Money Matters

Bitcoin vs. Bitcoin Cash: A Story Of Prioritization & Healthy Competition In Money

(Source: www.forbes.com)

As an offshoot of Bitcoin (BTC) known as Bitcoin Cash (BCH) surged past $2,000 this weekend, an influx of people reached out to ask the same question: Will Bitcoin Cash pass Bitcoin in terms of value and adoption?

Let’s look at the puts and takes of the two to better understand where they differ, my view on each, and why competition between Bitcoin and Bitcoin cash is a net gain for the industry as a whole.

[Disclosure: Investing in Bitcoin is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment. Disclosure: I own some Bitcoin.]

A difference in priorities

At the end of the day, the two are more similar than different but the major divergence between Bitcoin (BTC) and Bitcoin Cash (BCH) comes down to ranking of priorities.

In its current construct, design, and roadmap, the BTC community is focused first on keeping Bitcoin decentralized so that it can remain as a public, permissionless, highly censor-resistant network that anyone in the world can use and build on top of. Fast, cheap payments are a secondary priority.

In contrast, the BCH community is focused first on enabling fast, cheap payments over the network. The BCH community believes that by focusing on these features, BCH will onboard more people and this increased adoption will foster decentralization.

Blockchain Capital

To be clear, both camps also want the other camp’s feature: So, the Bitcoin community also wants fast, cheap payments—but not if it risks Bitcoin’s decentralization.

Similarly, the Bitcoin Cash camp also wants to maintain decentralization—but believes this is a second-order effect of a widely adopted network that enables fast, cheap payments.

The difference all comes down to an order of operations: Which one comes first? Do people want to use Bitcoin because they can make fast, cheap payments or do they want to use it because it’s un-seizable digital gold?

At the end of the day, it’s a “chicken or the egg” problem and nobody can say for certain which should come first or which is the correct path—this is all new ground. Reasonable people can disagree as to which approach is best.

My view: I see more value in Bitcoin’s approach than Bitcoin Cash’s

My view is that Bitcoin’s (BTC) approach which emphasizes Bitcoin’s value proposition as a public, permissionless, highly censor-resistant network will prove most valuable. This is the amazing novel innovation that Bitcoin brought into the world.

Much in the way that the internet enables a public, permissionless, and highly censor-resistant network of information, Bitcoin is novel in that it introduced to the world a public, permissionless, censor-resistant network of money.

In contrast, the world has many options for fast, cheap payments. People rarely complain about the speed or transaction cost of their credit card or mobile wallet—it’s just not a big problem in the developed world today.

In my view, Bitcoin’s features as a public (anybody can use it), permissionless (anybody can build on top of it), highly censor-resistant (nobody can block your transactions), and un-seizable form of money all stem from its decentralized architecture. If Bitcoin loses its decentralization, then it’s just an inferior form of centralized institutions.

A fool’s errand: Competing with PayPal for fast, cheap on-chain payments 

The Bitcoin Cash community would like to compete with centralized institutions like PayPal to offer faster and cheaper payments. Ultimately, I see this as a path destined for failure, for the reasons below.

Architecture

First, and most importantly, we need to consider the underlying architecture of a decentralized network like Bitcoin Cash vs a centralized network like PayPal’s. Both are essentially just databases.

When Bob pays Carol, PayPal simply updates its database—it is fast and cheap for PayPal to make this database update. In contrast, by design, Bitcoin Cash must notify tens of thousands of nodes (“databases”) around the world of the transaction, wait for them all to get in sync, and then ask all of these nodes to store the transaction record forever.

From a fundamental architecture standpoint, it’s clear that PayPal has an advantage for processing payments quickly and cheaply—to put it simply, it will always be easier to update one database (PayPal’s) than to update thousands of disparate databases around the world (Bitcoin Cash) and asking each to store the transaction forever.

Unbounded demand for cheap block space

Second, there’s unbounded demand for really cheap block space (cheap transactions). For Bitcoin Cash (and Bitcoin) to process an on-chain payment, the payment must be included in a block. There’s limited space in each block for transactions, so each transaction pays a fee to be included. In exchange for the fee, the transaction is stored on thousands of nodes on the world—forever.

There’s a real cost associated with processing and storing these transactions and people that want their transaction to be processed and stored by thousands of nodes should be prepared to pay for that feature—after all, there’s no such thing as a free lunch. But that’s exactly what Bitcoin Cash hopes to offer: a free (or artificially cheap) lunch.

The Bitcoin cash community would like to artificially suppress the price for processing a transaction (despite the fact that it has a real cost on everyone supporting the network).

My concern about this approach is that the cheap block space will be consumed as fast as it can be created so, in short order, we eventually end up with higher transaction costs anyways. Even worse though, in the process the network will have failed to appropriately compensate the people that support the network by running nodes and processing transactions.

If those parties aren’t appropriately compensated, they will not run nodes on the network, and Bitcoin will lose its decentralization and fundamental features as a public, permissionless, censor-resistant network.

Instead, in this scenario Bitcoin Cash morphs into a centralized network with only a few mega-nodes that process and store all the transactions—if so, we’re just back to PayPal or any centralized financial institution and we’ve lost what was novel about Bitcoin.

Instead of a public, permissionless network that enables censor-resistant transactions and un-seizable money we’re back to a model of gatekeepers that decide who participates when and in what form. That doesn’t seem novel, interesting, or empowering—it’s what we already have in the current banking system.

More Info: www.forbes.com

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