Bitcoin Killed The King & Now Network Effects Will Determine Its Future

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Hatched by Glasp

Sep 01, 2023

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Bitcoin Killed The King & Now Network Effects Will Determine Its Future

Money is simply a belief held by a lot of people. A collective trance. Money is simply the distillation of a shared confidence in the future. For the hierarchical pack animal we are, hierarchy with an alpha King on top is a stable and understandable structure. That’s why when the King issues a currency and tells people to use it, people believe in it. And the currency works as long as there is that belief.

The belief stems from: a) centralization of decision making and authority, 2) the longevity and predictability of the hierarchy, 3) guns and the ability to enforce behavior through violence which these hierarchies typically have, and 4) the tax base of the people within the hierarchy. Instead of a king or central authority creating the belief and then controlling the currency, Bitcoin doesn’t have a hierarchical network structure with a “strong man” at the top. It’s a decentralized network structure. Bitcoin killed the king, and is replacing it with a network.

We believe in decentralized cryptocurrencies because of 1) Decentralization, there is not one person or council who can ruin the currency, 2) Software-encoded rules that are hard to change, increasing predictability, 3) Ubiquity means it will be accepted in many places, and 4) resiliency because it’s self-healing and can avoid efforts to damage it. In short, to create belief network effects, hierarchical networks use power, while decentralized networks use ubiquity. (note: embedding, exchangeability) They don’t like each other because they are fundamentally different to live and work in. The mental models required to succeed in the different networks are different, so winners in one don’t like the winners in the other. Hierarchies fight with power and rigidity. They bring guns at the end of the day. Decentralized networks fight with flexibility and ubiquity. They sneak around.

The timeless fight between hierarchies and networks continues, but this time, it’s unfair for the decentralized networks because of the Internet and blockchain technologies. Most importantly, software-money more easily amplifies the “belief” network effect that gave older forms of currency power since today the world is more connected and shared, beliefs spread faster in higher densities.

But to understand Bitcoin’s current and potential value, we need to think from first principles. We need to look at the network math. Bitcoin’s future will be based on the future of its network effects. Understanding and then monitoring the health of each of those network effects will give you the first principles ability to predict the future of Bitcoin in the coming years.

What will make Bitcoin persist and drive up the value of its coins? There are only four defensibilities native to the digital age that Bitcoin might use: network effects, brand, scale, and embedding. Will Bitcoin and Ethereum end up like Facebook and LinkedIn, two competing network effect businesses that had value propositions that were similar but different enough that they both survived? When you lay out the benefits this way, it becomes clear why we assume Bitcoin will function primarily as a store of value, and less as a means of exchange.

There are three forces external to Bitcoin’s network effects and inherent product benefits that could impact its success or failure in competition with alternatives. Faked transactions. We don’t really know how many of the transactions on the Bitcoin blockchain are “authentic” and actually creating a market for the coins and how much is “faked” or manipulated to give the appearance of real activity. Responsiveness of the Bitcoin DAO. A key element to track about Bitcoin — or any distributed system governed by a DAO (Decentralized Autonomous Organization) — is how well and quickly it adjusts to needed changes. Government intervention. The leading fiat currencies, namely the US dollar and the Chinese Yuan, have the most to lose from the rise of cryptocurrencies. It’s too late for governments to stop Bitcoin. The suppression playbook has been written. The governments could run the same playbook they did with Kazaa, the distributed music sharing service, in 2000.

Belief Network Effect

Beliefs become more valuable to believers the more people believe. Bitcoin is valuable because we believe it’s valuable. It’s valuable because — after we were done believing salt was valuable — people decided to believe gold was valuable instead. And then when you layer some Ethereum “sand” on top of it, and the “sand” of the thousands of other cryptocurrencies in existence — all denominated in Bitcoin on the exchanges — the Bitcoin sand gets progressively more stable as a result of growing Belief nfx. What was once fluid and intangible transforms into something closer to rock. The more people who believed Bitcoin had value, the more value Bitcoin had, and the belief became self-fulfilling. This belief network effect grew at a time when the idea of a decentralized ledger currency was novel, so the network could grow without competition. It was “immaculately conceived.”

Protocol Network Effect

As the number of nodes that connect to the protocol increases, the network effect gets stronger. To the extent that the protocol changes or doesn’t, it might improve or decrease the fitness of the protocol to survive long term among all the competition. If Bitcoin cannot move off proof of work, it may prove fatal… or it could be the thing that makes it secure in its position in the ecosystem. Time will tell. But realize that features such as proof of work vs proof of stake affects Bitcoin’s protocol network effect strength.

Marketplace Network Effect (2-Sided)

In Bitcoin’s case, this creates two forms of marketplace nfx: 1) a speculation or “store of value” marketplace, and 2) a payments marketplace. But even the store-of-value marketplace network effect is weak for two reasons. First, plenty of layer-1 protocols can achieve a level of liquidity where big trades don’t move the price by themselves if they are done properly. We say that the liquidity effect is asymptoting, the network effect reaches diminishing returns after a certain size. Second, this kind of marketplace is easy to multi-tenant on, meaning I can hold lots of different currencies as a store of value.

Platform Network Effect (2-Sided)

In late 2020, Bitcoin had 400 monthly active developers and Ethereum had 2,300. Developers are a valuable, scarce resource. The more of them you have developing on your platform, the stronger your network effect.

Data Network Effects

It creates two data network effects. First, it creates an immutable history of interrelationships in the network that would be hard to replicate by a competitor. (note: For me, this is a new perspective for data network effects. I thought it like a scale merit & accuracy of recommendation based on the tons of data, but this is a length of data.) Second, as the chain of blocks gets longer, the amount of computation required to high-jack the network increases, increasing security and thus value for all participants. Like digital network effects, these social nfx can help create more value in your product for users the more people use it. People add value to each other by influencing them to think or feel differently. (note: This is one of the unique values that Glasp can provide to people. And this is why we need friends/colleague in the community.) By providing triggers and confidence to use your product. (note: Independent people believe what they think is right or cool. But usually, people believe what other people(influencers/friends) say about it, at least, they are affected.) By reinforcing their choice to continue using your product, they are psychological by nature, but no less real.

Tribal Network Effects

Our tribal networks add value to our lives by giving us an emotional sense of belonging and identity, and by helping us form useful connections. The main mechanism by tribal nfx is an in-group and an out-group so you can know who to help and be loyal to. The out-group typically turns into an “enemy.” With Bitcoin, the tribal effects are a powerful nfx defensibility.

Bandwagon Network Effects

Bandwagon network effects typically arise when a network first begins aggregating, when people are jumping on early. Because Bitcoin has the biggest worldwide brand in crypto and has the biggest market cap, the bandwagon effect is strongest compared to lesser crypto brands.

Two Other Defensibilities

Embedding

This embedding in the exchanges helps reinforce the marketplace network effect. Further, as sites like CoinMarketCap chart all other cryptocurrencies against the US Dollar and Bitcoin, which means Bitcoin is embedded in how they calculate and present value, which has significant branding impacts for Bitcoin. Another way that embedding could work is that in the future, if more merchants start accepting Bitcoin as a form of payment (e.g. Tesla, PayPal), or if more governments (El Salvador) do, Bitcoin will get embedded in their product experience and operations. (note: Haven't thought about this, but this is a good way. It makes defacto standard.)

Brand Negative Scale Effects

As the network grows, it gets more expensive and slower for miners to validate the transaction history because (1) there are increasingly more transactions, and (2) there are more miners competing to validate the transactions. There is a scenario where if the bitcoin price drops too far, and if the transactions continue to increase in cost, miners might be unwilling to support the network, and the network effect could unravel.

In conclusion, Bitcoin's future will be determined by its network effects. Understanding these network effects and monitoring their health is crucial in predicting Bitcoin's potential value in the coming years. Here are three actionable pieces of advice to consider:

  • 1. Continuously assess and analyze the belief network effect of Bitcoin. Understand the factors that contribute to the belief in its value and how they evolve over time.
  • 2.

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