Bitcoin is a dead end
The real action in crypto is stablecoins and DeFi.
Last week I stopped by a conference, “Bitcoin Asia”, which drew a decent-sized, diverse crowd. The mood was upbeat. Bitcoin’s price has been hovering around $110,000 and industry players are paying for booths and tickets. Eric Trump came and pumped his family’s bags. I left convinced that Bitcoin is yesterday’s news.
The broader digital-assets space is now becoming a major disruptive force in finance. The release of energy since the Trump administration signed into law new legislation setting frameworks for payment stablecoins is palpable, with jurisdictions like Hong Kong, Japan and Dubai keen to assert their local advantages.
But that is thanks to stablecoins and alternative layer-1 blockchain networks. None of this has anything to do with Bitcoin or its narrative as ‘digital gold’. Bitcoin’s contribution was to jumpstart crypto. For a long time this has been about hype and ‘number go up’ hysteria.
It wasn’t always thus. Satoshi Nakamoto’s white paper was subtitled: “a peer-to-peer electronic cash system”. Not a store of value, but a private, real-time payments network independent of banks.
This was revolutionary, but within a few years, changes among the core developer teams put Bitcoin on a different path. A combination of cabal-like developer groups and decisions to limit block sizes ensured the network would no longer be useful for payments. It was now about generating an asset suitable only for hoarding.
Listen to people talking stablecoins, and you will hear of hopes and fears among bankers, payment processors, fintechs, and monetary authorities. The conversations at Bitcoin Asia were different.
Many presentations and booth concepts were about shilling the dream and encouraging more people to buy bitcoins. For a system that claims to be the next global reserve currency, it’s strange that this drumbeat is necessary. If it’s so great, why aren’t more people clamoring to buy some? Why do you need to sell the idea so hard? I can think of many technologies or products that became popular on their own because they solved a need or created a new culture: TCP/IP, online brokerage, the World Wide Web, the iPod, ChatGPT. We’re 18 years beyond Satoshi’s white paper!
Bitcoin, of course, doesn’t do anything. It’s a digital rock, a story without a cause other than number-go-up. Even the rug-pulls aren’t about Bitcoin (see Eric Trump, above).
In theory there is also a story for Bitcoin about privacy and freedom. But the idea of mass self-custody is delusion, and the centralization of the core developers who control the network’s fate makes Bitcoin far less freewheeling than Ethereum or Solana.
Many of the panels at Bitcoin Asia featured developers discussing efforts to address these faults. Solve this or that problem, and you have the “massive unlock” of value that will secure Bitcoin as the reserve currency that everyone uses and guarantees number go up up up.
The first problem is lack of utility. This prevents bitcoins from participating directly in DeFi. At best it can serve as collateral, but even that requires awkward and vulnerable wrappers created by middlemen. This is an old problem. The first attempts at putting functionality around Bitcoin’s simple code date to 2013, when Blockstream invented side chains. Vitalik Buterin gave up on making Bitcoin programmable and helped launch Ethereum instead.
Today there are many groups attempting various Layer-2 solutions – moving activities to other blockchains, while returning to the L1 such as Bitcoin, Ethereum or Solana for final settlement. Side chains, rollups, etc.
There are ongoing arguments among developers about L2s versus trying to scale the settlement layer, but the point is that L2s on Ethereum, Solana, Sui and other chains are active, while those for Bitcoin remain mere blueprints. I’ve met teams doing interesting work on Bitcoin-focused L2 solutions. They continue to attract funding because yeah, if Bitcoin were programmable, or if its unique qualities could somehow be extended to other blockchains, then the “massive unlock” could occur.
I’m skeptical these will actually solve the fundamental obstacles in the Bitcoin network, however, which faces long-term problems around security; and bridges and other means of connecting blockchains remain vulnerable to cyberattacks.
At root, Bitcoin was designed to be first a P2P cash system, and was then subverted into a digital-gold narrative, and it can’t be both. I heard some pretty stupid arguments about Bitcoin’s supposed ‘utility’, such as that Microstrategy is using Bitcoin functionally. If you believe Strategy (as the company’s now called) is somehow creating use cases out of bitcoins, buddy, how’d you like to buy the Brooklyn Bridge?
Other topics around making Bitcoin usable include security and custody. These revolve around technical agendas such as CTV and CSFS. Check-Template-Verify and Check-Sig-From-Stack, meant to make Bitcoin scalable and to enable the existing Lightning Network (a slow, clunky network to transfer bitcoin payments) to operate faster and more securely.
These are not new. While developers generally agree on the desirability for better security and utility, there is no consensus to make these changes happen. It’s a lot of work, for starters. Secondly, in 2021 the Bitcoin network did undergo an upgrade, called Taproot, which was supposedly about making it more private. These were incremental changes, adoption has fallen short, and its aims to revolutionize Bitcoin’s capabilities with smart-contract-like workarounds haven’t worked. The developer community doesn’t seem interested in another hard slog for marginal improvements. They do like talking about such projects, though, maybe because it’s a good way to make a living off other people’s money.
It’s also worth noting, while we’re here, on what Taproot didn’t even attempt: to speed up Bitcoin’s capacity. It’s the slug of the crypto world, processing seven transactions per second. Solana does more than 20,000 TPS; Visa can manage up to 65,000 TPS. Is there a more oxymoronic name than the Lightning Network?
Another area of current work is on Snarks, cryptographic proofs that require only one party in a transaction to prove it possesses certain information without having to reveal the information itself. Zero-knowledge Snarks are an exciting area of work – for digital assets other than Bitcoin. In theory, a ZK-Snark application could do what bridges and L2s have so far failed to do, which is to prove that data on a given chain is true and can be used on other chains. This could replace smart contracts, allowing holders of bitcoin to use them on other blockchains. Maybe. One day.
“The financialization of bitcoin is the big unlock,” I heard someone say. Okay, dude. But this begs the question of who wants to use their bitcoins for spending or for any financial activity?
Financializing digital tokens? Broadly speaking, I get it. There’s expanding cryptonomics, there’s DeFi, there’s growing connections between stablecoins and the real economy. But Bitcoin as an asset is just a hoarding mechanism. HODL, diamond hands, corporate treasury buying, all this rubbish. It works as long as there’s another sucker eager to jump on the bandwagon.
Bitcoin is the first global, internet-connected financial mania. It’s the tulip bulb that keeps blooming. The US dollar price of Bitcoin could well rise again and again. Someday the bloom will come off and a lot of people will get hurt. Had the collapse come in recent years, it could have well derailed all things blockchain. Indeed, two years ago, post-FTX, blockchain was once again a joke on Wall Street. It ain’t now.
The best that can be said about Bitcoin is that it was the spark that lit the fire, and now real disruptive innovation is coming and the licenses and the political moats won’t save institutions that refuse to change. Existing institutions will have to adapt to a new infrastructure, one that comes with as many drawbacks and dangers as it brings opportunity, but the benefits are real. But as I spent time listening to the developers who purport to be the keepers of the Bitcoin flame, I just thought, these people are wasting everybody’s time.
If I’m dead wrong about all of this, then next year Bitcoin Asia should charge sponsors and delegates in bitcoins only, not in US dollars. That would shut me up.