Bitcoin's endgames

In the Bitcoin community there is much discussion about the price of Bitcoin as if that is the end goal. If anything the price of Bitcoin is just a noisy, lagging indicator of adoption.

What is the end goal of Bitcoin then?

Depends, but here are the three most likely outcomes from what I see.

#1 A new gold standard

What was the gold standard?

This is an attempt to summarize many nuanced topics that are better covered in depth in the amazing book: The Bitcoin Standard. Skip to "Why is this good" if you're familiar.

Throughout history precious materials were money, because they are difficult to devalue and so emerged as the best way for folks to preserve their wealth over time and move it through space.

Gold and silver have been the most common and enduring examples of the assets that have been the best money because they do this best. The challenge with gold and silver is they're physical objects, heavy ones at that. On top of that, verifying that they're not fake takes time. Further, we're still able to mine more, which devalues all the existing gold and silver in circulation.

The real nail in the coffin for gold and silver is the modern world. Visa processes ~270 billion - with a B - transactions per year (source) there's no way to do that directly using gold and silver.

To solve this problem governments have traditionally issued a currency that represents the amount of precious metal that government has in reserves, which the holder of the paper could trade in for the gold or silver at will. Paper money (and in the digital age, the ones and zeros in the database of banks) is far easier to transact in the volume that modern life requires.

The world left the gold standard in the 20th century in part because of the demands of the modern economy. But in larger part governments the world over left the gold standard because they realized it shackled them. The gold standard limited how much money they could spend on infrastructure projects, on economic policies, and on war. So they left it behind for money unbacked by any hard asset.

Bitcoin (at the very least) is a better gold

In the quantities of gold that are necessary to back a currency, Bitcoin really shines (no pun intended).

1. Bitcoin "account" balances can be instantly verified and they can't be faked. No more melting a gold bar to check if it's truly gold.
2. Bitcoin is very light - you can "store" billions of dollars of Bitcoin on a thumb drive.
3. Transferring Bitcoin is far faster than gold. It take 10 minutes via a computer vs shipping literal tons of metal.
4. Transferring Bitcoin is far cheaper than gold. It currently costs a few dollars to transfer any amount of Bitcoin. Even in a scenario of mass adoption of Bitcoin, the cost (in Bitcoin) to transfer Bitcoin will very likely be far less than the cost (in gold) to move gold.
5. Bitcoin is easily divisible. Bitcoin is digital so we can keep dividing it into smaller and smaller pieces as needed.
6. Bitcoin is more precious than gold. There will only ever be 21 million Bitcoin, that can't change. We add ~1% to the gold supply every year, and there may be a future where we find precious metals in immense qualities in asteroids which would completely obselete the rarity of gold.

Bitcoin is all of this without any future improvements. No additional work on scaling payments via Layer 2s or Drivechains, no need to increase the block size, nothing.

If countries adopt the Bitcoin Standard, the price will go up and so will the cost of transactions. This will likely price most individuals or businesses out of transacting in Bitcoin, but governments would be more than able to afford the fees for how much Bitcoin they'd be holding and transferring.

How would this work?

There would be a network of tens of thousands of Bitcoin-backed banks that issue their own digital currencies which are redeemable for Bitcoin. These Bitcoin-backed banks could be private corporations or governments.

These entities would rarely transacts on chain, only when they're increasing or decreasing their reserves would they need to transact on-chain. For day-to-day operation, they'd operate in their own digital currency. If they needed to settle transactions between these entities they'd likely use Lightning Channels that are kept open to decrease the fees paid to settle daily transactions between Bitcoin-backed banks.

Owning Bitcoin would be like owning gold, it's something you do when you don't trust the currency issuer / bank or you're switching between currencies / banks.

This could all work today with no change to the Bitcoin blockchain and very little additional work on the Lightning network from a technological standpoint.

This was something that Hal Finney (the receiver of the first Bitcoin transaction) outlined as the most likely positive outcome of the Bitcoin project.

Why is this good?

The gold standard restricted governments. They were never able to spend the money it takes to sustain the total warfare like WWI and WWII while on the gold standard. They were never able to spend the money it takes to maintain the bureaucracy that they can now. There's a clear correlation between when governments suspended the gold standard and the rise in government spending as a proportion of GDP (source)

Gold was better preserved your savings. In a world on the gold standard, if you owned physical gold, then you were immune to any currency shenanigans undertaken by overreaching governments (usually inflation, or confiscation).

Bitcoin is anti-colonial. The US has weaponized the dollar, and access to the dollar system, against smaller countries. It's been weaponized in favor of the interests of the US in a very extractive manner. Gold was a metal, if you had it, it had money. There were few ways to weaponize the gold standard. Bitcoin, similarly, is accessible (to anyone with an internet connection), therefore there are very few ways to weaponize the Bitcoin standard against other countries.

How might this come about?

The US-dominated, dollar-denominated, financial system is being increasingly weaponized. Wealth is being confiscated from Russia. Iran was cut off from the global trade financial system (source). The US is flirting with doing the same to China (source).

There's emerging signs that countries would like to reduce dependency on the dollar (source). The countries doing this are generally ones that are powerful in their own right and want independence from an increasingly belligerent US.

The natural choice is to create an alternative system of settling international trade. Since China's an emerging superpower, and the largest trading partner for most of the world (source), it makes some sense that an alternative will be based on the Chinese currency.

Most countries are aware of the authoritarian nature of China. So, many will ideally want to both de-dollarize AND avoid jumping from one authoritarian monetary system to another.

These countries may find it advantageous to back their currency with Bitcoin. They will still have to hold reserves of dollars and the Chinese renminbi to conduct trade, but they can back their own currency with Bitcoin.

This is a more natural choice for countries that have experienced hyperinflation like in Lebanon, Argentina, Zimbabwe. Venezuela. Because the price swings of Bitcoin (even as volatile as they are today) are far less volatile than the inflation rate of the local currency.

If enough countries do this, then those countries will have an easier time settling their trade in Bitcoin, further adding momentum to the adoption of a Bitcoin standard more broadly.

This adoption path would likely start at the margins and overtake the big economies last.

What are the downsides?

When people are still using government issued money that is only a claim on the reserves of a precious asset (even if that asset is Bitcoin), governments always eventually devalue the money to save themselves from the consequences of bad economic policies. (Rome, China, England, and many more)

In this scenario there's still an ability for governments to devalue the savings of everyday people who do not directly hold Bitcoin. You'll have your modern equivalent of "gold bugs" directly holding Bitcoin but unless everyone does it, there's still that danger.

#2 Hyper-bitcoinization

Hyper-bitcoinization is the future where Bitcoin is the main currency used in every context. It's the reserve asset for governments and corporations, it's the medium of exchange for international trade, it's what people use to buy groceries, it's what people use to save their money, it's the currency unit they think in.

Why is this good?

Bitcoin is a still a better gold standard, As outlined in the gold standard section, in this scenario Bitcoin would have many of the same positive effects: restricting government spending, reducing war, less wealth confiscation, etc.

A Bitcoin Standard is harder to get off if everyone is using Bitcoin directly. The fatal flaw of the gold standard was that it was very centralized. So, when the chips were down, a few politicians could decide to abolish it. If everyone is saving in Bitcoin and buying things with Bitcoin, then there's no centralized point for governments to reintroduce fiat money.

No currency devaluation. If everyone is using Bitcoin, then there's no way for anyone to debase the currency. No government will be powerful enough to change Bitcoin. No government will be able to get people to use their own Bitcoin-backed currency because using Bitcoin directly is just as convenient.

Increases economic freedom. If people can pay one another with fewer or no intermediaries, there's a lot less ability for governments, corporations, banks, etc to exert control over people. No one can be excluded from the economy because Bitcoin is an open protocol accessible with just an internet connection.

How might this come about?

There are many challenges to solve between where we are today and a future were hyper-bitcoinization is possible. And even more between possible and probable.

Bitcoin's price must stabilize. All paths to mass adoption of Bitcoin seem to go through the price stabilizing (or at least not going down precipitously). People just won't trust a currency that can lose it's value as quickly as Bitcoin has on bad trading days. The way to stabilize the price likely requires mass adoption, so we're in a catch 22.

Bitcoin must scale. To make Bitcoin compelling for mass adoption we must be able to handle all the financial transactions that currently happen. Visa does 270 Billion transactions a year. Even with Lightning, we're not even close to that. And we may need even more solutions to make this possible while preserving the ability maximize self-sovereignty.

Bitcoin must simplify. We need to build more tools to help people that aren't technically savvy. Just imagine your grandmother trying to use Bitcoin today. I bet she understands gold!

Some of this simplification is meeting people where they're at with education and accommodating the language they understand when it comes to money (no one knows but a public key is).

Other ways of simplifying is assuming people are going to make mistakes. People are going to lose their keys / seed phrase and so, for example, building easy to use ways to help people recover from mistakes will be necessary (probably multi-sig services under the hood).

Bitcoin must allow a spectrum. Not everyone on Earth is going to care about being perfectly trustless, some will always value expediency over their own sovereignty. We shouldn't scoff at that. We should support people with services and tech that allows them to dive into self-sovereignty only as deep as they prefer. They may regret it at some point, but better to have them on Bitcoin than not right?

What are the downsides?

Many technical challenges. Bitcoin as it is today, with all it's attendant services, apps, etc cannot support the weight of the entire world economy. That doesn't mean it won't be able to, but there is much to build before then.

We may need to make a trade off between mass adoption and perfect self-sovereignty. I have hope we can discover technical solutions so we don't have to choose, but right now every proposal has trade offs.

As currently conceived, the system requires being on Earth. Seems silly to say this now, but if we achieve hyper-bitcoinization it may endure into the time when humans begin leaving Earth. We never have to think about it because light (and therefore internet traffic) takes less than 1 second to circle Earth. Mars is (at best) 3 light-minutes away. Jupiter and its moon are 38 light-minutes away. If we have economies on those worlds, they can't wait over an hour for whether their payment for groceries went through. It will require some thought on how to deal with a more spread out humanity.

#3 Irrelevance

The Bitcoin ecosystem of apps, and services, and companies requires a lot more work to be able to handle a world of mass adoption. The greatest threat to Bitcoin at any point in its history was that developers, entrepreneurs, and storytellers  give up on Bitcoin and stop moving the ball forward on making the ecosystem more robust and more accessible.

If that ever happens, Bitcoin will fall into irrelevance, which will nullify any technical advantages over the existing financial system or any market penetration made up until that point. Bitcoin has to be something that excites people and motivates people to build on top of it (not just buy it).

Why would this happen?

Guilt by association. Many people associate Bitcoin with all the other blockchain-based technologies, whose biggest selling point seems to be "get rich quick." Bitcoin being lumped in with those speculative assets (and outright scams) is the default as of today. Even if legally Bitcoin remains different, that perception will turn people off if it's not fixed.

Price obsession. Many people that love Bitcoin seem more enamored with its price than its actual usefulness or ability to change the world. Talking about the price more often than the projects that are improving the Bitcoin ecosystem will keep reinforcing the idea that Bitcoin is just a speculative asset. This will push people away from adopting it.

First-world focus. The people that, today, would most benefit are folks whose currency's inflation is impoverishing them every day. Folks whose government is confiscating their wealth without due process. Folks who can't get access to financial services because of the opportunities in their region. In a relatively wealthy, relatively democratic, relatively stable place like the US or Western Europe, Bitcoin is a harder sell. Building for them first is a fool's errand.

Technical Stagnation. The Blocksize Wars taught our community (for better or for worse) that any major changes to Bitcoin should be fought tooth and nail. I'm not saying I agree with any current proposals, but without technical improvements Bitcoin will remain ONLY a better version of gold. Lightning is a glimmer of hope but even that must be improved and expanded to have a chance.

Waiting instead of acting. Much of what I hear in the Bitcoin community is "just you wait..." Whether they mean about the price, or that suddenly many countries will adopt the Bitcoin standard, or that everyday people are just going to wake up to the dangers of inflation and seek more stable assets, or that institutions are going to pile in and adopt Bitcoin.

There's a lot of  just waiting for Bitcoin to assume its rightful place as the centerpiece of the global financial system. This will be a monumental task that requires incredible ongoing effort, we have to keep building and pushing Bitcoin.

Much work to do

The dream of a Bitcoin future is a hopeful one. It's the dream of a world that's more free, more prosperous, and one that rewards the best in humanity.

It's worth putting your shoulder to the stone and joining in the push, no matter what you have to contribute. Even if we don't see the fruits of our labor for generations, it's that important.