Bitcoin Killed The King & Now Network Effects Will Determine Its Future: Composable Membership and its Role in Generating Social Capital

Bitcoin Killed The King & Now Network Effects Will Determine Its Future: Composable Membership and its Role in Generating Social Capital

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. 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.

Now, let's shift our focus to the concept of composable membership and its role in generating social capital.

When planning a membership system, we need to think about membership as bundles of access, permission, and status across Web2 services. Having a token brings a community together loosely with a financial stake, but composable membership holds a community together long term with social capital.

In Web3, a group of people holding or trading the same token does not necessarily mean they are a community. It simply creates clusters. Access, permissions, and status are key elements in shaping the membership funnel.

Access is about discovery, while permissions involve responsibility. Status represents weight within a community. These components form the customizable design area, which expands as we delve deeper into the membership system.

For access, ERC20 tokens are ideal as they offer fluid requirements and liquidity. Permissions, on the other hand, should be tightly coupled to a stake. There should be a level of risk involved in granting responsibilities, and permissions should evolve and can be revoked.

Status within a community varies greatly and is often event-dependent. By considering specific factors such as voting, we can assign status based on specific community actions, ensuring that it isn't always the participant with the most tokens who has the most influence.

In Web2, membership revolves around services, while in Web3, services revolve around membership. This membership interoperability is possible in Web2, with platforms like Patreon making strides towards implementing a hierarchical membership structure.

However, in Web3, no one is fighting to be at the top of the membership hierarchy because the primitives (tokens) aren't owned by any one platform. Smart contracts act as APIs, allowing for revenue splits and enabling platforms to fit around composable membership systems.

Membership systems that prioritize ownership of decisions and prevent social forks build social capital within a community. Roles, incentives, and platform integration are essential aspects of achieving this.

Defining roles within a membership system helps create clarity and opens up pathways for growth. Incentives tied to trust, engagement, and history further enhance participation and reputation scores.

Assigning roles can be a technical challenge, but with identity and membership solutions in place, platform integration becomes more seamless. Composable membership not only shapes communities but also ecosystems and platforms, forcing a reorganization of Web2 platforms to provide a more open surface for development.

In conclusion, Bitcoin's future is closely tied to its network effects, while composable membership plays a crucial role in generating social capital within communities. By understanding and harnessing these concepts, we can navigate the evolving landscape of decentralized cryptocurrencies and membership systems.

Three actionable advice to consider:

1. Monitor and analyze the health of Bitcoin's network effects to gain insights into its future value.
2. Develop a membership system that focuses on access, permissions, and status to build social capital within communities.
3. Embrace composable membership and its potential to shape ecosystems and platforms, creating a more open and collaborative environment for development.