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In the article, Bitcoin has been alternatively used as (B)itcoin, representing the underlying protocol, and (b)itcoin, representing the cryptocurrency.
Eleven years ago, on May 22, Bitcoin—then a fringe internet subculture—made the all-important jump from 'nerd' forums into the real world. On that day in 2010, Laszlo Hanyecz, hailing from Florida in the US, bought two pizzas with 10,000 bitcoins; this was the first recorded commercial transaction involving the cryptocurrency. May 22 has since been immortalised as Bitcoin Pizza Day, marking the first stage in a long ladder of evolution. It became the hot favourite for drug dealers on networks like Silk Road, and made its way into the gaming culture where it became ‘loot’ in World of Warcraft (WoW), and fifth and consolation prizes in gaming tournaments. As 2022 dawns, Bitcoin stands at a market cap of over $900 billion, and global notoriety as one of the most polarising assets in the world. Any mention of its name, and the reactions will range from Nobel and Turing Prize shouts for enigmatic founder Satoshi Nakamoto, to vehement calls for an immediate ban on the ‘world’s greatest Ponzi scheme’.
Now, Bitcoin stands at an inflection point. Major global players like India and the US are on the verge of announcing regulations on the now 10,000-strong cryptocurrency market, and the aftershocks of their decisions will linger in more ways than one. Most nation states have been ambivalent on crypto, with the most notable exceptions existing on two extremes; China has criminalised mining, trading and holding cryptocurrencies, while El Salvador has adopted it as legal tender. Most countries have expressed vocal concerns over the crypto surge. India, for instance, has raised in various international fora the threat of bitcoins as a funding and payment mechanism for cross-border terror, and Prime Minister Narendra Modi had warned in November that the technology should not be used to undermine democracies.
At the heart of this debate, says Vijay Boyapati, a former software engineer and the author of the The Bullish Case for Bitcoin, is a tug-of-war between the individual and the state for control of the monetary system. “Nation states have fought very hard to get their current [absolute] monopoly over monetary policy, prising it away from gold a thousand years ago. They are very reluctant to give it up. I think what will happen is that populations will, over time, lose faith in government. After all, the incentives of those who control the monetary policy are political, not economic [and hence they don’t align],” says Boyapati.
To understand the crux of Boyapati’s argument is to understand the past and the present natures of the cryptographic payment system that first took shape in 2009, out of an obscure ‘Cypherpunk’ internet forum.
Understanding Bitcoin architecture
In Nakamoto’s peer-to-peer currency paper that first introduced bitcoin to the world, a specific kind of decentralised ledger technology (DLT) called blockchain was introduced. Imagine a system with no centralised authority, where ledgers (record of accounts and transactions) are distributed among every participant in that financial system. In blockchain, the ledgers are updated in blocks of entries, each of them time-stamped, linked to all of the previous entries. All entries are immutable—they can’t be amended under any circumstance. The participant nodes can maintain a continuously updated ledger. There are numerous versions of blockchains. They can be public and permissionless (like Bitcoin), or private, permissioned (which is centralised to variable degrees, with user entry and participation restricted).
This decentralised concept gives rise to both opportunities and challenges. How could a system work among of a group of participants—any number of them could be bad actors—given the option of pseudonymity? Who will update the ledger? How will the system reach a uniform version of truth?
The beauty of Bitcoin was in the way it solved a lot of the long-standing issues with cryptographic consensus methods that included hashing and digital signatures with a combination of private and public keys, and carefully aligned economic incentives. Suppose User A wants to transfer 1 bitcoin to User B. The transaction data would be authenticated, verified, and moved to the ‘mempool’, where they will be collected in groups or ‘blocks’. Around 3,000 transactions will appear in one block, which will also carry the ‘block hash’, which is a cryptographically hashed version of the global state of the ledger—a record of all the transactions that have taken place since the genesis block.
The next big question is who among the participants in the system gets to place the block (ie write the next entry in the ledger). That is where the consensus protocol comes into play. Bitcoin employs something called as the ‘Proof of Work’ (PoW); the participants are pitted in a virtual race to determine who can solve a complex mathematical puzzle to derive the block hash first. This process is called ‘mining’, and the miner who first solves the puzzle gets to place the next block in the chain. The miner is incentivised to be an honest player—if the entry is validated, she is rewarded with a certain amount of bitcoin. Once the block is placed, the transactions are validated and a set number of bitcoins are transferred as reward.
Think of a real-world analogy: Clues are hidden in a gigantic mansion that is thrown open to everyone, and the person who finds a clue is rewarded financially.
In essence, with PoW, your identity in the Bitcoin system, and your weightage in it, is directly proportional to the computational power you expend on it.
What does Bitcoin herald?
There is a political context to Bitcoin’s genesis. The first block was mined one year after the 2008 global financial crisis that sent the US, and large parts of the world, into a devastating recession. This was followed by quantitative easing (in simple terms, printing money) in the US, which largely saved the world from something akin to a Great Depression. The banks were bailed out, but common people suffered. There was a great erosion of trust in the established financial institutions of the West. The genesis block of Bitcoin has a message explicitly referencing the financial crisis, and its programming espouses counter-culture values—it defies international borders, it is difficult to manipulate or seize, and it is anti-censorship. The first alternative economic model for a global populace, as the Bitcoiners put it.
In a cryptographic sense, Nakamoto’s white paper precipitated huge advances. It was the first to propose a solid solution to the knotty Byzantine Generals Problem within a global permissionless system, solved the issues of double spending (where the same bitcoin is spent twice), and Sybil attack threats (when an attacker creates a large number of identities to take over the system). It resulted in the development of concepts of complete anonymity like Zero Knowledge Proofs (ZKP), once described by Ethereum founder Vitalik Buterin as 'moon math' because of the sheer challenges involved.
On the economic side, Bitcoin leans heavily on the ‘deflation is good’ Austrian school of thought—very libertarian, and against any sort of government intervention in markets—repudiating the prevalent neo-Keynesian and monetarist orthodoxy. For the ABCT advocates, Bitcoin is the only remaining version of ‘sound money’, which is something “capable of obstructing the government’s meddling in the currency system”, as economist Ludwig von Mises wrote in 1912. For them, the fiat currency system (sovereign currencies with floating exchange rates post the gold standard era) is essentially intrinsically valueless, and ripe for unbridled government inflation and debasement leading to destruction of purchasing power. Bitcoin, they argue, is the exact opposite—it is deflationary, it has a fully non-discretionary monetary policy governed by algorithms, has limited supply, and as long as demand does not dip, the price would surge. As the popular online adage goes: “only up”.
Why is Bitcoin often referred to as digital gold? In every metric, Bitcoin tries to take after the yellow metal. Gold is a scarce commodity. Bitcoin copies that scarcity into the digital domain. There are finite number of bitcoins (21 million in total), and this cannot be changed. The more gold is mined, the harder it is to get more reserves. In a similar way, the more computing power goes into mining bitcoins, the harder the process becomes, courtesy the algorithm. Every four years, miner rewards are cut in half, in what are popularly known as ‘halving events’. Also, it is not theoretically impossible to synthesise gold from other elements; it is just that the nuclear power required for the process makes it prohibitively expensive. The same is the case with Bitcoin. The quantum of resources required to capture 51 per cent of the nodes (and thus the system) is exponentially higher than any incentive that can fuel such an act.
“In fact, bitcoin is superior to gold in every way,” says Boyapati. “Bitcoin is far more portable than gold. It is much more verifiable—you can state with mathematical certainty that you actually have a bitcoin, while it is much harder to verify whether you are in possession of fake or real gold. Bitcoin is far scarcer than gold; there will never be more than 21 million bitcoins, while gold supply increases two per cent every year and is prone to supply shocks [like during the European ‘Discovery of the New World’ in the past, or if technology makes deep sea or asteroid mining economically profitable in the future]. So, these are huge comparative advantages.”
What makes Boyapati most bullish on the cryptocurrency, he says, is that when nation states continue exerting heavy-handed monetary control measures, “individual self-interest will drive the monetisation of bitcoin, and there is an inevitability to that”.
That is not to say everything is sunny. Far from it. Bitcoin (still) faces massive scalability issues—the issue first came to the fore in 2015 amid an onrush of adoption, a surge of users, and the transfer process turned very slow and patchy. Bitcoin advocates would point to the second layer Lightning Network that has eased the issue to a large extent. “I think Lightning Network is a profound innovation, allowing for cheaper global transfers in smaller amounts. Bitcoin network, at the base layer, is meant for global settlement,” says Boyapati.
Economists across the world have raised serious questions about the fundamental value of the network, often comparing Bitcoin to Ponzi schemes or speculative bubbles like the 17th century Tulip Mania. “Bitcoin has completely failed in its primary purpose as a global payment system. Scarcity alone cannot be a measure of value,” Eswar Prasad, Tolani Senior Professor of International Trade Policy at Cornell University, had told THE WEEK. And, some of the concerns are quite justified, to an extent. There are more than 7,000 cryptocurrencies in circulation, all of them various shades of game-changing tech, pump-and-dump speculative assets, and outright money-grab scams. Prices are highly volatile, market manipulation is brazen and apparent, and there are no regulatory authorities. From a customer perspective, this means you can get ‘rugged’ (rug pulled under you by fraud actors), face exchange hacks, hardware wallet hacks, lose your wallet access, and there is absolutely no recourse available for you.
Bitcoin is also facing massive pressure from environmental activists, because of the tremendous energy requirements of the mining process—it is estimated that bitcoin mining takes up more energy annually than the whole country of Finland.
Within the cryptocurrency market, Bitcoin is facing a lot of pushback. Amid the rise of 'altcoins' like Ethereum (positioning itself as the decentralised internet), there are growing calls for the crypto market to decouple from the "skeletal, first generation" Bitcoin (often derogatorily referred to as boomer coin), and taunts about the perceived inflexibilities and dogmas of their developer community. However, as the Bitcoiners would point out, comparing Bitcoin to any other crypto network is like comparing apples to oranges—the former is the only system, they say, that is "truly decentralised" and sports a non-discretionary monetary policy that just about anybody can opt into. Against criticisms of not moving ahead with the times, Bitcoiners point out the recent chain upgrades in the form of Schnorr/Taproot.
So, what does the future hold ahead for Bitcoin?
In conversation with THE WEEK, Boyapati speaks about Bitcoin’s future, why it can never be compared to any altcoin, and pushback against the energy consumption narrative.
1. In traditional economics, money has to fulfill three purposes: a store of value, medium of exchange, and unit of account. Which of these criteria does Bitcoin fulfill? What would your response be to people who question its intrinsic value
One of the big failures of modern economics is that it defines money as a medium of exchange. That is just one of its functions. Bitcoin is a new, emerging form of money. As economist William Stanley Jevons said, forms of money don’t immediately become mediums of exchange. What is happening is that Bitcoin is going through the four stages of evolution, the same process that gold went through. It starts as a collectible [historically gold started as a collectible as well, because of its shiny appearance and scarcity in nature], and then slowly and surely becomes a store of value. Eventually, when it becomes widely established as a store of value, it becomes suitable as a medium of exchange, something which everything else is priced in terms of. People who say Bitcoin has failed don’t understand that it is still a nascent store of value. It will become a medium of exchange, but it is in the early stage of that evolution. The Lightning Network will allow Bitcoin to transform from the store of value use case to a medium of exchange use case.
2. When drawing parallels between Bitcoin and gold, are we underestimating the cultural value accrued over years and generations by the yellow metal?
The fact that gold has a long-standing history is an advantage only for a fairly short period of time. That is because people’s trust in a new technology, or a new economic good, rises asymptotically, very quickly. Take case of internet. From the 1990s to 2000s, nobody really understood why the internet existed or whether it would be permanent, or anything like that; fast forward another ten years, and literally everyone grasped the transformative effects of the medium. It was affecting every industry and every aspect of our lives. It will be true for Bitcoin as well. Bitcoin has been around for one decade. Give it one more decade, and you will have a whole generation of people who don’t know a world without Bitcoin, and who will keep their savings in BTC.
3. What will be the future of Bitcoin?
I think Bitcoin’s primary function will be as a global reserve asset. I think in 20-50 years, it will become the new global reserve currency, replacing the dollar. That will happen for a number of reasons. Bitcoin has a lot of properties that make it superior to fiat currencies. One such attribute is scarcity. There is no limit to fiat money, and we have seen in past year how many trillions and trillions of dollars have been created [out of thin air] by US. I think nation states, and we have already seen the beginning of this in El Salvador, will want to hold bitcoins as an asset that is valuable, that isn’t controlled by any other nation. Holding reserves in dollar, you are completely at the mercy of the US.
4. As third and fourth gen networks start coming up, what is the future of Bitcoin within the cryptocurrency market?
Bitcoin has one big property, and that is true decentralisation. The importance of true decentralisation is that no one has the ability to change its core attributes, which give it the comparative advantage. If we could change monetary policy of Bitcoin as easily as changing monetary policy of dollar, what value is there at all? Ethereum recently changed its monetary policy to become more deflationary. Proponents of the chain say that it makes it superior to BTC. What they don’t understand is that it is not the monetary policy that matters the most, it is the credibility of the monetary policy. Bitcoin is only system that is truly decentralised. It is the only system that has come under attack by nation states, and proven itself resilient. As a computer scientist by training, a lot of these new altcoins are interesting from a technological perspective, but not from a monetary or geopolitical perspective. There are a lot of projects copying what Nakamoto did. Most of them have been made to enrich the creators themselves. They have massive pre-mines. The creator keeps 70-80 per cent of the entire supply. No government is going to allow any of these coins to become global money if 70 per cent of supply is held by just a couple of people.
5. How would you address the questions posed by environmental activists concerned by Bitcoin’s energy consumption?
This is one of the biggest misunderstandings when it comes to Bitcoin, and one of the biggest reasons for anti-Bitcoin activists to attack the system. Bitcoin is actually one of the most powerful forces for good in the development of renewable energy. What Bitcoin does is give economic incentives for development of renewables. Consider an area where natural gas is extracted, and there are outbursts of methane, which is very harmful when it goes out into the atmosphere. What the Bitcoin community can do is come in and say: “We will take your methane. We will use it as fuel for Bitcoin mining.” A few companies in the US are now starting to do this. You should not just look at how much energy Bitcoin is spending, you should look at where it is being spent on, and whether or not it incentivises renewable energy. Total energy footprint is a naïve way of looking at things.
6. India is discussing regulation of cryptocurrencies. What if it decides to ban bitcoins?
India can try and ban it, and try to make it illegal to own bitcoins. That is not going to change anything, because all you need to do is hold your private keys. All you need for that is a computer and a phone. A ban will just put the Indian people at a major disadvantage when compared to the rest of the world. It is like saying: We don’t like our people communicating freely in India, so we will ban the internet. All that will do is impoverish the Indian people. I hope the people in power recognise that this is a potentially transformative technology. Give the Indian people freedom to save and build on this new technology.