Posted June 18, 2019
Network effect is a weak argument for Bitcoin’s value. There is a stronger one: There can only be one definition of time with computation.
An argument against Bitcoin’s value is that alternate crypto currencies, also known as “shitcoins”, exhibit the same digital scarcity within their own network. Pundits add up market cap of Bitcoin with shitcoins to come up with a market cap of “crypto”.
Some think the existence of shitcoins defies Bitcoin’s scarcity and show that Bitcoin can be copied and multiplied and consequently Bitcoin and all crypto is worthless.
It is pointless to argue against this with the network effect of Bitcoin, as the question is not if Bitcoin could be replaced with a better version of itself, but if scarcity can be achieved at all by a design similar to Bitcoin.
Similar to Bitcoin?
A shitcoin could be considered similar to Bitcoin for many reasons. Some consider ZuckBuck similar, because … whatever.
The similarity that really matters is the mechanism that creates scarcity. In Bitcoin’s case it is the Nakamoto consensus built on proof of work (POW).
Many shitcoins experiment with alternate consensus algorithms, such as BFT, POS, POET, governance or any combination of them. The ability to prove work is ultimately constrained by physics and available resources. Those alternatives to POW use strictly more assumptions hence the scarcity they achieve is of lower reliability, quality.
We will soon see if the quality of scarcity offered by Zuck is deemed sufficient by the masses and hence ZuckBuck manages a “flippening” against fiat in the daily uses of buying likes or in-app gadgets in facebook and related apps.
Our quest is however not for a good enough scarcity for some use case, but that of ultimate digital scarcity, which would give rise to highest value.
Proof of Work
Different qualities of scarcity are with us already. There are less guarantees for scarcity of fiat than that of gold. The marginal supply of fiat changes at the will of bureaucrats, that of Gold is limited by natural reserves and work invested.
A doubt of Gold Standard could be articulated as: Other precious metals exhibit very comparable physical properties, hence they are as good as gold, therefore supply of “hard money” is not constrained by gold supply.
The world however operated on Gold Standard and not on Precious Metal Standard. Those promoting an alternate Silver Standard experienced heavy losses in the process of consolidation.
It seems that although several precious metals are eligible through their physical properties and supply of all of them is constrained by work, only one became the standard to store value.
Scarcity through POW
There is a striking parallel between work in gold mines and in Bitcoin mines. The resulting product proves work performed. POW is not unique to Bitcoin. POW is used by countless shitcoins. Do shitcoins that also use POW undermine digital scarcity?
Digital scarcity based on POW does not require that Bitcoin, as we know it today, becomes the only one, but that only one POW coin is desired by all. Like there can only be one Highlander, one immortal swordsman.
POW Standard or Bitcoin Standard ?
To keep its emission schedule Bitcoin requires the proof that miner did (busy-)wait a time span (expected 10 minutes) before producing a new block. The proof is the result of a computation.
The difficulty adjustments based on timestamps are only there to periodically adjust for time measurement errors, the actual tool of time measurement is the computation itself.
Time measurement with computation is only reliable if the executed computation is irreducible and all resources capable of its computation are deployed to that task.
Fragmenting computing resources across competing time chains however will not achieve the reliability of one time chain that uses all resources. The Bitcoin Standard will arise as a consequence of aiming for the best quality of time chain.
I anticipate on the long run a convergence to a single time chain, that is likely a descendant of Bitcoin as we know.
There are many choices of irreducible computation, and double-SHA256 of Bitcoin is not one. See midstate or ASICBoost. A better time chain would have a simpler POW that is provably irreducible. One that can be evaluated on the least simple machine, a cellular automaton as in NKS to exclude any chance of shortcut. A time chain with such POW would give us the most precise measurement of time with computation.