Hi friends,
Welcome to The ₿it Economy! I’m Rob, and each week I write a blurb about something I learned that’s broadly Bitcoin related. In this week’s edition, I outline a formula for the adoption of Bitcoin and the greater digital asset ecosystem. I’ll preface it by saying it is in its early stages and would appreciate any and all feedback. My goal is to shed a tidbit of info that I believe will get you thinking about the digital world around you. And per usual, if you know anyone who would be interested, please do forward this along, send them to the archive, or have them subscribe here. 👇
-Rob
Introduction
There is a growing narrative among enthusiasts that protocol interoperability is essential for the longterm success of digital assets. Though important, I think it leaves out a few key variables from the equation. And no, it is not number go up. Ultimately the success of Bitcoin and other assets is driven by the number of people using the asset (whether they know it or not). Why is that? This profoundly moves the needle of society. What good is this technology without achieving self-sovereignty and the freedom to move value across the digital world with a few clicks on your mobile device. So today, I propose a simple equation to get hobbyists, innovators and investors alike thinking about how to get digital assets in the hands of the masses.
Standardization
If you have 50 different plug types, appliances wouldn't be available and would be very expensive. But once an electric outlet becomes standardized, many companies can design appliances, and competition ensues, creating variety and better prices for consumers.
— Bill Gates
The rapidly evolving technical nature of digital assets is playing a significant role in furthering the information gap between those in the space and those who are not. This growing information asymmetry is bringing about unwanted complexity in the user experience. Highly uncertain markets are often characterized by an unstable and fast changing technical environment, in which different technological paths compete. In such markets, information asymmetries increase the probability of a potential misfit between those in the weeds and the everyday consumer. What might be great for an experienced trader might not be for your Uncle Bob.
Developers want to build protocols they believe will be around for a long time, not ones that have a high likelihood of failure. Therefore, further clarity creates security that attracts developers, which will build more useful applications, which will attract more users, which will increase transaction fees of the network, which will entice more miners, which increases security. Thus creating a positive, self-reinforcing feedback loop that is close to impossible to halt. Standards are used in all aspects of our daily lives: transport, communications, energy, finance, media, healthcare, food and so on. All blockchains, by definition, share a common data structure to organize and reach consensus on ownership changes.
In a global connected world, the need for international standardization is increasingly important. Whether that is in the form of governance (on-chain or not) or through favorable regulation that does not hinder the industry's growth, it is the first step towards adoption. The average newcomer in the digital asset space has no technical background; therefore, there is a clear need for accountability within the space. It is key to set and implement industry-wide standards to ensure best practices across the entire ecosystem and bolster this security through bug bounties, audits, and other forms of developer engagement.
Composability
Money won’t create success, the freedom to make it will.
— Nelson Mandela
Composability is a design principle that involves the combination of various components of a software stack in different ways. It allows developers to focus on their core business logic by leveraging permissionless and censorship resistant infrastructure. And it is all made possible through free and open-sourced software that underpins cryptonetworks. Composability is what smart contract platforms are all about, as they attempt to emulate similar benefits to those constructing these protocols.
The recent rise of decentralized finance (DeFi) on protocols like Ethereum is only scratching the surface of what is to come. When paired with the soon to be implemented Schnorr/Taproot Bitcoin developments, users will have the opportunity to explore decentralized exchanges, collateralized loans, lending and borrowing platforms, leveraged trading synthetic assets, prediction markets and much more — all trusted by the world's most secure network in Bitcoin.
Lowering the barriers to entry is a net benefit for consumers and businesses alike. Unlike their traditional counterparts, digital asset protocols are transparent and provide (a lot) more insight into the backend infrastructure. That is not to say there is no inherent risk when interacting with Bitcoin and other protocols (private key loss, impermanent loss, smart contract hack). However, the risk is recorded in an open, immutable ledger distributed around the world where anyone can point out fraud and system risk.
Composability increases capital efficiency as assets can be used within multiple applications at a time, with near zero friction costs and no permission required. As previously mentioned, there are risks to both composability and the greater interoperability of protocols. Even with all the benefits, developers should stray away from creating a house of cards on a foundation of quicksand. Every protocol from Bitcoin to Sushi has its own design trade-offs in order to meet specific needs for each desired use case. When combined, they enable a lot of moving pieces to work for their users who flock to digital assets for an abundance of reasons.
Middlemen
“Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.”
— Carl Menger
The traditional finance market is centralized. Central authorities issue the currency that powers the economy around us. Centralized financial organizations control our assets and in turn the ability to regulate the flow and supply of such currencies. This centralization of risk has given rise to a financial system with an unmanageable level of risk. Coupled with a lack of transparency only compounds the problem.
Decentralized networks can drastically reduce coordination costs while redistributing transaction fees to stakeholders personally responsible for using, monitoring and securing these systems. The middleman is replaced by a larger group of stakeholders, who, acting in their own self-interest are incentivized to uphold the integrity of these networks.
Digital assets like Bitcoin offer secure decentralized peer-to-peer value transfer without intermediaries. The power of an interlocking financial system offers users a wide array of lending and derivatives products, available globally at any point in the day. In a world powered by Bitcoin, there is no reliance on a central intermediary to hold funds — instead, trades and loans occur directly between participants through automated processes.
Centralized finance products are custodial by nature, use centralized price feeds, and initiate margin calls, provide liquidity for their margin calls and centrally determine interest rates. As capital controls are tightened across the board many will seek out greener pastures that are permissionless by design.
Adoption
The internet wants a native currency and I think Bitcoin is the best manifestation of that thus far and I can't see that changing given all the people who want the same thing. Our job as a toolmaker is to make that easy for people to access and understand.
— Jack Dorsey
Positioned as a hedge against exponentially rising systemic risk of the fiat currency system, negative interest rates and money printing, digital assets can now be put into work in a few clicks. As these technologies start to leverage each other, network effects have triggered that promise to make each component in the decentralized stack more valuable. With a focus on normalizing best practices, seamlessly integrating protocols and removing gatekeepers, it only a matter of time before the masses turn to digital assets for their value transfer needs. In doing so, a strong and more resilient digital asset ecosystem is created and users’ funds, assets and value are safeguarded in the best manner possible.
Threads🧵
Breakdown of long-form content into an easy to read and concise format.
News 📰
The top announcements in Bitcoin. All in one place.
Ledger Live now supports Coin Control
Kraken Wins Bank Charter Approval
Bakkt Bitcoin Futures Daily Trading Volume Hits ATH
MicroStrategy Announces Additional Bitcoin Purchase
Paxful Exits Venezuela's P2P Bitcoin Market Citing Regulation
Bitrefill Balance cards available on Paxful
Fold to Match Your Paycheck in Satoshis Every Month with Fold Card
Coinbase to Pass Network Fees to Customers
Square Crypto Renews BTCPay Server Grant
Namecheap.com adds BTCPay Server as Payment Option
Foundation Devices Teases Passport Hardware Device
Lightning Labs Announces Accounting Feature
LN Markets Displays Instant Funds Transfers and Trading on Mobile
Market Watch 💸
One-stop-shop Bitcoin market & network snapshot.
What I'm Reading 📕
Scowered the internet so you didn’t have to.
MPPs & Wumbo Channels: Optimizing Liquidity on the Lightning Network
The Alchemy of Hashpower, Part II.
Bitcoin Optech Newsletter #115
DLCs are on Bitcoin, Bringing New Functionality and Major Potential
MPPs & Wumbo Channel: Optimizing Liquidity on the Lightning Network
FATF Virtual Assets Red Flag Indicators
Bitcoin and Multisig in a Pandemic
What I'm Listening To 🔊
Give your eyes a break and pop in the earbuds.
Michael Saylor on Buying Bitcoin with his Balance Sheet
Decentralizing Venture Capital
Bitcoin Grants, Design & Crypto Patents (COPA)
How to Watch Bitcoin's Mempool, Lightning Adoption & Privacy
The State of Innovation Systems
Thoughts from Ray Dalio Eric Schmidt, Peter Thiel, & Sam Zell on the Current Economy
Obtaining the first Wyoming SPDI
Monetary Policy is Finished and Macro Debates are Boring
Billions of Bitcoin on Ethereum
The Hidden Truths of DeFi & Tokenized Bitcoin
What I'm Watching 📺
Take a break from Netflix and check these out.
Housekeeping 🏡
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Final Quote 🎩
Thanks for reading. Send me tips, stories I’ve missed, or comment below. And if you liked this piece, you can sign up here for more issues of the Bit Economy, a newsletter on something bitcoin related.
Until then, have a great week! See you next Sunday.