Dispelling Misconceptions

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.
Alan Greenspan

“Bitcoin has no intrinsic value” is a statement often used by critics. It sounds intelligent and objective, but it is neither. It is either rooted in deliberate or ignorant semantic confusion or it is an oxymoronic statement of opinion. We explore why.

There seem to exist two separate definitions of intrinsic value which often causes semantic confusion when discussing intrinsic value. One of these we call the ‘economics’ definition and the other the ‘philosophical’ definition.

Introduction

In order to make progress we begin with some definitions that should help winnow out some semantic ambiguity and separate economic and philosophical elements.

We define an asset as anything which has a market price or whose value is measured somewhere, for example on a company's balance sheet.

We define an asset as having economic value if the asset has a price, or whose value is measured somewhere, for example on a company's balance sheet.

Note: As we are defining assets as things which have a market price or whose value is measured somewhere, for example on a company's balance sheet, something is an asset if and only if it has economic value.

We define an asset as having economic intrinsic value only if it can be derived mathematically from something other than its price alone. For example in addition to price, flows (in $), and other calculable or well-defined variables such as time, interest rates and volatility. We make one exception for the case of the measurement unit itself, in this case US$, which logically must have intrinsic economic value of itself.

Value, intrinsic value, economic and philosophical

The following table lays out whether or how various assets have value or intrinsic value.

Having economic intrinsic value tells you nothing about the philosophical position, although you don't need to know as nothing has philosophical intrinsic value (see the following section).

Since nothing has philosophical intrinsic value and only some things have economic intrinsic value there is no logical implication on the reverse path either.

Semantic confusion arises when people suggest that there is some logical flow. Eg. Bitcoin's status as having no philosophical intrinsic value somehow flows logically from, or is caused by, its lack of economic intrinsic value.

Since economic intrinsic value is only defined by and within the bounds of the measuring unit (in this case the US$), it can tell us nothing about different measuring units such as gold or bitcoin. Although if we were using gold or bitcoin as the measuring unit in another table, they would automatically gain economic intrinsic value due to being the measuring unit. Value measuring units can be thought of as analogous to SI units such as the metre, gram or kelvin. Although other units exist for these physical properties, the definitions and properties of these particular units have qualified them in scientific terms to become the universal standards. We ultimately expect Bitcoin to become the equivalent of the SI unit for value.

Philosophical Intrinsic Value

You cannot touch or hold the value you place on a friend or family member, even though you can hold their hand. The same is true for a gold coin; you can hold the coin, but not the value itself. No one has ever observed ‘value’ as a physical entity. No one has claimed that they have found a ‘value’, or some ‘value’, lying around. There may be physical things around us that we value, but they are not value themselves. We may, or may not, at one time or another, individually place value on them. For example we may consider the value of water, essential to sustain life. However, the value we place on water can vary by time and location. Compare its value in these contexts:

• At home, with taps that can supply a huge supply of clean water when needed (low value at any one moment ?)
• Crossing a desert, or an ocean, on a journey taking several days (high value mostly ?)
• In the middle of a freshwater lake, at risk of drowning (negative value ?)

Therefore, in the absence of physical evidence we must conclude that ‘value’ does not exist as an embodied physical entity.

So, if not physical, then value must exist solely in the virtual world of ideas, feelings and opinions. Being a virtual concept, we restrict our argument to the human mind and set aside the concept of other lifeforms’ sense of value, if any. 

The reasoning and constraint above leads to the observation that only humans endow real physical things with value. Value is a thought, an idea, or an opinion: something virtual. Therefore, value cannot be intrinsic to any physical object or material since intrinsic means “belonging to the essential nature or constitution of a thing” (Merriam-Webster). Your thought, idea or opinion cannot be part of the essential nature of a physical object, since if it were, what of everyone else’s possibly different thoughts, ideas and opinions? If we put the object under a microscope, no matter the level of magnification we would not observe these aggregated thoughts, ideas and opinions anywhere.

If a physical object were to have intrinsic value, then its value would exist independent of the existence of any human being. But, since value itself is endowed only by humans, that would lead to a contradiction. Hence ‘intrinsic value’ is internally contradictory, an oxymoron.

We now consider whether a human or human-created and non-physical item can have intrinsic value. Maybe a human can be said to have intrinsic value, since there is at least one human to endow value: the person themselves. But, what if they feel suicidal, does that mean they no longer value themselves, in which case even humans themselves may not have intrinsic value?

In the case of human-created physical (e.g. machines / art) and non-physical items (e.g. ideas) we imagine a future with no humans around. In such a world there would be no value remaining in anything created by humans since there would be no one to endow that value. So, even human-created objects and ideas are unable to have intrinsic value. 

When people use the statement “has no intrinsic value”, either they are unaware that nothing has intrinsic value, and that therefore what they are saying is meaningless, or they’re really saying something else, for example: “I don’t value it”. This is not a supporting argument, it is simply a statement of their view, but wrapped up in a way that strives to make the claim sound cleverer than it is. Actually what it reveals is that the claimant doesn’t understand what value is, intrinsic or otherwise. There is some irony here; that they could make the claim may demonstrate one underlying reason why they don’t value bitcoin, because they are missing some foundational knowledge about the nature of value. 

Another thing that people may mean when they use the statement “bitcoin has no intrinsic value”, is “I don’t think bitcoin has any utility”. It is self-evident that this is a subjective statement of opinion, and many others disagree and think it has a range of utility, make use of it, and can directly evidence many evolving and growing use cases.

Value, intrinsic value, economic and philosophical

Value and money are not real physical things, they are ideas, they are virtual.

For a more detailed explanation of the motivations and paths of the human development of money see part 1, chapters 1-4 of Broken Money by Lyn Alden. The next paragraph is a very high level meta description of what happened; we are making no claims that this is how it actually happened, but rather why it happened with the benefit of perspective.

Humans realised early on that through voluntary exchange both parties to a transaction could benefit. Each party for whatever reason valued what the other was prepared to trade higher than the thing they were prepared to trade for it. Ultimately this potential to benefit led humans to innovate an idea related to value which has proved very useful. If a social consensus were to arise whereby certain physical things are widely held to be valuable, then by exchanging these things we could gain more benefits from more trade, transferring value between us in the present and maybe also through time. As mentioned above, we almost certainly did not invent it via the thought process, or for this purpose, more likely it emerged naturally from the market as a consequence of the desire to trade, and we offer the above analysis to explain why it emerged. This idea for measuring and transferring value is now called money. 

Money today

For almost the entirety of human existence until 1971 humans were forced to use physical items to ‘carry’ value and these enabled the value exchanges necessary for the development of complex economies. Then, in 1971, when Richard Nixon suspended the US Dollar’s convertibility to gold, we embarked on a historically near unique experiment to see if we could successfully virtualise money by linking it to something else other than a physical good. We had an idea that maybe we could attach value to something virtual, the virtual something was itself an idea that can’t be touched or physically held – state power; this was the separation of money from stuff. 

This has been done more or less successfully by different countries. At the more successful end, the Swiss Franc lost 78% of its value between 1956 and 2024, whereas the United States Dollar lost more than 91% of its value over the same time period (source: in2013dollars.com). By comparison, the Venezuelan Bolivar lost more than 99% of its value in 2018 alone, this was on top of losing 90% of its value in 2017.

What the difference also highlights is the dependence upon political processes to construct the idea upon which the money rests, and thus how dependent people are on the competence of the state within which they happen to live. Unfortunately, in all countries, political processes are unpredictable, and that’s not a great start for underpinning such an important foundation for our economies. Even worse, political processes, driven by humans, are inevitably open to being influenced by the very thing (money) which in this implementation they are supposed to underpin. This forms a feedback loop which when combined with innate unpredictability generates instability. The ability for the money to influence its own underpinning political processes also creates very perverse incentives for governments and other politically or financially powerful groups or individuals. These incentives have arguably been causing, but certainly contributing to, a general degradation in politics and a decline in the perceived fairness of the system. The Great Financial Crash of 2008-2009 and its aftermath were a symptom of this decline.

The State is that organization in society which attempts to maintain a monopoly of the use of force and violence in a given territorial area
Murray Rothbard

For all its faults, however, at least this underpinning of money is of the same nature as money itself – it is virtual – an idea - namely human belief in state power (or the value placed by humans on avoiding the consequences of breaking the law set by the entity which has the monopoly of violence in that territory). Neither states nor state power are intrinsic to physical reality. In the absence of a human mind there is no such thing as a state or state power. Even the paper money, now a low proportion of money in existence, is clearly just a token of the idea, no one really values the paper itself, and it is not directly underpinned by any physical item anyone values.

In late 2008 / early 2009, based on discoveries in computer science, a new idea emerged that seems to be showing that it is possible to have money that is virtual without relying on political processes to underpin it. A money that is indistinguishable from its value; a money that has no use other than being money; a money whose (virtual) existence is owed entirely to the fact that it is money, and which would cease to exist if it weren’t. A money that is underpinned by mathematics and physics, which are substantially more predictable than political processes. Further, mathematics and physics remain unaffected by the money itself; there is no feedback from money into the mathematics of finite fields, money is no exception to the law of the conservation of energy. This money is the distillation of the idea of value that we imbue into physical things, or that we sought to underpin with unpredictable political processes; the separation of money from stuff and the state. 

This money is purely virtual, it is indistinguishable from the value placed on it, separated from anything real, but with just enough of an anchor into physical reality to make it secure and scarce. An anchor is required so that despite not being physically present in the universe, the money can nevertheless be constrained by the limits of physical reality. This is a requirement because without it, the money would emerge from an unconstrained environment, while being used to transmit value in the constrained environment of physical reality. The money needs to be constrained to reflect the constraints of nature itself.

The new anchor to time and energy that emerges from Satoshi’s innovation can be seen as the replacement for the mass and spacetime implicit in the previously used physical items, such as gold coins, which could only be located in one place at any one time and thus displayed nature’s constraints. Gold acted as an anchor to tie the creation of money to a physical commodity to help maintain its value. However the security, costs and inconvenience of having to transport that Gold from the buyer to the seller over distances proved prohibitive, leading to its storage in vaults and replacement with promissory notes from the bank. Bitcoin instead ties money to physical energy for creation and security, but the value is stored on the network and can be transmitted globally at low cost and replacing physical security with encryption.

This is our money, it is or will be your money, and that of your descendants. This money is bitcoin.

It is remarkable that the implementation of these ideas - embedded within the Bitcoin network and protocol - has remained essentially unchanged since first release and yet has demonstrated exceptional continuous up time. In this way, Satoshi appears to have appreciated the importance of stable design and robustly reliable implementation that encapsulates all essential functions (and properties that enable them) from day one. In this way, Bitcoin appears to resemble a real-time, safety-critical and stress-tested software engineering solution, such as a flight system, where failure comes with considerable human cost and reputational damage.

Bitcoin represents the first form of money that humanity has created that works effectively in the digital world we are rapidly moving towards. It has the potential to replace the 100-year typical transition from one global reserve currency to another that we have seen over the last millennium to be the only currency we need for the next.

2.2.0 Introduction

A criticism often leveled at Bitcoin is that it uses too much energy and is therefore bad for the environment. This has been going on for years as the examples above show, so is Bitcoin really using too much energy, or could it in fact help the transition to renewable energy sources and assist companies with their commitment to ESG?.

The first question to consider is how would anyone objectively determine if something like Bitcoin uses too much energy or is ‘bad for the environment’? If any central authority does not believe in the value of Bitcoin, then it will declare any energy used by it to be wasted, as it could have been put to a better use. If willing participants provide the energy to run the Bitcoin network, what central authority should be able to determine whether they should be allowed to do so.

BItcoin’s energy consumption comes primarily from the mining function. Rather than being an issue, this feature of linking real world resources to create blocks, settle transactions and secure the Bitcoin network is one of the key innovations of Bitcoin. 

The Bitcoin network does use a substantial amount of energy, but this consumption is what makes the Bitcoin network robust and secure.

So, does Bitcoin use too much energy?

When considering this question, it is important to evaluate what you are comparing it to

1. Gold is an alternative sound money. A reasonable comparison is therefore to consider how much energy is used to find, extract, process and store gold, usually in a vault somewhere.
2. The fiat currency system comprises all of the banking infrastructure, branches, data centers, and offices. 
3. How does this compare to other energy uses?
4. What value does Bitcoin provide to the world in return for the energy used?
5. Is there a viable alternative to Proof of work (POW) to provide the necessary security of a decentralised money with a credible fixed supply. 
6. How could the Bitcoin network provide potential benefits to other industries, such as the adoption of renewable energy sources, mitigation of greenhouse gas emissions or reducing energy costs for some applications. 

2.2.1 Gold as a non-sovereign store of value

The energy usage of the Gold mining industry is not as easy to evaluate as Bitcoin.

The Market Underestimates The Tremendous Energy Consumption By The Gold Mining Industry.
Steve St Angelo

Although the article listed above is several years old now the comments are still valid. 

The days of finding gold in large quantities and easily accessible, such as in the California gold rush, are well behind us. In a similar way to Bitcoin’s proof-of-work process becoming incrementally harder to produce the same output, a gold miner will typically have to find and sift through an ever greater amount of rock to extract a few ounces of gold.

The improvements in technology to help find and extract gold have been balanced out over time by the increasing difficulty of finding it to provide a reasonably consistent increase in the gold supply, or inflation, of around 2% per annum.

1. Exploration: 1-5 years to identify potential sources and drill for samples.
2. Extraction: Extracting tons of core and loading onto large trucks.
3. Transportation: These trucks use fossil fuel energy, typically managing a few miles per gallon, and require energy to produce.
4. Milling: Once the tons of ore have arrived on site, it needs to be crushed and then ground further to release the gold.
5. Smelting: Smelting requires heating the gold to high temperature to remove impurities to further refine and purity the gold.
6. Casting: The gold is melted and formed into bars by pouring the molten gold into moulds.
7. Transportation: The gold bars are then moved under heavy security.
8. Storage: The gold bars are then stored in bank vaults.

All of these processes require a large amount of energy. We would not be able to extract the amount of gold as we do currently without a large usage of fossil fuel.

2.2.2 The Fiat Banking system

The current fiat banking system is not a direct comparison to Bitcoin. To achieve the final settlement capability that Bitcoin offers, it requires multiple settlement layers and cooperation between banks at different levels of the local, national and international system. Lightning also offers a similar settlement capability to the current card system in place. Calculating the energy usage of this system is very difficult to calculate, but would need to include:

• The office infrastructure used by banks throughout the world
• The data centres in place to run the current financial system
• All of the retail branches in place to offer financial services
• The global ATM network
• The card provider (Visa and Mastercard primarily) infrastructure 

Estimating the energy used to maintain this infrastructure is extremely difficult, but Galaxy Digital Mining attempted to do so in a report dated May 2021.

Bitcoin’s energy use compares favorably to these two alternatives.

The US Dollar has been the global reserve currency after taking over dominance from the UK pound early in the twentieth century. After the final disconnection from the gold standard and the creation of the petrodollar in the early 70’s, the fundamental underpinning of the USD has been the military infrastructure which provides the security of the currency. The ability to project physical power underpins the value of the USD, but the financial and human cost of this approach is hard to measure. 

First of all, Bitcoin and Visa are fundamentally different systems. Bitcoin is a complete, self-contained monetary settlement system; Visa transactions are non-final credit transactions that rely on external underlying settlement rails. Visa relies on ACH, Fedwire, SWIFT, the global correspondent banking system, the Federal Reserve and, of course, the military and diplomatic strength of the U.S. government to ensure all of the above are working smoothly.
Nic Carter

2.2.3 How does this compare to other energy uses ?

Bitcoin does use a substantial amount of energy to protect the network, but how does this compare to other energy uses?

The University of Cambridge puts together a live update on Bitcoin's energy consumption and provides us with a current (2022) estimate;

• In terms of global energy consumption they calculate Bitcoin's share as 0.28% (Total global energy consumption is 115,575 TWh)
• In terms of global electricity consumption they calculate Bitcoin's share as 0.56% (Total global electricity consumption is 22,315 TWh)

As you can see, while Bitcoin does use energy, it is a rounding error in comparison to overall energy usage, and one could argue that creating and securing a global permissionless currency is of greater benefit to mankind than, for example, using energy to dry clothes or having the convenience of electronic devices such as TVs on permanent standby. 

So, what value does the world obtain from the energy used by Bitcoin?

2.2.4 What are the benefits of this energy usage by Bitcoin?

We have seen how the energy usage of Bitcoin compares to other financial alternatives such as Gold and the current fiat system, but what do we get for the energy that bitcoin uses? 

Bitcoin transactions are efficient in that the ability to transmit value across the world almost instantaneously, with final settlement, is unrivalled.

• Cash can provide immediate and final settlement of a transaction but is only useful for people in close proximity to each other.
• The use of credit cards may feel like it enables instantaneous digital settlement, but it’s more akin to a short term loan enabled by a complex set of players operating behind the scenes that enable each transaction, and who all want a small cut for their troubles.

The two areas where Bitcoin is described as wasteful are in the Proof of Work consensus mechanism, and in the distributed nature of the ledger, where every node potentially has an entire copy of the ledger. These key attributes are what enables Bitcoin to be a truly decentralised form of money. It enables every node to verify the validity of each transaction and ties real world energy costs to the process of creating the blocks. This is what enables Bitcoin to avoid any central authority that can arbitrarily change the rules, create new Bitcoin, cancel transactions or ‘double spend’ the Bitcoin, or be shut down. The energy consumption requirements make a Bitcoin blockchain takeover unlikely due to the sheer cost required to produce enough blocks fast enough for such an attack to succeed. This ensures the ‘unforgeable costliness’ of attacking Bitcoin, thereby mimicking gold’s scarcity in the digital realm.

2.2.5 Is there a viable alternative to POW and a distributed ledger to provide the necessary security for a decentralised money with a fixed supply?

If you believe that the energy used by Bitcoin is wasteful, but still see a benefit of having a global decentralised and permissionless form of money with a fixed supply, what are the alternatives ?

Centralised model

One option would be to have a central server(s) controlled system that validates transactions as they arrive against the ledger. For scale and resiliency, this would probably consist of a distributed set of servers that coordinate to run the system and manage the supply of new coins. The question is who would run these servers and ensure adherence to the protocol? As Satoshi Nakamoto stated in 2009:

Previous attempts at creating a digital currency include examples of systems using centralised servers which were shutdown by authorities. This experience influenced the development of Bitcoin to avoid these issues. 

The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.
Satoshi Nakamoto

Central Bank Digital Currency

Many Central Banks around the world are developing CBDCs’ - a blockchain based alternative to the current system of money. A recent report from the cross-party Lords economic Committee (January 2022) concluded that CBDC’s were a ‘solution in search of a problem’ that could potentially enable:

• The removal of any privacy for anonymous transactions 
• KYC requirements for all wallets and usage
• Unconventional monetary policy (such as sell-by dates on stored money or restrictions on usage, for example a limit on alcohol purchases)
• Security risks from cyber-attacks

Far from achieving the desired goal of a global, permissionless form of money, CBDCs would concentrate even greater power into the hands of Government and financial authorities..

Proof of Stake

An alternate method for managing a blockchain based form of money whilst maintaining a level of decentralisation is to replace the POW process with Proof of Stake or POS. 

Ethereum, another crypto currency, made the switch to POS fairly recently and claimed that the energy efficiency gained by doing so made it more attractive as a protocol. So how does it work?

With proof of stake, participants referred to as “validators” lock up set amounts of cryptocurrency or crypto tokens—their stake, as it were—in a smart contract on the blockchain. In exchange, they get a chance to validate new transactions and earn a reward. But if they improperly validate bad or fraudulent data, they may lose some or all of their stake as a penalty.

The blockchain algorithm selects validators to check each new block of data based on how much crypto they have staked. The more you stake, the better your chance of being chosen to do the work. When the data that has been cleared by the validator is added to the blockchain, they get newly minted crypto as a reward.

Logically, using this approach, the people who already have the largest amount of resources staked into the system will win the most opportunities to validate new blocks and claim the reward, trending towards centralization over time. They will also have an outsized influence on the direction of the protool, and this in turn opens up the network to potential bribery attacks and changes to the protocol to benefit the largest holders. The creation of money ‘for free’ by the stakeholders instantly and for which they derive the benefits mimics the fiat monetary system of insiders gaining value at the expense of other users. This goes against the principles of sound money and equitable distribution based on effort that Bitcoin stands for.

2.2.6 Could the way that Bitcoin uses energy actually provide benefits to other industries?

Although the complaints about the energy usage of Bitcoin have been occurring ever since it began to gain a level of scale as to be noticed by outside interests, a more interesting and recent development has been how the unique way in which Bitcoin uses energy can actually be of benefit:

• Enabling renewable energy
• Bringing power to remote region
• Grid demand response
• Recycling heat
• Banking the unbanked
• Tapping energy from the oceans
• Reducing Methane gas emissions
• Using sustainable energy

Enabling renewable Energy

Bitcoin mining is a highly competitive landscape, miners are incentivised to streamline their operations and carefully manage production costs, the largest input for this is electricity. Miners are therefore constantly searching for the lowest cost sources of electricity, which is often tied to under-utilised hydro, wind or solar power.

Wind and solar power have limitations, wind output is variable and the sun often doesn’t shine. Renewable energy facilities are also often incentivized to deliver electricity in a manner consistent with contractual agreements. This can lead to a supply and demand mismatch which needs to be addressed.

Bitcoin miners can setup anywhere, including colocating around these renewable energy sources offering a flexible load that can work in harmony with supply and demand patterns. This ability to dynamically flex power consumption during periods of excess supply and/or low market demand can provide additional incentives to the buildout of additional capacity, This can improve the economics of renewable energy. As an example a recent report stated that 

‘the UK Government’s recent plan to cut the average delay time projects face to connect to the grid from 5 years to just 6 months could bode well for unlocking speedier commissioning of wind farms.’ Imagine if all of those wind farms could have been mining Bitcoin while waiting to be connected.

Demand response

In addition to being a buyer of last resort when demand is low, Bitcoin miners have the opportunity to serve as a flexible load through participation in demand response programs that help to balance electrical grids. This is accomplished by the interruptible nature of mining operations in that they can curtail their power usage at a moment’s notice to give that power back to the grid in the event that demands exceeds available supply at peak usage times. Under normal or low usage times, the electricity producer needs a ready buyer for every Watt produced to minimise waste and maximise return on investment. An exponential increase in bitcoin mining would reward electricity producers for their investment as well as load-balancing at the peak of production at all times.

Methane reduction

Methane is a greenhouse gas emitted from a range of sources such as coal mines, landfills and industrial processes such as oil and gas extraction. There is a big focus on how methane emissions can be reduced, as it is about 80 times more potent as a greenhouse gas than carbon dioxide according to the United Nations Environment Program. 

So how can Bitcoin mining help? Companies who specialise in building modular data centres powered by stranded natural gas are now partnering with oil and gas companies to convert flared gas into electricity for Bitcoin mining, This reduces emissions and creates an additional revenue stream to monetise otherwise wasted energy. 

Landfills are also a significant source of methane emissions, and other startup companies are focusing on mining Bitcoin at municipal landfills in the USA, which enables the landfill operators to convert methane emissions into useful electricity, reducing the environmental impact of their facilities

Bringing power to remote regions

It is estimated that approximately 770 million people around the world do not have access to electricity, the majority of which live in sub-saharan Africa. A lack of infrastructure is one of the driving forces behind this, creating the need for micro grids that rely on local renewable energy sources. Many of these microgrids are initially funded by charities and struggle to maintain financial viability. Bitcoin miners are able to co-locate within these microgrids and allow the operators to monetize what would otherwise have been wasted energy due to supply and demand mismatch. This in turn provides more consistent and cheaper electricity to residents by increasing the useful load factor on the local grid and decreasing the costs. The Bitcoin mining company can also have a better chance of obtaining loans for development as they represent an immediate revenue stream for the project. 

Banking the unbanked

The ability to provide financial services to the nearly 1.4 bullion people who do not have access to financial services is enabled by the expansion of reach of the Bitcoin and Lightning network, mining can provide access to non-KYC Bitcoin. Although not a direct result of the usage of energy by the Bitcoin network, it’s adoption in remote areas as described above can help to bring financial services to those who would otherwise not be ankle to have access. 

Recycling heat

Bitcoin mining is embracing a wave of innovation by repurposing the heat from the mining to power state-of-the-art cooling, thermal insulation, and heating of homes, swimming pools, and greenhouses. Bitcoin mining produces significant heat. This heat can be harnessed to heat homes, buildings, greenhouses, and swimming pools.

Tapping the energy from the oceans

Ocean Thermal energy conversion (OTEC) has been an idea for decades, with prototypes that harness the temperature differences between the warm tropical surface water and the deep cold sweater to create usable energy. Bitcoin has the potential due to its unique properties to enable the progression from prototype to operational plant. 

Using sustainable energy sources

Another complaint of Bitcoin has been the use of energy and hence the climate impact of the network. Bitcoin can lead the way by using the methods described above to obtain the majority of its energy needs from renewable sources. In fact a 2021 study found that capturing just the potential flared gas in the United States and Canada would be sufficient to power the entire Bitcoin network. 

Daniel Batten, managing director of Bitcoin ecosystem investment firm CH4 Capital and author of The Bitcoin ESG Forecast wrote in a January 2024 note that the Bitcoin mining industry is the only major global industry to be powered mostly by sustainable energy.

According to Batten, the Bitcoin mining industry is using more sustainable energy than ever before, with the share of “sustainable mining” hitting an all-time high of 54.5% in 2023

Sources

1. 60+ Bitcoin energy and mining statistics
2. Bitcoin’s role in the ESG imperative KPMG
3. How Bitcoin can unlock the energy of the Ocean for 1 billion people
4. Bitcoin meets ESG: Bitcoin’s emerging role in sustainable investing
5. UK Offshore wind 2023 round-u and 2024 outlook
6. What Bloomberg Gets Wrong About Bitcoin's Climate Footprint

Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities…..The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.
Clifford Stroll

17 years later, Newsweek ceased print publication and became exclusively available online. Imagine being alive in 1974 when the Transmission Control Protocol (TCP) was first created.

No one foresaw the smartphone, with all its apps, sitting in your hand. No one saw the SatNav system in your car.

The internet did not emerge as a one and done, but rather gradually as an evolution of protocols and layers. These evolutions have built on, but mainly not changed TCP.

So as I look at transitioning to the communication platforms of the future, I see that the beauty of Internet protocols is you get the separation of the layers between service and technology.
Michael K Powell

Compare Bitcoin’s evolution with that of the internet

TCP was necessary but not sufficient for the emergence of everything else on the internet. Bitcoin’s evolution seems to be following a similar path. Open systems seem to be more resilient and successful when developed in layers, although there can be a lot of elapsed time between the laying of the initial building blocks and widespread adoption. All in one solutions do not seem to be as effective in open systems as those built in layers on protocols . Just as no one has needed to rebuild the internet because films couldn’t be streamed using TCP, so it is likely to be with Bitcoin.

There are already a number of layer 2 protocols sitting on top of Bitcoin, and there are many applications sitting on top of these layer 2 protocols (see section 201.4 for more details on these).

Rather than focusing on what bitcoin and the Bitcoin network can’t do today, think about what can already be done today, and compare that with what it could do 10 years ago. Do this exercise with the internet from 1985 to 1995, and then look at how much faster the internet got over the subsequent 30 years and the applications that became possible. Use that insight to roll Bitcoin forward and imagine what it may look like in just another 10 years, or 30 if your imagination can stretch that far.

Compare Bitcoin with the existing global money system

The central claim that Bitcoin is too slow to be global money is arguably true if we are to be restricted to the base layer of Bitcoin. It is also true that the base layer of our existing money systems are too slow to be global money, if a similar restriction meant that there were no payments infrastructure built on top of it by private banks and payments services such as Visa and Mastercard. Our existing system is built in layers, so we might expect the future to look similar. Some design trade-offs such as between trust, speed and cost may translate between systems delivering the same solutions albeit they are built to move different tokens of value.

Some of the existing layer 2s on Bitcoin directly address the speed issue, for example Liquid and the Lightning Network (See section 201.4 for more details). Liquid is faster and cheaper than the Bitcoin blockchain, and the Lightning Network is even faster and cheaper than Liquid. A proliferation of layer 2s, each with different trade-offs is to be expected and is healthy. 

There will likely be more layer 2s and 3s and an explosion of applications making use of these, just as happened with the evolution of the internet.

Motivation

When this criticism is raised, it is worth considering whether the critic has other motivations. For instance, do they have a new or different blockchain project? This may be analogous to trying to sell a better Transmission Control Protocol.

The Scalability, or Blockchain, Trilemma, was first raised by Vitalik Buterin in 2017. It says that there is always a trade-off in blockchain design between the properties of Decentralisation, Security and Scalability. Anyone raising the criticism that Bitcoin is too slow and that they have a quicker solution in a layer 1 blockchain will be sacrificing some security or decentralisation in order to achieve it. Whilst such a trade-off for a blockchain designed for other uses may make sense, the order of priority for a global money must be:

The first two features create the environment for issuance without makers, payments without mediators and custody without managers.

Bitcoin makes the right trade off of the three blockchain design features given that its targeted use case is as global money, and it mitigates the scalability and speed trade offs using layers.

Satoshi discovered how to protect the integrity of digital money without trusted parties - no makers, mediators or managers needed.
Resistance Money, 2024, Bailey, Retter, Warmke

The creation of a thousand forests is in one acorn.
Ralph Waldo Emerson

Critics often attempt to claim that Bitcoin is 'old' or 'dead' technology because it does not change the base layer protocol as often as competing blockchains. This claim ignores both the reasons why changes to Bitcoin are adopted slowly and the amount of innovation happening to scale the network on higher layers, such as the Lightning Network. It also ignores that many of our most flexible and durable technologies also do not scale quickly on the base layer.

For example, there's also no innovation happening in Transmission Control Protocol (TCP), which underlies the internet. TCP was first created in 1974. The last time TCP was updated was in 1982. It does what it needs to do. It’s not perfect, and there are debates about whether we need to upgrade IPv4 to support future internet developments. However, to say that there has been no innovation in the internet since 1982 would be a remarkable claim. All this innovation has been ‘on’ TCP, rather than ‘in’ it.

The vast majority of innovation that’s happening is not ‘in’ Bitcoin but ‘on’ Bitcoin. One day there will likely be no innovation ‘in’ Bitcoin, and that should be a target and not a criticism, as it will be a reflection of how fundamental it has become in supporting the global economy by providing the foundations for global, neutral and permissionless sound money. Money that is sound both in the economic sense that there is fixed supply and an immutable ledger, but also sound in technological terms as it doesn’t change and what’s running has had years of uninterrupted uptime. Bitcoin has already achieved 100% uptime over the last 10 years.

However, it would be a concern if no innovation were happening ‘on’ Bitcoin. Let’s take a look at that over the last 10 years:

'In' Bitcoin

Segregated Witness (SegWit) was implemented in 2017 to protect against transaction malleability and to increase block capacity. SegWit was also a necessary precursor for lightning and some side chains to work efficiently.

Taproot was implemented in 2021 to allow batching and validating of multiple signatures by incorporating Schnorr signatures, introducing a scripting language to allow for more complex functionality and increasing the privacy and censorship resistance of transactions.

'On' Bitcoin

Liquid Sidechain

The Liquid sidechain was implemented in 2018. Liquid, like other sidechains, is a separate blockchain ledger that is linked to the main Bitcoin blockchain, according to a predefined set of rules. These rules are flexible enough to allow the Liquid chain to develop and incorporate design and scalability enhancements over time. However, the link to the Bitcoin blockchain ensures the total 21 million supply cap of bitcoin is consistent across both chains.

The asset in Liquid, L-BTC, is two-way pegged to bitcoin on the main chain. There are cost, speed, privacy and security trade offs which make L-BTC ideal for some applications. Cost, speed and privacy are all improved with L-BTC, at the expense of placing some trust in the organisations making up the Liquid Federation, who between them control an 11 of 15 multisig process to peg in and peg out L-BTC to bitcoin and vice versa.

Lightning Network

The Lightning network was implemented in 2018. Lightning is designed to be a peer to peer payments network in the form of a graph of nodes connected via channels; it is not a blockchain. Bitcoin is locked by a node runner on the main blockchain in order to make it available for use on the Lightning Network, this ensures that only ‘real’ bitcoin is used. Nodes can then open liquidity channels via multisig smart contracts with each other. Payments find routes through the network from source to destination, optimising for cost against the requirement that sufficient liquidity exists in the right direction between each node step in the route. The Lightning Network massively improves cost, speed and privacy in return for a loss in security (or increase in trust required) and increase in complexity. However, it is intended for high volume, low value day-to-day payments, so this is considered a very reasonable trade off for its millions of daily transactions (source: River, 2023). 

Chaumian eCash Mints

Fedimints can be thought of as a community-bounded lightning network. They are designed to leverage the inherent trust that exists within certain communities (eg. families, villages, friendship groups) in return for simplifying the complexity and enhancing privacy for users. They are modular, open source protocols to custody and transact bitcoin in a community context. They are interoperable with the Lightning Network itself. 

Cashu is a bearer token that can be stored on a device such as a mobile phone; the design is aimed at reproducing the benefits of physical cash but in a digital form. Cashu is an example of Chaumian eCash built on Bitcoin and increases privacy and censorship resistance and reduces complexity in return for trusting the eCash mint being used. Cashu mints issue eCash tokens, representing bitcoin, that can be spent by users without revealing their identity. Cashu is interoperable with the Lightning Network.

There are likely to be many more layer 2 applications built in the future, with many layer 3 applications in turn built on top of each of those.

As an example of the incredible number of applications being built on top of Lightning, here is an extract from a Lightning Network Research Report by River.

“Cryptocurrency either doesn’t work, in which case investors lose a lot of money, or it does achieve its objectives perhaps and displaces the US dollar or interferes with the US dollar being virtually the sole reserve currency in the world”
Brad Sherman

2.5.0 Introduction

Of all the arguments against Bitcoin adoption, perhaps the most common one an educator will hear is the possibility of government restriction on the use of Bitcoin or even an outright ban.

It is not a crazy suggestion. Even if you have studied Bitcoin for some time and become convinced of its potential to positively impact economies and societies, it still sounds fanciful that governments and regulators would simply sit back and allow a new money system, outside of political control, to gain a foothold in the economy without clamping down on it somehow. This is especially the case if that new money is deemed a threat to existing government fiat currency or the wider banking system.

Control over the supply of money is, in many ways, the ultimate political power. It is the most important mechanism a nation has to control both its domestic economy and how external actors trade with it. This control empowers the government to monitor the flow of money via the traditional banking system and allows it to implement regulatory restraints on money to control capital flows, both inside and outside its borders. 

Even more importantly, the control of money allows governments to create new money to address budget deficits. This control permits governments to increase their spending way beyond the levels that tax receipts and market borrowing would normally allow. This is the principal reason why the Gold Standard was abandoned. 

However, this increase in new money for government spending, without the fiscal discipline that tying government currency to a hard asset like gold would impose, effectively debases the value of currency. 

It is not just certain politicians that have concerns about Bitcoin. Some bankers don’t like it either.

Bitcoin itself is a hyped-up fraud. It’s a pet rock.
Jamie Dimon

If we park the irony of the CEO of the largest US bank by assets (that has paid approaching $39 billion in total fines 1 for regulatory violations) accusing the Bitcoin network of being fraudulent, it is understandable why Jamie Dimon has concerns. Perhaps he recognises the threat an alternative money from outside the existing system would have on his privileged business of traditional banking and its key role in the issuance of new fiat money.

2.5.1 Can governments stop an alternative money?

I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop.
Friedrich A. Hayek

This was the opinion of Nobel Prize-winning economist, Friedrich Hayek, during the 1980s, long before Bitcoin’s inception. Hayek recognised that political control over the monetary system was so deep-rooted that for something to come along to dislodge it, that idea must be so powerful that to attack it is essentially pointless.

So, is Bitcoin that monetary idea whose time has come?

Bitcoin is such a powerful idea because it is an open network and protocol that is neutral, borderless, permissionless and decentralized. At its heart, Bitcoin is simply mathematics and open-source software. Therefore, it cannot be gamed or manipulated, nor does it offer any advantage to one particular user over another. Most importantly, Bitcoin, like mathematics and software, has no central authority that can be pressured, coerced or stopped.
Darren Freemantle

2.5.2 Where does Bitcoin stand with regulators now?

At the time of writing, Bitcoin has achieved a form of regulatory acceptance in both of the world’s largest capital markets, the US and the European Union (EU). This is despite some prominent politicians voicing anti-Bitcoin messages, often based on outdated and inaccurate data. 

Helpfully, Bitcoin also has many supporters among the political class, such as Senator Cynthia Lumis in the United States. This provides an essential counterbalance to the negative rhetoric.

Arguments against self-custody software [for Bitcoin] threaten the fundamental property rights that are core to being an American. I will fight for your rights to hold your own keys and run your own node.
Cynthia Lumis

In January 2024, Bitcoin achieved a crucial regulatory milestone. The Securities and Exchange Commission in the US granted authority for Exchange-Traded Funds (ETFs) to hold Bitcoin and to market to retail investors. The ETFs have been a huge success, attracting tens of billions of dollars at the time of writing and onboarding a new cohort of investors to Bitcoin. 

The EU has gone a step further and developed the Market in Crypto Assets (MiCA) Regulation which attempts to provide a framework and regulatory clarity for the industry and investors.

So, no sign of a ban in the US or EU just yet.

2.5.3 If Bitcoin becomes more powerful, will there be renewed calls to restrict it?

Almost certainly. As Bitcoin becomes more accepted by traditional markets, we may see it attract large pools of capital away from other asset classes like equities, bonds, real estate and fiat currencies. 

If that happens it may spook politicians and regulators. But what could they do?

Could a nation state successfully attack the Bitcoin network?

A successful attack on the Bitcoin network would require the attacker to gain control of a majority of the network’s mining power (the so-called 51% attack) and to maintain that control. If successful, the attacker could, in theory, add fraudulent entries (blocks) to the Bitcoin ledger. This would cause the value of the network to collapse as it would be obvious that the network is no longer secure.

Bitcoin is the largest computer network in the world by computing power and that power has grown year-over-year since its creation. Therefore, gaining ‘51% control’ of the network is likely to cost tens of billions in hardware and energy costs and that cost rises as the network grows. This is notwithstanding the challenges around acquiring the requisite mining hardware needed to achieve and sustain an attack that would disrupt the network. It may require many years of available hardware production to be almost 100% acquired by the attacker in a market of open competition for such equipment. And, during this time, the existing network would likely become aware that a nefarious actor is building these capabilities and take evasive action, such as altering the Proof-of-Work algorithm to render the attacker’s mining hardware obsolete. 

The further problem the attacker has is how to maintain control once it is achieved. The Bitcoin software is open-source and distributed across thousands of nodes around the world whose job is to verify the network. 

It is likely that once it is obvious the network is under attack, Bitcoin developers would ‘hard-fork’ the Bitcoin software, so that the ledger would be ‘forked’ away from the point the fraudulent entries were generated by the attacker. The majority of nodes would then implement the revised version of the software and the attacker’s efforts would be ignored.

Andreas Antonopoulos - 51% Bitcoin Attack

A more light-hearted description from Andreas Antonopoulos on the possibility of state-sponsored 51% attack.

Could self-custody of Bitcoin and peer-to-peer transactions be banned?

This form of attack on Bitcoin is more likely at the individual nation state level. Some states have issued bans on Bitcoin being stored in self-custody and from being transacted, with China and Nigeria being two examples. Although Nigeria has softened its stance more recently, peer-to-peer use of Bitcoin was barely impacted by the ban and remained prevalent. We should expect more nations to pass similar laws, especially where a government is more authoritarian or the local currency is especially weak. 

Is a ban on the self-custody of Bitcoin workable?

To hold Bitcoin in self-custody and to transact with it, a local wallet must have knowledge of a public/private key pair. These are simply pieces of text that translate to a number that is used to encrypt a transaction.

Therefore, a government ban on self-custody of Bitcoin is akin to preventing a person from having knowledge of a number and transferring knowledge of that number to someone else.

No liberal democracy has attempted anything like that before.

Will some governments try to ban it anyway?

Yes, and we should expect them to try. Some governments will attempt to implement a ban, even if it isn’t that workable. Interestingly, some nations will do precisely the opposite and embrace Bitcoin, such as El Salvador, or at least wait to see if they can gain an economic advantage by allowing Bitcoin to grow within their borders.

An interesting example is to consider the aftermath of China’s ban on Bitcoin mining in the country in 2021 (see the chart below). After an initial sharp drop in total network hash rate (mining power) as miners fled China, the overall hash rate rebounded significantly over coming months as mining activity moved to other locations, such as the US.

Because some nation states will likely benefit from allowing Bitcoin to flourish, a universal internationally-coordinated ban on Bitcoin is unlikely. 

We should also expect poor and unworkable Bitcoin laws to be enacted by some nations, only to be repealed sometime later, especially if it becomes clear that the local economy is at a significant disadvantage by keeping a draconian law in place.  

The United Kingdom’s Red Flag law of the late 19th century is a historical example of an excessively severe law that was subsequently repealed.

Will governments close exits from the existing fiat system?

Some governments are already restricting the exits from the existing monetary system into Bitcoin. In some countries, such as the UK, some traditional banks (under regulatory guidance) are limiting the fiat amounts that can be transferred to cryptocurrency exchanges. 

We may see increased efforts to corral Bitcoin investors into regulated products, such as the newly-authorised ETF in the US. As these products grow in value, they will become a tempting ‘honey pot’ for governments to confiscate to fund deficit spending. This could take the form of a ‘wealth tax’ to grab some unrealised capital gains. Even worse, governments may attempt to take the entire wealth of ETFs if it is deemed ‘essential to market stability’. Investors might be ‘compensated’ with an inferior asset, such as Treasury Bills.

It is important to note that even in the US, where property rights are enshrined in its constitution, the country has seized hard money from its citizens before. Executive Order 6102, signed by President Franklin D. Roosevelt on 5th April 1933, gave citizens less than one month to ‘deliver all gold coin, gold bullion and gold certificates to a Federal Reserve Bank’.

Of course, gold is a physical commodity, so attempting to leave the country with your gold in order to protect your wealth would have been extremely challenging in 1933. Also, most of the gold was already held in vaults at banks, so the government was fully aware of where it was.

This sorry episode should serve as a reminder that holding Bitcoin in self-custody is the optimum way to protect it from seizure. Because Bitcoin is not a physical item it is much harder to confiscate. If you hold Bitcoin in a local wallet, you are simply holding public/private key pairs. i.e. numbers. These keys can be regenerated using English language ‘seed phrases’. A Bitcoin holder could destroy all their wallets containing private keys and create new wallets in a more Bitcoin-friendly jurisdiction using just 12 memorised words.

2.5.4 Expect further crack-downs

In conclusion, we should expect some nation states to either further restrict the use of Bitcoin within their borders, or attempt outright bans.

As government debt levels increase and fiat money continues to be debased, the benefits of Bitcoin as an ‘exit from the system’ will appear more attractive to citizens and corporations alike. This increases the possibility of a defensive reaction from governments. Capital controls are nothing new and there have been numerous examples where this mechanism has been used in countries where excess government debt needs to be inflated.

Bitcoin may even be blamed by politicians and their stooges in mainstream media as the cause of a currency crisis. While this is akin to blaming the lifeboat for sinking the ship, governments will become increasingly desperate to prevent citizens exiting the system with their wealth, effectively locking them in steerage so they go down with the vessel.

Of course, blaming Bitcoin for causing a fiat currency crisis would be absurd. After all, Bitcoin is simply provable mathematics and open-source software. If that is all that is needed to ‘take down the system’, it would show that the system was incredibly fragile in the first place.

It is also important to note that Bitcoin becomes stronger when it is attacked. This is because these attacks serve to dispel the myths perpetuated by naysayers that Bitcoin is fragile and vulnerable. So not only should we expect governments to overregulate Bitcoin, we should welcome it.

Notes

1. The DailyHodl.com reported on July 8, 2023, that JPMorgan Chase Has Paid $38,995,000,000 in Fines for Banking, Securities and Additional Violations As New SEC Enforcement Action Kicks In. https://dailyhodl.com/2023/07/08/jpmorgan-chase-has-paid-38995000000-in-fines-for-banking-securities-and-additional-violations-after-sec-enforcement-action/
2. In 2015, Bitcoin educator Andreas Antonopoulos answers a query on whether a large nation state possesses the ability to attack the Bitcoin network and whether such an attack could disrupt the Bitcoin blockchain. https://www.youtube.com/watch?v=ncPyMUfNyVM

Just because a token on a blockchain is called a “coin” does not mean its purpose is money or that it has the necessary properties to be money.

Scarcity vs Credible Scarcity

Of all the foundational properties of money the single most important is scarcity, so we’ll dig a little deeper into this property.

Many coins claim to be scarce, or to have a fixed supply schedule. However, we must ask whether these claims are credible.

Credibility comes from results. Everything else is just marketing.
Richie Norton

Credibility cannot be claimed, it has to be earned. Most coins lack credible scarcity. The passage of time and consistency over time are prerequisites for any supply schedule to earn credibility. Three ways claimed scarcity may not be credible:

• Too little time has passed to earn credibility; the coin is too new
• Issuance schedule has changed a number of times already
• There is an identifiable group of actors who have the power to make changes

Since credibility must be earned, creating a new coin and claiming it is scarce is not sufficient to make it so. Time must pass, during which consistency must be demonstrated and thus credibility is earned.

Evidence of historic changes to the issuance schedule provides empirical evidence undermining credibility. For example, between 2015 and 2021 Ethereum’s supply issuance rules were changed 5 times (source: Galaxy Digital Research), and twice more between 2022 and 2024.

Ethereum’s dynamic and progressive community, spearheaded by the Ethereum Foundation, has already created multiple hard forks that have changed its monetary policy and has plans to do so again.
Fidelity Digital Assets

Even where there is no history of changes to supply issuance, if the coin is controlled by a company, foundation, or a group who can exercise their will then the coin also lacks credible scarcity.

Whilst there does exist a mechanism for changing Bitcoin’s scarcity, it is not under the control of any identifiable or targetable group; Bitcoin is more decentralised than any other coin and credibility of scarcity is positively correlated to the degree of decentralisation.

There would be economic disbenefits to users in agreeing an increase in the supply, or change to the schedule. There is no history of changes to the supply of bitcoin. Both the history and the logical counterweight make the probability of any change very low.

Credibility of scarcity is necessarily a probabilistic judgment as it pertains to the future which is not bound. Therefore it would be impossible for anything to have absolutely credible scarcity. 

So, we can say that Bitcoin has the most credible scarcity of all solutions to money yet discovered or invented, and nothing could achieve 100% credibility into a necessarily uncertain future.

A new bitcoin?

Could the emergence of another, theoretical coin that did demonstrate the necessary money properties, in particular scarcity, earn it credibility for its supply schedule and thereby challenge bitcoin’s scarcity claims?

Money tends towards one. It’s true, and I’ll prove it using logic.
ArmanTheParman

Since money tends to one any such new theoretical coin would either replace bitcoin or it would not, it wouldn’t challenge bitcoin’s scarcity.

A network effect is an attribute of a company or other system such that as more people use the network, the network becomes exponentially more valuable for each user. It’s one of the strongest economic moats that a system can have against competitors.
Lyn Alden

Since bitcoin does demonstrate all the foundational properties of money, and Bitcoin has achieved a large network effect, any new contender would have to fulfill the properties of money an order of magnitude better in order to displace bitcoin. Furthermore, it would have to do this starting with a decade or more of lost time earning credibility for its supply schedule.

Fixed Supply

A coin with a fixed supply, such as bitcoin, also demonstrates absolute scarcity. Whilst this is a very useful feature for base money, it may not be a useful feature for applications with a purpose other than money. For example, tokens used to purchase compute may perform their role better if the supply can flex with demand in some circumstances.

Conclusion

Almost all other coins do not have credible scarcity and therefore cannot hope to compete effectively against Bitcoin as money. To make a claim that the existence of other coins somehow undermines bitcoin’s scarcity is an error of categorisation; it’s counting apples as pears. Fixed supply is an extremely useful feature for base money, but may not be ideal for other applications.

Crypto’s complexity arises from attempts at decentralisation—by distributing power and governance in the system, there is theoretically no need for trusted intermediaries like financial institutions. That was the premise of the initial Bitcoin white paper, which offered a cryptographic solution intended to allow payments to be sent without involving any financial institution or other trusted intermediary. However, Bitcoin became centralized very quickly and now depends on a small group of software developers and mining pools to function
International Monetary Fund

As the quote above from a fairly recent post by the International Monetary fund shows, the mainstream financial industry continues to claim that Bitcoin is not decentralised, as well as confusing Bitcoin with other crypto assets.

Introduction

Decentralisation is a critical aspect of Bitcoin. The ability to maintain the rules of the protocol such as scarcity and distribution without a central authority ensures that it can act as permissionless money for a global society. 

As Satoshi noted in his online correspondence, decentralised services such as BitTorrent were ‘holding their own’ against Government clampdowns, in comparison to services with identified owner(s) and decentralised servers. He was clearly concerned about the potential risk of Governments or other interests shutting down or otherwise adversely affecting Bitcoin. 

In this context, we are interested in decentralisation of:

• The development and management of the code running the protocol; who is allowed to change the rules?
• The mining function that created new blocks in accordance with the rules and validates against double-spend 
• The nodes that validate transactions for validity and keep a copy of the blockchain

Developers

Bitcoin is an open-source protocol that anyone is free to look at, download, copy or suggest changes to. It is available in a GitHub library, the source code having been launched originally in 2009 By Satoshi Nakamoto. Anyone is free to download the code and run a node, the majority of which run the original Bitcoin core software, which has been updated over time.

Bitcoin Core development follows the best practices of open source development. At any time, there can be any number of developers writing or reviewing code changes. They need to listen to the concerns of the node operators and miners, as well as the user base before making any critical change to the code, which will be reviewed and agreed on as shown in the above flowchart before finding their way into the code.

The rules of Bitcoin are then encoded in this Bitcoin Core software, which runs on each node. Anyone can suggest a change to the rules – the rules are code, but they are not just code, they are agreed-upon code. If changed unilaterally, the new code is no longer part of consensus and is no longer part of Bitcoin. Changing something with Bitcoin and remaining in consensus is tricky. Suggested changes to the code fall into one of three categories:

• Within existing rules: Minor upgrades such as spelling errors, nicer UI or data management may fall into this category and are relatively trivial to gain approval for.
• Adding a new rule that adds restrictions to the rules – such as reducing the block size. This is referred to as a ‘soft fork’. Nodes that choose not to implement the code change and stay on the old release will still be able to take part in the network.
• Adding a new rule that breaks the current rules, e.g. an increase in block size. Nodes that do not upgrade to the new code will dismiss a block created in the larger size as invalid. This is referred to as a ‘hard fork’ and will create a chain split between the nodes running the original and new code and creates a new coin. This has happened previously but has not led to any long-term success for the new coin as the majority of the nodes decided to keep to the original code.

Therefore, a single party or group of people cannot unilaterally change the Bitcoin code without gaining a consensus agreement, or they risk a chain split and the creation of a new coin following a different set of rules. 

Mining

The mining function validates the transactions just like any other node on the network, but it will then expend the energy required to create a new block which meets the consensus rules in the code. Success enables the miner to gain the rewards in the form of transaction fees and Bitcoin rewards (at the time of writing 3.125 coins per block).

Mining is normally carried out by mining ‘Pools’ where people consolidate the mining power or hash rate together to increase the chances of successfully mining a block and sharing the rewards. There is a danger that one or more of these mining pools could combine together to achieve a 51% dominance in mining and essentially overrule the network validation protocol in their favor to double spend coins. This would require a massive amount of resources to achieve at great cost, and individual miners can very easily move to a different mining pool at any time. Such an attack would also likely collapse the value of bitcoin, since it would be obvious that the network integrity had been compromised. An attacker would therefore have to convert any bitcoin gained quickly to fiat before the value erodes. This would make it even more difficult to sustain an attack for a long period, and therefore makes it more profitable for a miner or a pool operator to adhere to the rules and attempt to mine valid blocks.

The geographic distribution of the mining function is also important to avoid governments for example taking over mining capacity or shutting it down. For example, a recent ban on mining by China demonstrated the ability for Bitcoin to adapt and survive such government intervention, adapting and recovering quickly from the resultant loss of hash power.

Nodes

Unlike mining, which requires a significant financial investment to effectively compete in the race to mine new blocks, or code development which requires coding expertise, running a node is something that anybody interested in helping to maintain the decentralisation of Bitcoin can do. 

Nodes run the Bitcoin Core software and enforce the rules that the code includes to ensure that the miners don’t cheat, for example by allocating themselves a greater block reward than is allowed. They also enforce the 21 million supply cap, which is critical to maintain the scarcity of Bitcoin. For any government or bad actor to stop Bitcoin, it would have to destroy every single copy of the blockchain, currently running in thousands of nodes distributed globally, an almost impossible task.

People

Another aspect of potential centralisation is people. Every other ‘alt-coin’ has a figurehead- someone that could be potentially coerced into advocating for changes not in the best interest of Bitcoin. Satoshi Nakamoto stayed around long enough to ensure that Bitcoin was on a path to success before disappearing for good, leaving it in the hands of others to enhance and adapt the software.

What about holders of large amounts of Bitcoin? Early investors, that have held their coins and not lost them, will be extremely wealthy at this point. It is important to note that this may well be the case, but that doesn’t give them any more influence on the system than anyone else, unlike the ‘proof of stake’ coins where the early adopters who are already wealthy in that coin gain advantages in decision making and distribution of future coins. This has or will inevitably lead to centralization over time.

Conclusion

What are the potential threats that decentralisation can try to mitigate?

• Government shutting down or banning Bitcoin
• Unwanted changes to the code that favors one set of interests in Bitcoin, e.g. increasing the block reward 
• Coercion of the protocol by government or bad actors to influence the direction of the protocol
• Ability for a pool of miners to take over the network and ‘double-spend’ Bitcoin – a 51% attack

As we can see, the combination of nodes, code developers and miners, as well as the use of the ‘proof of work’ mechanism, decentralises Bitcoin to a sufficient level where these potential threats are not considered to be of great concern. The community will need to continue to monitor the situation to ensure this remains the case.

Referring to bitcoin or other crypto as “currencies” is a misnomer. They are not a unit of account: virtually nothing is priced in them…Bitcoins are barely used by legitimate companies as payment for goods and services
Nouriel Roubini

2.8.0 Introduction

A criticism often levelled at bitcoin is that it is not widely accepted as a means of payment within the general economy. The criticism is sometimes framed as “If I own bitcoin, I can’t spend it anywhere”. Within almost all economies, it is certainly true that there are relatively few providers of goods and services readily accepting bitcoin as a means of payment. 

So, if I can’t spend bitcoin on coffee at my local store, does that mean it is failing as money?

When considering this question, it is important to take a step back and consider the three core functions of money. These are:

1. A trusted store of value over time
2. An acceptable medium of exchange of value for goods and services
3. A recognised unit of account that goods and services can be priced in

Over thousands of years, many materials (from glass beads, to shells, to precious metals) have been used as money, because they satisfied the functions above to some extent for those that used them. 

However, did all three functions appear at once? Must one function be satisfied before another can develop?

2.8.1 Is ‘Medium of Exchange’ money’s primary function?

The “I can’t buy coffee at my local store with bitcoin” criticism implies that medium of exchange is the core function of money. This sounds fair to many people because, after all, what is the point of money if relatively few businesses accept it as payment for goods and services? 

However, it is also reasonable to expect that a society must trust that a particular money will hold its purchasing power over time before it will feel comfortable enough to accept it as a means of payment. 

If this is true, it implies that the three core functions of a particular money do not manifest all at once, but rather develop over time. It also suggests that ‘monetisation’ is a process of acceptance for a monetary good that evolves, much like the adoption of new and innovative technologies.

In his seminal article, The Bullish Case for Bitcoin, Vijay Boyapati describes in detail how money has always evolved in stages and why we should not expect Bitcoin to be any different. He argues that for a money to be an accepted medium of exchange, it must first be trusted as store of value.

There is an obsession in modern monetary economics with the medium of exchange role of money. In the 20th century, states have monopolized the issuance of money and continually undermined its use as a store of value, creating a false belief that money is primarily defined as a medium of exchange. Many have criticized Bitcoin as being an unsuitable money because its price has been too volatile to be suitable as a medium of exchange. This puts the cart before the horse, however. Money has always evolved in stages, with the store of value role preceding the medium of exchange role. 
Vijay Boyapati

2.8.2 The Process of Monetisation

1. Store of Value
2. Medium of Exchange
3. Unit of Account

When considering the monetisation process above, we should expect that Bitcoin must first achieve widespread trust as a store of value. This is also consistent with the words of Satoshi Nakamoto in his forum post on 11th February 2009 that introduced the Bitcoin whitepaper. 

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.
Satoshi Nakamoto

By referring specifically to the problem of central banks debasing the value of currency, Satoshi alludes that conventional fiat money’s trust problem ultimately stems from its failure to function as a long-term store of value. In other words, if we are to fully address the problem of trust in fiat money, a successful alternative system must first be trusted as a store of value over time and space.

It is also widely understood within traditional finance that conventional money has a store of value trust problem. It is precisely the erosion of the purchasing power of money that makes saving in fiat money such a poor choice over the longer-term. This has contributed to the dramatic expansion of the wealth management industry over the past 40 years as people turn to professional money managers to help them preserve and grow their purchasing power and to combat the challenges of fiat currency debasement.

Our country, and every democracy that’s ever existed, has devalued its currency over time….Over the long term, $100,000 in the bank today is going to be worth $50,000 in 17 years time….and that’s guaranteed to happen
Ron Baron

So where in the monetisation process is Bitcoin right now?

At the time of writing, the Bitcoin network has been running for over 15 years and the number of wallet addresses holding in excess of $1 has reached approximately 50 million. It is impossible to be sure how many users this translates to since a single user can control multiple addresses and a single address (held by exchanges or funds) can hold funds for multiple users. However, some studies suggest the number of bitcoin holders stands at over 100 million.

January 2024 saw the launch of spot Bitcoin Exchange Traded Funds (ETFs). Buyers of those funds see their investments pooled in common wallet addresses by the designated custodian. Therefore, as the spot Bitcoin ETFs grow in assets under management, it is reasonable to expect the number of individuals having financial exposure to bitcoin will rise significantly without there being a corresponding increase in the number of wallet addresses.

Currently, relative to the global population, the proportion of bitcoin holders is small. However, this is growing significantly and, as the number of bitcoin holders increases, it is reasonable to expect the fiat denominated price of bitcoin to rise, given the fixed supply nature of the asset class.

Since its inception in 2009, bitcoin has been in a continuous state of ‘price discovery’ as the number of holders has ramped up and more capital is allocated to the network. Since 2009, the value of the network has increased from zero to over $1 Trillion. However, despite this meteoric rise, most holders seem unwilling to sell or trade their bitcoin.

By analysing the bitcoin ledger, it can be shown that over 70% of the entire bitcoin supply is held by long-term holders. Therefore, it appears the majority of holders appear content to sit and not sell or spend their bitcoin. Given the dramatic increase in purchasing power of bitcoin since its launch, it is reasonable to assume that the majority of holders expect bitcoin to become more valuable and this is influencing their decision to continue to hold and not spend.

2.8.3 Gresham’s Law

The preference for bitcoin holders to hold rather than spend their bitcoin can also be considered with regard to Gresham’s Law. 

Gresham's law is a monetary principle stating that ‘bad money drives out good.’ The principle takes its name from financier Thomas Gresham and his urging of Queen Elizabeth I in the mid-1500s not to further debase currency by reducing the precious metal content of minted coins.

Gresham’s law is the concept that good money (money which is a stable store of value) will be driven out of circulation by bad money (money which is a poor store of value). 

Bad money is considered to have less long-term value compared with its face value, whereas good money is currency that is believed to have more potential to achieve a greater value than its face value. Logically, people will choose to transact business using bad money and hold balances of good money because good money is expected to increase in purchase power over time.

The reluctance of bitcoin holders to spend their bitcoin and their preference to use conventional fiat money instead for trading in real world goods and services can be viewed as an application of Gresham’s Law. 

As fiat currency continues to debase in purchasing power it is a monetary ‘hot potato’. In high-inflation economies, people are incentivised to spend it as fast as they can, whereas good money has superior store of value properties which incentivise saving over spending.

2.8.4 Bitcoin is not for coffee – yet.

In conclusion, bitcoin cannot truly enter a stage where it is widely accepted as a medium of exchange until the ‘store of value’ stage of bitcoin’s monetisation has been accomplished. To achieve this, the market must go beyond merely trusting that bitcoin functions as a store of value. Instead, participants must be satisfied that the value of bitcoin has reached a level where the potential upside is beginning to slow, such that they are comfortable parting with it for goods and services in the real economy. The aversion of long-term holders to spend their bitcoin at current price levels is an indication that we have not reached that point. Indeed, it may still be far away, perhaps many years or even decades.

Therefore, we should continue to expect good money (bitcoin) being saved, and bad money (fiat) being spent. As fiat currency continues to decline in purchasing power, bitcoin becomes increasingly compelling as a savings mechanism.

However, as an increased proportion of the population decide to save in bitcoin, it is possible that we see whole economies transition quickly towards using it as a medium of exchange. This transition may accelerate as the superior monetary properties of bitcoin versus fiat money become widely understood and fiat becomes much less desired by sellers of goods and services.

Technology will also play a part in this transition. The Lightning Network - a ‘layer 2’ solution built on top of the Bitcoin protocol - was launched in 2018 with the purpose of enabling fast micropayments of bitcoin without the requirement to settle those transactions on the underlying ledger or blockchain. While the Lightning Network is still very much in its infancy and widespread usage is perhaps some way off, anecdotal evidence suggests its use for small payments is steadiliy ramping up. It’s also encouraging to note the release of new applications on top of Lightning that are helping to simplify its functionality and improve user experience.

In the meantime, bitcoin is not for spending on your morning coffee, that’s what your debased fiat currency is for. 

Notes

1. The most common method of estimating the number of Bitcoin owners is to look at the amount held in different addresses. In 2023, estimates show there are 106 million people who own Bitcoin. https://buybitcoinworldwide.com/how-many-bitcoin-users/
2. From the perspective of bitcoin holders, if a merchant accepts bitcoin and would prefer to receive it, the buyer could ‘spend and replace’. That is, spend their bitcoin with the merchant and immediately replace it by purchasing bitcoin with fiat money.
3. This phenomenon is described by Theirs’ Law, which states that good money drives out bad money and thus is the inverse of Gresham’s Law. Thiers’ Law applies when a local currency loses so much purchasing power that merchants will no longer accept it as a means of payment. At this point, they will only accept the good money, so Gresham’s Law is no longer applicable.

One of the arguments that are offered in favor of a digital currency (CBDC) in particular - you wouldn't need stablecoins (and) you wouldn't need cryptocurrencies if you had a digital US currency
Jerome Powell

2.9.0 Introduction

A common concern put forward by those new to Bitcoin is whether the introduction of a Central Bank Digital Currency (CBDC) will detract from or negatively impact the Bitcoin network. 

Will there be no need for Bitcoin among the general population if there is a government-sponsored alternative using similar technology that allows users to transfer value instantly and securely? It is a helpful question for educators, because answering it cuts to the heart of why Bitcoin exists. But first, let’s look more closely at what a CBDC is.

2.9.1 The Structure of a CBDC

The precise structure of a CBDC will likely vary from country to country. A CBDC doesn’t simply mean digital government-issued fiat money - the overwhelming majority of fiat money in use today already comes into existence digitally via the domestic banking system, with physical notes and coins representing just a small fraction of conventional money in circulation.

The key difference with a CBDC is that governments will seek to leverage some of the technology already used within the cryptocurrency space, such as cryptographic security and distributed ledgers. In theory at least, this enables governments to build a means of payment that provides detailed real-time information regarding transactions, combined with the ability to program and control the uses of money within a population.

Within a CBDC environment, the user – which could be a citizen or corporate entity – may have an electronic money account directly with its nation’s central bank or government. The user would interact with this account via a personal digital wallet. Of course, this transition will raise concerns among traditional banks whose role currently is to provide the mechanism by which money circulates within the economy. Therefore, many countries may introduce a CBDC in close consultation with traditional banks ensuring that they retain a major role. 

2.9.2 Why would a government pursue a CBDC?

It is fair to suggest that the drive to implement a CBDC is, at least in part, a reaction to the success of the Bitcoin network. Bitcoin showed it is possible, using a distributed ledger, to transfer value globally, peer-to-peer, and without the permission required of a third-party, i.e. a bank. In a speech to the London School of Economics in March 2016, the Deputy Governor of Bank of England alluded to Bitcoin being such a catalyst for research into a CBDC.

The main point here is that the important innovation in bitcoin isn’t the alternative unit of account – it seems very unlikely that, to any significant extent, we’ll ever be paying for things in bitcoins, rather than pounds, dollars or euros – but its settlement technology, the so-called “distributed ledger”. This allows transfers to be verifiably recorded without the need for a trusted third party. It is potentially valuable when there is no such institution and when verifying such information on a multilateral basis is costly. Acting as a trusted third party is precisely what a central bank does. It performs that role only for one particular asset, central bank money (i.e. reserve deposits held largely by commercial banks at the central bank). But the function goes right to the heart of what central banks do and how they came about. And if a private-sector digital currency uses the technology to substitute for a third-party clearer, the central bank counterpart would do the opposite.
Jim Broadbent

While Bitcoin has shown the world that globally decentralised settlement is possible, it has also demonstrated to central banks that they must react and develop a competing technology or risk losing control of the monetary system. It also revealed additional possibilities; if a government or central bank has unrestricted access to a complete ledger of currency transactions, this opens the door for dramatically increased surveillance of citizens’ spending and, perhaps, the ability to control spending behaviour.

In cash, we don’t know who’s using a $100 bill today; we don’t know who is using a 1000 peso bill today. A key difference with the CBDC is that the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability. And also we will have the technology to enforce that.
Augustin Carstens

The desire to explore the programmable nature of CBDCs as a tool for increased surveillance and control is particularly attractive to governments that lean toward authoritarian policies. This is the case in China, where a CBDC project is being rolled out gradually and tested alongside a social credit scoring system.

In theory, a programmable CBDC could be used to either encourage or curtail certain purchasing decisions, ‘nudging’ citizens toward behaviour that governments find more desirable. Additionally, it could seamlessly enable centrally-controlled welfare payments or the introduction of universal basic income. Law enforcement or courts could automatically deduct penalties or fines or remove the ability to transact altogether. 

From an economic standpoint, it would be possible to charge varying rates of interest or tax in a targeted manner, in order to micromanage citizen behaviour. For instance, a version of a CBDC could be programmed to expire on a particular date or be aligned with a negative interest rate. These ‘features’ would effectively discourage saving and stimulate increased consumer spending within the economy as directed. Furthermore, a location-based element could be attached to ensure money is not transacted by a citizen that travels beyond an authorised region, such as so-called ’15-minute cities’.

Of course, within less authoritarian and more democratic countries, a suggested implementation of a CBDC with these capabilities is likely to meet some political opposition, especially with regard to the impairment of freedoms and human rights. However, that does not rule out some form of creeping implementation; history tells us that at times of ‘crisis’ (e.g. war or pandemic), citizens are more willing to accept authoritarian measures ‘for the greater good’ of society. Essentially, we should consider the roll out of a CBDC as the next step in the gradual loss of transactional and financial freedom and privacy that began with economies slowly transitioning from cash-based transactions to credit and debit cards.

2.9.3 Current Implementations of CBDC

At the time of writing, there are more than a hundred CBDC projects globally in various stages of planning and implementation. To date, only six CBDCs have officially launched: Digital renminbi (China); DCash (Eastern Caribbean); Sand Dollar (Bahamas); e-Naira (Nigeria); JamDex (Jamaica); and Digital Ruble (Russia).

With its initial rollout in 2020, China has perhaps the most advanced rollout of a CBDC and counts hundreds of millions of users. However, it remains in the evaluation phase, being rolled out gradually within particular regions and for the payment of salaries at certain state-owned companies.

The Eurozone, UK and US are all said to be in various stages of planning, with the latter appearing less likely to move forward in the medium-term due to considerable political push-back, mainly from within the Republican Party.

2.9.4 Does a CBDC compete with Bitcoin?

In order to answer this question, it is instructive to take a step back and consider a key reason why Bitcoin was created. In his original blog post accompanying the Bitcoin white paper, Satoshi Nakamoto addressed directly the problem of trust in central banks. And, in particular, how the unrestricted expansion of money supply breaches our trust in the central bank not to damage the purchasing power of conventional currency. 

For this reason, Bitcoin was created with a hard cap of 21 million, that in turn can be subdivided into 100 million units at the most granular level. In other words, Bitcoin was created to be absolutely scarce ‘hard money’.

By comparison, governments will likely extol the virtues of CDBCs as a ‘convenient, fast and secure’ way to exchange money for goods and services within a local economy and overseas. Indeed, there may well be considerable speed and cost improvements in currency transfers versus the legacy banking system. Advocates may also suggest that increased surveillance over monetary transactions is a good thing, since it allows the proceeds of crime and terrorist financing to be detected more easily. Authorities may even offer a financial incentive in the form of free money to early adopters of the new technology.

However, any CBDC will remain plagued with the key Achilles-heel of fiat money. It will not have a supply cap and therefore will likely decline in purchasing power over time. It will not be hard money and cannot function as a long-term savings mechanism. Hence, the key problem of trust in the central bank (not to debase money and erode purchasing power) remains.

In addition, when considering the functionality of a CBDC versus Bitcoin, it’s worth remaining mindful of Bitcoin’s permissionless nature and that changes to the protocol may only occur with the consensus of the entire network. Therefore, any degree of censorship on public usage of a CBDC imposed by a governmental body could never apply to Bitcoin.

Bitcoin’s resistance to censorship also extends beyond national borders. A CBDC issued by a nation state (or group of states such as the EU) will likely be exchangeable for another national currency through established foreign exchange capital market channels. However, this exchange may incur cost and/or delays within the legacy banking system or be subject to certain capital controls. Bitcoin, on the other hand, cannot be impacted by these limitations since it is location agnostic.

2.9.5 Expectation of CBDC rollout

In conclusion, despite inevitable claims that a CBDC is a ‘government-backed’ digital currency that will use much of the same technology as Bitcoin, such as distributed ledgers, blockchain and cryptographic security the CBDC remains ‘digital fiat’. Therefore, it fails at what many consider to be the primary function of money - a stable, long-term store of value over time and space.

Nevertheless, we should expect governments to press ahead with CBDC implementations, and these will take various forms depending on political conditions in each jurisdiction. Some implementations might have very limited levels of surveillance and behavioural control functionality, whereas others, especially within more authoritarian regimes, can be expected to focus more strongly on these elements.

Because increased government surveillance and control is controversial in democratic countries, we can expect development to move slowly in some states. It is also worth noting that any nationwide CBDC implementation is a huge IT undertaking that is fraught with political and economic risk, with huge consequences for a system failure. Furthermore, there is also a real possibility of serious unintended economic consequences if designers overlook or fail to prepare for rare economic events.

For the US, in order to mitigate some of the risk, the government might consider co-opting an existing dollar stablecoin from within the private sector (such as Circle or Tether) as a CDBC.

The rollout of a CBDC could also be positive for Bitcoin – as users become more comfortable using local digital wallets for storing digital currency, this may prompt them to compare the monetary properties of Bitcoin with a CBDC. We should then expect general awareness of Bitcoin’s superior ‘store of value’ properties will improve. Of course, some countries may react by restricting local onramps to the Bitcoin network, in an attempt to prevent citizens from exiting a CDBC system. 

Within authoritarian regimes, the CBDC is a godsend for governments as a tool for increased surveillance and population behavioural control. However, citizens within less restrictive and more democratic countries need to be vigilant to a creeping deterioration in freedoms that the technology behind a CBDC would facilitate.

2.10.0 Introduction

A common question raised by those who are new to Bitcoin is around the longevity of the technology. How long will it survive? Will it be overtaken by another technology that is perhaps ‘better money’? Will Bitcoin be rendered obsolete by a competitor?

For students of technology investment or history, these are reasonable questions. There are countless examples of technologies and their applications that were once very popular but still found themselves overtaken by competing offerings.

Bitcoin skeptics may point to the dominant position IBM once held in the personal computer market that was broken by the emergence of Microsoft’s Windows operating system. Within the mobile space, both Nokia and Blackberry appeared unassailable within their respective target markets, until both Apple and devices running Google’s Android operating system took the smartphone market in a new direction. The relatively new phenomenon of social media has also seen its share of disruption as early movers Myspace and Bebo were overtaken by Facebook and others.

Will Bitcoin suffer a similar fate? Is there another technology waiting in the wings that might implement the functionality of money more effectively?

2.10.1 Taking a step back - the nature of Bitcoin

When considering the longevity of Bitcoin, it’s instructive to take a step back and consider the nature of Bitcoin itself.

Bitcoin is not a product, a service or a company. It has no CEO, no Board of Directors, no marketing department, no proprietary design team, no shareholders, and no employees. It required no seed investors or venture capital backing.

Bitcoin has none of these things because it doesn’t need them. Bitcoin is, simply, technology. It is a breakthrough technology that is employing established mathematics combined with the harnessing of physical energy. It is neutral, open, transparent, and accessible to everyone globally, at all times. 

These characteristics lead some to suggest that Bitcoin resembles an important scientific discovery rather than simply an invention of a product or service.

2.10.2 The discovery of Bitcoin

So, if Bitcoin is a breakthrough discovery, what is it the discovery of?

Bitcoin represents the discovery of absolute mathematical scarcity. In order to ensure that bitcoin the asset remains scarce and that its 21 million absolute limit cannot be exceeded, Satoshi Nakamoto designed the network to ensure that bitcoin could not be ‘double spent’. 

The key breakthrough Satoshi Nakamoto made was to develop a system that prevented the ability of the sender of digital value to copy or send it again. The decentralisation of the network ensures that all participants are aware that bitcoin has been transferred from person A to person B. Furthermore, any attempt by person A to resend that value in a fresh transaction would be universally rejected by the network.

So, Bitcoin can be thought of as the application of the discovery of absolute mathematical scarcity. The storage and transfer of value across an open and global network is perhaps the most obvious application of this discovery.

Absolute mathematical scarcity had never existed in usable form before Bitcoin and, for Satoshi Nakamoto, it was necessary to make this discovery as a means to enabling a new non-sovereign monetary system. This echoes Isaac Newton’s breakthrough work on integral calculus, which was made as a means to help him develop new theories around motion, gravity and mechanics.

Breakthrough discoveries such as the wheel, electricity, trigonometry, the laws of thermodynamics or the principles of flight happened just once in mankind’s development. Those discoveries continue to exist whether they are embraced or ignored. Bitcoin educator Knut Svanholm describes below how the discovery of mathematical scarcity can be considered a once-only event.

Absolute mathematical scarcity, achieved by consensus in a sufficiently decentralized network, was a DISCOVERY, rather than an invention. It cannot be achieved again by a network of participants aware of this discovery, since the very thing discovered was resistance to replicability itself.
Knut Svanholm

Viewing Bitcoin as a discovery also makes the identity of Satoshi Nakomoto less relevant. For instance, we do not have to trust who Pythagoras was, or what his moral principles were. It does not matter because Pythagoras’ Theorem can be verified with a paper and pencil, similar to the way the Bitcoin network can be verified by running open-source code.

2.10.3 Is there a better Bitcoin out there? 

Some critics of Bitcoin suggest that the technology is now considered old and will likely be made obsolete by a newer digital asset or network. Such suggestions are often made by creators and supporters of competing digital assets - they claim they have a ‘better bitcoin’.

Each time this claim is made, it should be seen as an attack on Bitcoin. These attacks should be welcomed, since they are both inevitable and necessary. The past dozen or so years has witnessed the appearance of thousands of competing digital asset networks. And, not a single one has managed to credibly rival Bitcoin for value, reliability or network effect. 

So far, all of these attacks have failed, further serving to demonstrate Bitcoin’s resistance to obsolescence.

Every day that goes by and Bitcoin hasn’t collapsed due to legal or technical problems, that brings new information to the market. It increases the chance of Bitcoin’s eventual success and justifies a higher price.
Hal Finney

Supporters of other digital assets at times lament that Bitcoin’s core code lacks additional functionality such as support for smart contracts or other ‘Web3’ related applications. This should not be a concern as Bitcoin focuses on a single use case - money. The money use case is worth hundreds of trillions of dollars globally. After 15 years of reliable operation, Bitcoin has shown it is the overwhelmingly dominant digital monetary network and protocol. It appears to have won the money use case. And, the longer this situation continues, the longer it is likely to continue. This is a phenomenon known as the Lindy Effect.

The Lindy Effect states that the lifespan of a non-perishable good increases in line with its current age.

Bitcoin, being more than 15 years old, stands alone as the reliable, global, decentralised, non-sovereign monetary network. As new transactions are settled, new blocks are mined and added to the ledger, worldwide confidence grows in the network’s resilience and immutability. This improved confidence becomes a self-reinforcing cycle, helping to lengthen the time that users are content to store their wealth on the network.

2.10.4 Bitcoin is a protocol

Bitcoin is often described as not just value for the internet, but the ‘internet of value’. The reason why this description resonates with many is because it speaks to the technological structure of the internet protocol software.

The software that controls internet-based communication is made up of a series or ‘stack’ of protocols, built in layers. The base layer, Internet Protocol (IP), and its complementary, the Transmission Control Protocol (TCP), together define the rules around how packets of data move around a network. On top of TCP/IP are several ‘application-layer’ protocols which define the rules governing how particular applications are used, for instance, FTP for file transfer, SMTP for email and HTTP for browser-based communication. 

These protocols are decades old and show no sign of being replaced. While it’s possible the internet stack could change over time, should a business avoid investing in internet-based technologies just in case something new comes along?

Upgrades to existing protocols are normal. The internet application layer protocol HTTP was extended in the 1990s to use encryption for secure communication and became HTTPS. In the same way, we should expect the Bitcoin protocol to incorporate enhancements in future that, for instance, improve privacy or security.

As well as being the world’s first open, non-sovereign monetary network, Bitcoin is also a protocol or set of rules for value transfer. It is not a proprietary product.

Bitcoin also represents the application of a discovery, that of absolute mathematical scarcity. It is winning the money use case because it has remained simple, secure and predictable for more than 15 years.

A protocol like Bitcoin is a set of rules for communication much in the same way that a spoken language is also a set of rules. While they may adapt and change to new circumstances, spoken languages typically endure for hundreds of years.

Bitcoin will also adapt because it is an open technology that will accept enhancements as the majority of network participants demand.

Bitcoin is the new Bitcoin
Andreas Antonopoulos