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

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

In the world of currency, belief plays a crucial role. Money is simply a collective belief held by a large number of people. It represents a shared confidence in the future and acts as a store and exchange of value. For centuries, this belief has been centered around hierarchical structures with an alpha King at the top. When the King issues a currency and tells people to use it, they believe in it because of the centralization of decision making and authority, the predictability of the hierarchy, the enforcement through violence, and the tax base of the people within the hierarchy.

However, Bitcoin has disrupted this traditional model by replacing the King with a decentralized network. The belief in decentralized cryptocurrencies stems from their decentralization, software-encoded rules, ubiquity, and resiliency. Unlike fiat currencies, cryptocurrencies are not constrained by geography or time. They are programmable and can be quickly improved in response to market needs. Moreover, in today's interconnected world, beliefs spread faster and more efficiently, amplifying the "belief" network effect.

The future of Bitcoin will be determined by its network effects. There are four defensibilities native to the digital age that Bitcoin can utilize: network effects, brand, scale, and embedding. Among these, network effects are the most powerful. The network math of Bitcoin protects it from government bans. Even if certain governments were to ban Bitcoin, owners of fiat currencies would likely not follow suit as it is in their best interest to stay updated with the evolution of money.

Bitcoin's network gravity is undeniable. Beliefs become more valuable to believers the more people believe. As a pack animal, Homo Sapiens seek to be part of the "in group" and be accepted by others. Sharing common beliefs is a critical part of creating that sense of belonging. Bitcoin's network effects are further enhanced by the Protocol Network Effect, where all nodes can plug into the network using a computational standard.

However, Bitcoin faces challenges in the form of competing protocols that offer superior speed, cost, and environmental impact. If Bitcoin cannot move away from proof of work, it may face fatal consequences. Nevertheless, Bitcoin has established itself as a leader in the store-of-value and payments marketplace. The value of Bitcoin in the store-of-value marketplace increases with more buyers and sellers, as it enhances liquidity.

Developers are a valuable resource in strengthening network effects. Bitcoin had 400 monthly active developers in late 2020, while Ethereum had 2,300. The more developers a platform has, the stronger its network effect becomes. Additionally, social network effects play a role in adding value to products through user influence and emotional connections.

Brand also plays a significant role in network effects. Bitcoin's worldwide brand and market cap give it a strong bandwagon effect. People tend to default towards what is familiar and are less likely to switch to an unknown or lesser-known brand. Psychological switching costs are created by well-established brands.

As the Bitcoin network grows, miners face challenges in validating transaction history due to increasing transactions and competition. The DAO must come together to make changes that alleviate these challenges and maintain Bitcoin's value.

Belief was the initial driving force in the Bitcoin network. Bitcoin has become embedded in the crypto ecosystem and the world's consciousness. Embedding is achieved by integrating a product directly into customer operations or ecosystem players, making it difficult to replace with a competitor. This embedding heightens switching costs.

In conclusion, the future of Bitcoin lies in its network effects. While hierarchical networks use power and rigidity, decentralized networks fight with flexibility and ubiquity. Bitcoin's network effects, brand, scale, and embedding will determine its success. To further strengthen Bitcoin's position, it must address challenges, such as competing protocols and scalability. Three actionable advice for Bitcoin's future are:

1. Embrace technological advancements: Bitcoin must adapt to new protocols and technologies to remain competitive and address scalability concerns.

2. Foster developer community: Encouraging more developers to work on the Bitcoin platform will enhance network effects and contribute to its growth and improvement.

3. Enhance brand recognition: Bitcoin should continue to build its brand and establish itself as the leading cryptocurrency, leveraging the bandwagon effect and creating psychological switching costs.

Bitcoin's journey may take time, but its network gravity will prevail. As more people believe in its value, the belief network effect will continue to strengthen. Bitcoin has disrupted the traditional monetary system, and its future lies in the power of network effects.