems. Sidechains and interoperability protocols like Interledger will enable trust-minimized transfers of bitcoin across different blockchains, each with their own unique features and applications. For example, people will be able to pay for Turing-complete smart contracts with bitcoin on the Rootstock sidechain, and the Liquid sidechain will enable faster, more discreet transfers of bitcoin between exchanges and wallets. The days of using altcoins for anything but pump and dumps and niche experiments will be a distant memory.

Keep It Simple, Silly

The reasons why I believe bitcoin will be the Trust Layer of the internet and not a competing open blockchain are twofold:

  1. Bitcoin already has a massive network effect, giving it a strong lead over competitors, and
  2. The bitcoin blockchain is relatively simple, which is great from a security perspective. As computer security expert Bruce Schneier has said, “Complexity is the worst enemy of security.”

The most obvious runner-up for the “Trust Layer of the Internet” title is ethereum, a cryptocurrency that has an impressive amount of hype for how unstable the network is. To its credit, ethereum is still very much a work in progress, and the hype is mostly due to overzealous startups and crowdsale investors than any concerted effort on the part of the core development team. That said, while ethereum seems to have the potential to catch up to bitcoin’s network effect, by its very nature it will never compare when it comes to simplicity.

I believe that the Trust Layer of the internet demands the simplicity of bitcoin’s limited scripting language, because it is much easier to reason about when analyzing the security properties of the system. With ethereum, it is fundamentally impossible to know whether or not a contract will be deployed that could crash the nodes in the network since anything is possible with a Turing-complete scripting language.

My personal view on this is that if you need Turing-complete contracts, you can use a sidechain or permissioned blockchain for that. Then if there’s a problem, it doesn’t damage the Trust Layer, the problem is isolated to the other blockchain. The same goes for any other experimental, novel, or exotic blockchain use-case.

Due to the costs of transacting on open and decentralized blockchains at-scale, most people will choose to transact off-chain anyways. Since the scripts required to support a range of off-chain transaction security models are relatively simple, it’s reasonable to conclude that bitcoin is “good enough” to serve as the Trust Layer upon which everything else is built.

My vision for the bitcoin application stack

After watching the evolution of bitcoin and the blockchain technology ecosystem over the last few years, the stack of protocols and services that developers are using to build the next generation of digital applications is becoming more clear to me. It looks something like this:

Bitcoin as the Trust Layer of the internet

Of course, developers won’t have to use each “brick” or even each layer in the stack when building their applications. But each component will be available for building centralized and decentralized applications alike, and at the bottom of the stack sits the Trust Layer, the decentralized arbiter of truth and justice – the bitcoin blockchain.


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37 Days to SegWit: When SegWit is Live…

Ever since SegWit was first introduced at Scaling Bitcoin Hong Kong in 2015, I have found myself starting sentences with, “When SegWit is live…”, followed by some prediction about how this technology will supercharge bitcoin. In the spirit of the optimism around growing support for SegWit among miners and the broader bitcoin economy, I thought I’d share some of the things I’m excited about for “when SegWit is live” on bitcoin in 37 days (or less!).

When SegWit is live…

  • More transactions will fit in each block, and as far as I can tell this will not come at the expense of node or hashpower decentralization. In my humble opinion, more transactions per block is always a good thing as long as we don’t sacrifice the security of the system.
  • Transaction malleability will be fixed for SegWit transactions, enabling advanced scaling technology such as a more secure version of the Lightning Network. Lightning Network is very exciting because it opens up whole new micropayment-related use-cases that have simply not been possible on-chain.
  • It will be safer to increase the block size limit, due to the way that SegWit fixes the quadratic scaling of hashed data problem. As mentioned earlier in this post, more transactions per block is a good thing so long as bitcoin’s security is not compromised.

I’m very excited to see these and other benefits added to bitcoin because taken together, they strongly reenforce bitcoin’s leadership in the cryptocurrency market since virtually any cryptocurrency feature or use-case someone could think of will be possible either on bitcoin’s “mainchain” or a Layer 2 protocol such as sidechains or Lightning. This adds a tremendous amount of utility for the millions of people using bitcoin, and further increases the network effect and security that makes bitcoin such a powerful technology.

To the moon!


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Many Blockchains, One Cryptocurrency

Since the introduction of Namecoin, the first serious attempt to build a public blockchain network separate from Bitcoin, there has been an explosion of so-called “altcoins” – bitcoin competitors – which have sought to unseat bitcoin from its throne atop the cryptocurrency charts. So far, none have come close to matching the market demand for bitcoin, with bitcoin commanding about 92% of the market share in the $7.1 billion cryptocurrency market at the time of this writing. This despite the numerous advanced features offered by its competitors: private transactions in protocols like Dash and Monero, cross-currency transactions in protocols like Ripple and Stellar, energy-efficient consensus algorithms in protocols like Bitshares and NXT, and fully-programmable smart contracts in protocols like Ethereum.

It took over a year to find out if bitcoin could withstand competition from a coin using the same mining algorithm (namecoin), and it took almost four years to find out if bitcoin could withstand competition from a coin which didn’t need mining at all (ripple). Bitcoin has met these challenges, and has continued to meet additional challenges from coins with varying feature-sets, parameters, consensus algorithms, and user-base demographics. Despite bitcoin’s perceived shortcomings – the lack of protocol-level features, the lack of governance structure, the poor branding and marketing – it has a strong network effect that is owed in part to its first-mover advantage and is supported today by a large community of developers, investors, miners, and end-users, a global exchange network, and widespread merchant integrations. In short, bitcoin is unlikely to be overtaken by a competing cryptocurrency any time soon.

Scaling Up and Out

To further fan the flames that are fueling bitcoin’s rise to dominance as the world’s standard for electronic cash, an innovation has been developed that would allow bitcoin to be transferred to and from other blockchains that have their own independent feature-sets and consensus algorithms, providing a way for bitcoin to scale both up (in terms of transaction capacity) and out (in terms of features) without having to make risky changes to the main bitcoin blockchain. This innovation, called a “sidechain,” is currently being prepared for production use.

An implementation of sidechain technology called Liquid has already been adopted by a consortium of bitcoin exchanges to increase liquidity in the bitcoin trading market. Liquid allows traders to transfer bitcoin almost instantly between participating exchanges and payment processors without having to wait for confirmations on the main bitcoin network. This is just one variation on sidechain technology and shows what is possible even with the limited feature-set of today’s Bitcoin protocol. In the future, there will be bitcoin-denominated sidechains that can replace all of the useful functionality of even the most popular altcoins (see Rootstock for one such example). And as in the altcoin market, there may be dozens or hundreds of sidechains competing for business – all backed by bitcoin.

There are other cryptographic off-chain methods for scaling bitcoin transaction capacity that have been proposed, including the Lightning Network and Open Transactions voting pools. These methods make use of Bitcoin’s native scripting capabilities to lock-up bitcoin for a period of time, track transfers off-chain using payment channels in the case of Lightning Network and triple-signed receipts in the case of Open Transactions, and then redeem the locked-up bitcoins and transfer them back to an on-chain address when the recipient is ready to take full custody of their coins. Like sidechains, these methods will never provide the exact same kind of security as on-chain transactions, but the benefits gained with the security trade-off can include speed, privacy, and cost-efficiencies that make it more than worth it for users to temporarily move low-value or short-term bitcoin transactions off-chain.

Software advancements like sidechains, the Lightning Network, and Open Transactions hint at what the future holds for bitcoin, both in terms of how new features will be added and how bitcoin will continue to scale to meet market demand for a fully digital currency that can be transferred without counterparty risk to anyone anywhere in the world at the speed of light.

The Highlander Coin

The total addressable market for a cryptocurrency – made up of not only all liquid and fungible stores of value and mediums of exchange, such as currencies and precious metals, but also all use-cases that require access to a tamper-proof ledger of record – is in the tens of trillions of dollars. Bitcoin, by comparison, has a “market cap” of “just” $6.5 billion at the time of this writing (current price times number of mined bitcoins).

While difficult, a competitor would only have to convince current bitcoin investors (and the rest of the world) that their decentralized solution to the double-spending problem and/or their coin’s “monetary policy” was superior to bitcoin in order to overtake bitcoin as the most valuable cryptocurrency. Since cryptocurrency competition is a zero-sum game, in this hypothetical scenario the liquidity in the current cryptocurrency market would eventually leak out of bitcoin and other altcoins and into the superior competitor until it had the same monopoly position in the cryptocurrency market that bitcoin holds today. From there, it would grow into the total addressable market, eventually commanding a market cap in the tens of trillions of dollars. It remains to be seen if any in the existing stable of altcoins is up to the challenge, or if a dark horse competitor will emerge that is better-funded and more well-organized than their counterparts in the Bitcoin ecosystem.

Given the technological advancements like sidechains and cryptographically-secure off-chain transactions that extend bitcoin functionality and scale bitcoin transaction capacity to match or surpass that of competitors, it is increasingly unlikely that another cryptocurrency will ever even come close to matching or surpassing the market cap of bitcoin. Instead, we will continue to see bitcoin on top of the charts as the most valuable cryptocurrency, with new innovations being tested and rolled out as sidechains, soft-forks, or even hard-forks on the Bitcoin network.

Over time, altcoins will be widely accepted as either scams or curiosities of a bygone era, a time when it was realistic to imagine a cryptocurrency that could compete or coexist with bitcoin. Until then, we will continue to see serious (and not so serious) attempts at launching altcoins, with millions of dollars invested to fund further experimentation in blockchain technology and consensus protocols, all of which will continue to benefit bitcoin as it learns from and builds upon these innovations in its own unique ways.

The end result? There will be many blockchains, but only one cryptocurrency.


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