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

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

In the world of currency, belief is a powerful force. Money is simply a shared confidence in the future, a collective trance that we all participate in. Traditionally, this belief has been fostered through a hierarchical structure, with an alpha King at the top issuing a currency that people trust and use. The stability and predictability of the hierarchy, along with the ability to enforce behavior through violence, have been key factors in maintaining this belief.

However, Bitcoin has disrupted this traditional model by replacing the King with a decentralized network. Decentralized cryptocurrencies like Bitcoin offer several advantages over traditional fiat currencies. First, they eliminate the centralization of decision making and authority, making it harder for any one person or council to ruin the currency. Second, they have software-encoded rules that are difficult to change, increasing predictability. Third, they have the potential for ubiquity, being accepted in many places. Finally, they are resilient and self-healing, able to withstand efforts to damage them.

The fight between hierarchical networks and decentralized networks is a battle between power and rigidity versus flexibility and ubiquity. Hierarchies rely on power and guns to enforce their authority, while decentralized networks rely on their ability to adapt and spread their influence. Unlike fiat currencies, which are constrained by geography and time, decentralized cryptocurrencies like Bitcoin are programmable and can be improved quickly in response to market needs.

The future of Bitcoin will be determined by its network effects. Network effects are one of the four defensibilities native to the digital age that Bitcoin can leverage, alongside brand, scale, and embedding. Network effects occur when the value of a product or service increases as more people use it. In the case of Bitcoin, there are two forms of network effects: a speculation or "store of value" marketplace, and a payments marketplace. The more buyers and sellers there are in the store-of-value marketplace, the more valuable Bitcoin becomes.

Developers also play a crucial role in creating network effects. The more developers there are working on a platform, the stronger its network effect becomes. Bitcoin had 400 monthly active developers in late 2020, while Ethereum had 2,300. These developers contribute to the value of the platform by enhancing each other and creating a vibrant ecosystem.

Brand is another important factor in network effects. Bitcoin has the biggest worldwide brand in the crypto space, which creates psychological switching costs for users. People tend to default towards what is familiar and trusted, making it harder for lesser-known brands to compete.

Scale is also a factor in network effects. As the network grows, it becomes more expensive and slower for miners to validate transactions. Bitcoin's value would likely increase if changes were made to alleviate this effect.

Finally, embedding is a strategy that can strengthen network effects. By integrating Bitcoin directly into customer operations or other ecosystem players, it becomes harder for competitors to replace it without incurring significant costs.

In addition to network effects, the concept of the equity equation can also be applied to the world of startups and entrepreneurship. The equity equation states that you should give up a certain percentage of your company if what you trade it for improves your average outcome enough that the remaining percentage is worth more than the whole company was before.

This equation applies to various scenarios, such as taking money from a top VC firm or giving stock to employees. In the case of taking money from a VC firm, if the deal makes the company worth more than 1/(1 - n), where n is the fraction of the company given up, then it is a good deal. Similarly, when giving stock to employees, the equation works in the other direction. If the addition of a new person increases the average outcome of the company, then they are worth n such that i = 1/(1 - n), where i is the average outcome. By calculating the value added by the new person, you can determine the percentage of stock to trade for them.

It's important to consider not only stock, but also salary and overhead when determining the cost of hiring someone. Early employees who are willing to take lower salaries can benefit from receiving a larger share of stock, which can be more valuable in the long run.

In conclusion, Bitcoin's future will be determined by its network effects, which are based on decentralization, ubiquity, and the belief of its users. The equity equation provides a framework for evaluating the value of giving up a percentage of a company in exchange for a benefit that improves the average outcome. By understanding and leveraging these concepts, individuals and businesses can navigate the evolving landscape of cryptocurrencies and startups.

Actionable advice:

1. Understand the power of network effects and how they can shape the future of a product or service. Consider how your own business or project can leverage network effects to create value.
2. Evaluate the trade-offs of giving up equity in your company. Use the equity equation to determine if a deal or partnership is worth the percentage of ownership being traded.
3. Consider the long-term value of stock versus salary when hiring employees. Encourage early employees to take lower salaries in exchange for a larger share of stock, which can increase their potential financial gain in the future.