The Protocol Layer

When I first looked at Bitcoin in 2016, it was immediately obvious to me that, as designed, bitcoin wouldn’t work as a transactional currency.  The bitcoin flaw. No currency has ever existed in fixed supply. An extremely primitive example is the Rai Stone on the Micronesian island of Yap. Vitalik Buterin has cited the Rai Stone as an example of a historical currency and ledger that provides a premise for cryptocurrency and the blockchain. But this is silly. A cryptocurrency has to act like any other currency throughout history. There has never been a fixed supply currency adopted by any expanding monetary system. The addition of “crypto” to currency combined with digital cryptography does not magically overthrow thousands of years of monetary history. The same rule holds true for fiat currency. The massive increase in computational power that tenuously holds together the global fiat financial system will not add permanence to fiat currency. Fiat has no set value against a monetary standard of reference. All fiat systems eventually fail via their inherent proclivity for devaluation. The current global fiat system will be no exception.

One can make the case that Bitcoin initially required a fixed supply to demonstrate its efficacy. Bitcoin started from nothing and was a revolutionary technology understood by only a few specialized technologists. By limiting the supply of bitcoin, future demand would increase its value commensurately. Oddly, it was Ross Ulbricht’s Silk Road illegal drug marketplace that proved bitcoin’s efficacy as a currency. Silk Road demonstrated that the Bitcoin protocol worked as an unhackable ledger and that its currency could obtain value, which led to eventual wider adoption by the general public. For his illegal marketplace demonstration of bitcoin’s currency efficacy, Ross Ulbricht will spend the rest of his life in prison. 

However, the fixed supply template of crypto that was successful in demonstrating Bitcoin’s efficacy by creating value for bitcoin will naturally have to evolve into a functioning currency that expands in supply to meet demand relative to a standard of reference.  This is the only way that cryptocurrency and the blockchain can achieve widespread adoption and fulfill its promise.

The rise of the internet provides a template for Bitcoin but with a significant difference. The internet acted as a foundational platform defined by the TCP/IP protocol. TCP/IP is a singular protocol foundation. The data transport packet switching layer to internet addresses created the foundation upon which developers built the internet. Once the foundation for the internet’s data transport and internet address layer was in place with proof of efficacy, internet applications and development expanded organically. The internet naturally progressed along with advances in Moore’s Law and computational power. Builders of apps required no incentives, educational tutorials, or coercion to build on the internet. The internet grew naturally and then exploded exponentially into what it is today. Nobody could foresee the future development and applications the internet would unleash. It merely required the creation of a functional, unalterable foundational layer.

Bitcoin requires a dual-layer platform, a currency to validate the blockchain, and the blockchain to validate a decentralized currency. It is a symbiotic relationship. Both foundation layers must work properly to incentivize the Bitcoin buildout in the same way the TCP/IP foundation incentivized the internet buildout. The blockchain layer has proven itself. It has run continuously for 11 years with no successful hacks and maintains its immutable ledger defined by the protocol.  Scaling solutions are getting addressed and solved.  Bitcoin SV released the Genesis upgrade on February 4, 2020, that results in unlimited block sizes.  It is the monetary layer of bitcoin that has not proven itself. There remains no adoption of bitcoin as a transactional currency for goods and services.

The lack of transaction adoption remains a puzzle to Bitcoin developers but gets written off as an anomaly that will eventually correct itself. This was the view in late 2015 when Bitcoin exploded into public consciousness. Five years later, the puzzlement remains. Bitcoin is no closer to acting as a transactional currency despite a half-decade of technological development and massive amounts of creativity and money thrown at the problem.

The internet created a protocol upon which developers and innovators could build the use case. As a result, the internet exploded into what it is today. Bitcoin has it backward. It is attempting to force a use case onto a flawed monetary protocol. The flawed monetary protocol has evolved Bitcoin into a speculative asset with limited utility. It will not achieve its transactional promise until a protocol defines the monetary layer by the historical three roles of currency, 1) a means of exchange, 2) a store of value, and 3) a unit of account.

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