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 is everything. Money is simply a collective trance, a shared confidence in the future. Throughout history, we have created a store and exchange of value using whatever technology is available to us. And for the hierarchical pack animals that we are, a centralized authority with an alpha King on top was a stable and understandable structure. When the King issued a currency and told people to use it, they believed in it. The currency worked as long as that belief was present. This belief stemmed from centralization of decision making, the longevity and predictability of the hierarchy, the ability to enforce behavior through violence, and the tax base of the people within the hierarchy.

However, Bitcoin changed the game. It killed the king and replaced it with a network. Decentralized cryptocurrencies like Bitcoin gained our belief because they offered decentralization, software-encoded rules that are hard to change, ubiquity, and resiliency. These networks fought with flexibility and sneaked around, unlike hierarchies that fought with power and rigidity. Bitcoin, unlike fiat currencies, is not constrained by geography or time. It is programmable and can be improved quickly in response to market needs. Moreover, software-money easily amplifies the "belief" network effect, given the connected and shared world we live in today.

The future of Bitcoin hinges on its network effects. There are four defensibilities native to the digital age that Bitcoin can utilize: network effects, brand, scale, and embedding. Network effects are the most powerful of these. It is too late for governments to stop Bitcoin because the network math protects it. Even if some governments were to ban Bitcoin, owners of other fiat currencies would likely not ban it since it is in their best interest to stay up to date with the evolution of money. The network gravity will prevail.

Beliefs are more valuable to believers when more people believe in them. Bitcoin's value lies in the fact that we believe it is valuable. As pack animals, we want to be part of the "in group" and be accepted by others. Sharing common beliefs is crucial in creating that sense of belonging. A Protocol Network Effect arises when a computational standard is declared, and as more nodes connect to the protocol, the network effect strengthens. Bitcoin's competitors may offer superior speed, cost, and environmental impact, but Bitcoin's network effect is what sets it apart.

In the marketplace, Bitcoin has created two forms of network effects: a speculation or "store of value" marketplace, and a payments marketplace. The value in the store-of-value marketplace increases with more buyers and sellers, as it increases liquidity. Developers also play a significant role in strengthening the network effect. Bitcoin had 400 monthly active developers in late 2020, while Ethereum had 2,300. Developers are a valuable resource, and the more of them working on a platform, the stronger the network effect becomes.

Our tribal networks, our sense of belonging and identity, add value to our lives. They help us form useful connections and influence each other's thoughts and emotions. Bitcoin, with its worldwide brand and market cap, benefits from the bandwagon effect. Most people tend to be risk averse and default to what is familiar, so a well-established brand creates psychological switching costs.

As the Bitcoin network grows, it becomes more expensive and slower for miners to validate transactions. The DAO, or the community of Bitcoin users, must come together to make changes that alleviate this effect and ensure the currency's continued success.

Belief was the original force in the Bitcoin network. Bitcoin created and embedded itself into the crypto ecosystem and the world's consciousness. Embedding is crucial for any product or technology to ensure it becomes an integral part of customer operations or ecosystem players. This heightened embedding increases switching costs and makes it harder for competitors to replace the product.

In the world of technology, network effects play a significant role in determining the success and future of a product or currency. Bitcoin, through its decentralized network, has disrupted the traditional hierarchy of currency and created a belief network effect that is driving its growth. To ensure Bitcoin's future success, it is important to continue building on its network effects, strengthen its brand, scale its operations, and embed it further into the crypto ecosystem.

In conclusion, here are three actionable advice for Bitcoin's future:

1. Foster the growth of developers: Developers are a valuable resource in strengthening the network effect. Encourage more developers to work on the Bitcoin platform to enhance its capabilities and adaptability to market needs.

2. Emphasize the importance of the store-of-value marketplace: The store-of-value marketplace is a key component of Bitcoin's network effect. Increase liquidity by attracting more buyers and sellers, which will make Bitcoin more valuable to believers.

3. Collaborate for scalability and efficiency: The Bitcoin community, or the DAO, must work together to address scalability and transaction validation issues. Making changes to alleviate these concerns will ensure Bitcoin's continued success in the face of competition.

By leveraging its network effects, brand, scale, and embedding, Bitcoin has the potential to reshape the future of currency and become the dominant force in the digital age. The belief network effect that Bitcoin has created is a powerful force that will continue to shape its future and drive its value. As more people believe in Bitcoin, its network effects will only strengthen, solidifying its position as the decentralized currency of choice.