Paths to hyper-bitcoinization
What is hyper-bitcoinization?
A hyper-bitcoinized world is one where the main currency in the world is Bitcoin and everyone thinks in Bitcoin as the unit of account for anything of value.
One scenario where this happens is via the widespread adoption of Bitcoin backed currencies (a Bitcoin Standard) until Bitcoin disintermediates those currencies because they were technologically unnecessary.
Or a bottoms up approach where people just start using Bitcoin to transact because Bitcoin is a better system of money for people. Then governments wanted their cut for taxes and so started allowing taxes to be paid in Bitcoin. In this scenario, Bitcoin eventually out-competes locally issued currencies until they're irrelevant.
What isn't hyper-bitcoinization?
A new and improved version of the gold standard wouldn't be considered hyper-bitcoinization.
There are many advantages that a new gold standard based on Bitcoin would have over the current system (outlined here), but it's not considered hyper-bitcoinization.
What stands in the way?
Currently you cannot go to most stores, restaurants, or landlords and pay for their offering in Bitcoin. That happens to be the best measure of hyper-bitcoinization. It's also the proof most people need in order to want to offer the ability to receive payment for things with Bitcoin. Definitely a catch-22.
So what are the problems that need solving in order to resolve this catch-22?
Technical limitations (transaction throughput)
Bitcoin cannot support all the commerce of the world on-chain. For that to be possible, we'd need to increase the block size and/or the block time. That war was already fought and lost for good reason (The Blocksize Wars). Taking either action would increase centralization and would never fully solve the problem.
If Bitcoin is to be the default value system fo the world, the network must be able to handle billions of transactions per day. We'll get into the currently proposed solutions to this problem, but there is no path to hyper-bitcoinization without solving this technical limitation.
Perception of worthlessness
I had a conversation with an older uncle once and he asked me "what is Bitcoin?" I started out trying to explain Bitcoin like gold. But he kept saying "but yeah, what IS Bitcoin."
He even wound up holding up a dollar bill and saying "but see I know this is worth something because it came from the US government." It took a half-hour conversation about how money is created to even start to explain how Bitcoin is actually more real than most fiat money. I had a hard time helping him understand where money came from so he gave up on getting the answer he was looking for about Bitcoin.
Due to Bitcoin's digital nature, it's not tangible. That's one of its greatest assets but it's also a big psychological barrier to understanding it as valuable.
This is a hard problem to overcome, but we'll need some way to do so.
Perception of being criminal money
There are some high-profile examples of criminals using Bitcoin in the early days (The Silk Road is the most commonly cited case). That just isn't the reality anymore, so much more of Bitcoin usage is as a savings instrument.
Not to mention the Bitcoin blockchain is public and contains a record of every transaction every made with Bitcoin. That doesn't seem like a great place for criminals to hide activity. (source)
Political pressure
Fiat currencies may not be technologically necessary in a world with Bitcoin, but they are politically necessary to support the will of powerful people. The Fiat system supports endless deficit spending, (source) which props up war and the military industrial complex.
The Fiat System also helps the politically powerful to use that system to silence and disadvantage their opposition. (Canadian Truckers, Russia, Iran) Even if you agree that their targets are justified, the ability to wield the system as a weapon may not remain aimed solely at targets you agree with.
This is a challenge that doesn't seem to have a solution. This may just come down to the people who want Bitcoin overcome the people who want the current system.
Paths to achieving hyper-bitcoinization
Scale via Lightning
"Lightning is a decentralized network using smart contract functionality [on Bitcoin's] blockchain to enable instant payments across a network of participants." (source) Lightning can theoretically scale the amount of "Bitcoin transactions" by many orders of magnitude.
There are many advantages to Lightning,
- Lightning can handle many more transactions. Most Lightning transactions don't happen "on-chain" so Lightning can handle many more payments per second than Bitcoin by itself.
- They're fast. Most lightning payments take a few seconds in my experience, even beating out my credit card in some cases.
- It's cash settlement. Meaning there's no T+2 days settlement like there is with credit cards. Once the transaction is complete, the receiver has the funds.
- It's good at maintaining a low-trust environment. Bitcoin is truly trust-less, but Lightning sacrifices a small amount in that realm and gains order of magnitude in speed and cost of transactions.
Lightning has many obstacles to overcome.
- Lightning is fairly centralized (for now). Because running a node in the Lightning network isn't very easy, the largest contributors to the network are the big Bitcoin wallet providers. They are large hubs in the network. That's ok but not ideal. It could end up that these "hubs" take the place of what Banks are today in the modern economy, these hubs would just take lower transaction fees.
- Lightning capacity needs to grow. The number and size of transactions that can be run via Lightning is directly tied to how much Bitcoin is "locked up" in the Lightning network to facilitate payments via Lightning. Current public capacity of the Lightning network is ~3500 Bitcoin (roughly $91M at the time of writing)., and that's not nearly enough to handle global commerce.
Lightning might be the silver bullet, but it still has a long way to go in order to prove that.
Scale via Sidechains
What is a sidechain? "Sidechains are separate chains attached to the main blockchain. They were designed so as to move certain aspects of blockchain’s functionalities off the main chain. Even so, a sidechain is still linked to the main blockchain, enabling the two chains to interact with each other." (source)
How do they work? "If [a user] would like to transfer funds to a sidechain, users must send an amount of crypto from the main chain to an output address. Once having done so, the coins are escrowed [by the sidechain operators] and the user cannot spend them anywhere else. Next, a waiting period begins in order to provide extra security. As this period passes, an amount of coins equal to the amount locked at the output address is released on the sidechain [for the user's use on the sidechain]. The same thing happens with transfers from a sidechain to the main chain." (source)
That way users can operate in the side chain with a balance of Bitcoin that allows them to take advantage of the features unique to the sidechain.
Disadvantages: There's quite a bit of trust users have to put in the entity that operates the sidechain. Once the Bitcoin is in the output address, the sidechain operators have full control of it. There's no technological gurantee they'll release the funds once a user initiates a transfer from the sidechain to the main chain.
How this could solve scale: Sidechains could be built to do anything. Reimplement Lightning as a side chain? Yep! Smart contracts platform like Ethereum? Totally possible. There's even proposals to move domain name registration (like GoDaddy) to a sidechain because it will be more decentralized and cut out a lot of middlemen. Lightning is currently limited to essentially monetary transactions.
Drivechains (discussed below) are just special side chains with a formal relationship respected by the main Bitcoin blockchain. Critics of Drivechain point out that having a formal relationship with the main chain upends the incentives around mining, and could open Bitcoin to attack. It's still not clear to me how exactly, but it's hotly debated.
Side chains that aren't Drivechains have the advantage and disadvantage over Drivechains of not having a formal relationship with the main chain. There is more trust required to operate a side chain (disadvantage) but less likelihood of screwing up the main chain's incentives (advantage).
A side chain (like Liquid) could create a settlement layer for transactions that could handle the same scale as Visa, but still transacting in a Bitcoin-pegged currency. They "just" need to garner enough trust from Bitcoin users to earn that right.
Current Bitcoin users are just very skeptical of this kind of system since sidechains have the same risks of paper currencies backed by gold or silver did. The issuer of the currency can manipulate and inflate the currency. L-BTC isn't BTC, it's essentially a theoretical claim on some amount of BTC.
Scale via Drivechain
"Drivechain is the technique for the creation of decentralized 2-way peg sidechains for Bitcoin. These sidechains can be used to improve Bitcoin in every front, including privacy, scalability, decentralization and security, and also add many interesting features not possible before" (source)
What this means is that people could set up sidechains (blockchains that operate outside Bitcoin but are attached to Bitcoin) that could solve a problem that Bitcoin cannot, and should not, solve. This leaves Bitcoin to do what it does best, but enables innovation and scaling, which is necessary for hyper-bitcoinization.
Drivechain has a main (massive) advantage over Lightning:
Drivechain is infinite possibilities. Like all side chains, Drivechains can do anything. They can do so with a more formalized relationship with the main Bitcoin blockchain.
There are a few downsides to Drivechain though:
- Bitcoin needs to add a feature to enable this to work. BIP-300 and BIP 301 are proposals that need to be adopted by the Bitcoin network in order for sidechains to work properly. That requires getting a vast majority of Bitcoin node operators to agree to the change, which is no mean feat.
- Drivechain is infinite possibilities. The use of sidechains is optional as previously stated, Bitcoin purists can just ignore their existence (in theory). But sidechains do enable all the worst parts of alt-coins to operate on Bitcoin.
- Mining incentives. it's unclear (in practice) what the effect will be on mining incentives for Bitcoin. Currently Bitcoin's hashrate (a measure of how much mining focus is focused on Bitcoin) is at all time highs. If miners can make money helping maintain sidechains, will that be more attractive than mining Bitcoin itself and therefore start to jeopardize Bitcoin itself?
There is no consensus in the Bitcoin community about if Drivechain is a good idea or if it's even necessary. But it is a path that could enable Bitcoin to be adopted broadly just by the sheer amount of problems that it could solve for day-to-day internet users.
Focusing on the "Global South"
“If you're born in the Global South, where you've seen rapid inflation or your parents have seen rapid inflation or hyperinflation where your currency can massively devalue and you're going to need a wheelbarrow to truck it around, then you get Bitcoin much quicker.” (Samson Mow via CoinDesk)
It's much easier to explain Bitcoin to people who have suffered repression via bad monetary policy. They're more likely to get value from Bitcoin despite the price volatility because the price volatility of Bitcoin is better than the equivalent volatility in the local currency.
A bottoms up approach could work better in these environments where people get immediate value from what Bitcoin can offer today. If it continues to provide value it will spread and outcompete the local equivalents.
Bitcoin Standard before hyper-bitcoinization
Aiming straight at solving scale and usage may bypass the greatest potential allies of the Bitcoin movement: governments that hate the dollar standard.
If governments want to back their currency with something other than dollar reserves, Bitcoin could be a viable choice today, and has many advantages over the current fiat system (as I've written about here).
Doing so would also help governments switching from a US-dominated dollar-based authoritarian monetary system to a Chinese-dominated, authoritarian monetary system (as would be the default alternative today should the dollar start to decay).
Adoption of Bitcoin as an asset to back currencies would precipitate a reverse-run on Bitcoin:
- Country A buys Bitcoin to start backing their currency -> Bitcoin price goes up
- Country B also wanted to start backing its currency with Bitcoin and sees the price is going up.
- Country B buys Bitcoin as fast as it can before the price goes up even more.
- And so on.
If this "run" could be started, there will be far more political and economic willpower to improve Bitcoin. So there would be more resources available (intellectual, economic, and political) to help solve the technical problems outlined above.
Education and Political advocacy
Technically speaking Bitcoin is ready to become the foundation of a new gold standard in the previous section. "All" that's needed is education of political leaders and advocacy.
And maybe timing.
There may be a moment where the US belligerently violates countries' soveirgnty by weaponizing the dollar and/or the dollar's value becomes more volatile; that would be a moment where it may be politically possible and economically feasible for some smaller countries to start backing their currency with Bitcoin.
This is all predicated on political leaders being informed about the complex topic of fiat money and Bitcoin, and arming them with the tools to convince their constituents that making such a move would be advantageous.
Anti-paths to hyper-bitcoinization
Price-obsession
If you took all the online conversations about Bitcoin, anecdotally it seems like close to half of them are about the price of Bitcoin. That's a lot of mental energy for something that isn't the point of Bitcoin.
That energy is better spent helping build in the Bitcoin ecosystem so the probability of Bitcoin succeeding continues to march closer to 100%.
This isn't about "diamond hands" vs "paper hands" it's about how the price of Bitcoin is a lagging, noisy indicator of adoption and isn't worth thinking about day-to-day. We need to be building things of value.
Browbeating and ignoring marketing/education
If you want to make sure Bitcoin doesn't remain a niche thing that nobody uses in practice, we need to make Bitcoin accessible to normal people.
Normal people don't respond well to toxic responses to basic questions, nor do they respond well when talked down to.
Bitcoin maximalism has been useful in the dev community as an immune response to people who had ideas that jeopardized the Bitcoin movement, or who just wanted to get rich at the community's expense.
Bitcoin maximalist culture will not be the tone or community that will invite mass adoption. We shouldn't compromise on the core mission of Bitcoin at all, but I don't think that making education about Bitcoin more accessible and friendly is in conflict with the mission at all.
Stagnation
Bitcoin's architecture makes it so that changes to Bitcoin have to be extremely popular or they don't happen (as we saw in the Blocksize Wars). That's a tremendous feature of the system.
It's also true that Bitcoin in its current iteration isn't guaranteed to overcome the technical requirements for hyper-bitcoinization. Lightning might be able to scale to the point where it can handle every day-to-day transaction on Earth, but there's a chance it won't.
If it become clear Lightning can't solve the problems ahead, we must have conversations about what upgrades need to be made to Bitcoin to both honor the mission and maximize Bitcoin's chance at success.
Infini-HODLers
There is no point to money if it never changes hands. At some point Bitcoiners should be spending their Bitcoin. I am certainly not suggesting that people have "paper hands" and buy and sell Bitcoin based on the fear cycle, but HODL-ing forever is ludicrous.
I sincerely hope that the diamond hands out there that got in early and rode out the price volatility get fabulously wealthy. But I see some folks saying they'll "never sell" without seeming to understand that the future of Bitcoin relies on them at some point "selling" their Bitcoin for goods and services.
It's important to get this right
CBDCs are coming. And they are very real threats to political and economic freedom.
A Dollar crisis could be coming. The US could be in the beginning of a debt spiral: hight interest rates and high deficits are self reinforcing forces that even the congressional budget office acknowledges is a problem. The easiest (and most common) way out of a debt spiral is to inflate the currency.
Fiat currencies enable unsustainable governement spending. Without fiat money, governements wouldn't be able to wage wars at the scale they have been. Without fiat money they can't distort the economy with deficit spending.
Bitcoin can be a tremendous help to the world
Bitcoin can help workers maintain their savings, reduce war, increase freedom, and much more besides. It's important that we get this right, because we have a chance at truly making a positive difference for all of humanity.
What do you think?
If you see alternative paths to hyper-bitcoinization I'd love to hear more!
Hit me up on Twitter @gregorygmwhite
Or on Nostr @gregwhite@nostrplebs.com