Written by Sergio Barbosa on January 20, 2021

It is over for Bitcoin

Bitcoin will never make it.  It has no practical application.  I mean, how can you rely on a currency whose value in real terms changes every second?  You cannot expect the lay person to accept that the price of the BigMac on the menu behind the checkout counter is going to change many times before they get to the front of the queue to place their order.  And then they must wait for 10 minutes while their payment is confirmed in China (because that is where 65% of all Bitcoin is mined) and a ton of coal is burned?

I am sure you hear comments like this all the time when you are not in your Crypto echo chamber.  And they are very valid with one caveat.  The reference point for comparison is the current status quo of what money is and how we pay for things.  The problem with this is that Bitcoin lives in a parallel financial dimension.  To compare it to Fiat money like the US dollar, or to compare the payment mechanism to what we have available from the card schemes of VISA and Mastercard, would be like comparing a car to an aeroplane.  They both can get you from A to B, but in very different ways.  Cars and planes live in the parallel transport dimensions of land and air, respectively.  If you had to use the plane to get from A to B, but it had to stay on the ground all the time, it would be impractical and frustrating.  And trying to get a car to fly… well good luck with that.

The parallel financial dimension that Bitcoin lives in is the decentralized financial dimension.  Fiat money like the US dollar and the card schemes of VISA and Mastercard live in the centralized financial dimension.  The decentralized financial dimension is in its infancy though.  Bitcoin is just the very first building block of that dimension and is much more like gold than it is like the US dollar in today’s terms (because the US dollar and Fiat money in general are not backed by their underlying assets anymore and there is no limit to the supply).  In the early days, gold was also cumbersome for frequent transactions, and reserved for less frequent, larger, settlement type transactions.  Over the centuries, services were built on top the underlying asset of gold to make it more convenient and secure to use, like bank notes/cheques, credit, loans, exchanges, insurance, etc.

The recent surge in the value of Bitcoin (relative to the US dollar for example) can largely be attributed to the rise of the next set of building blocks in the Bitcoin timeline. Aptly name DeFi, for Decentralized Finance, these next set of building blocks make use of Smart Contracts (mostly Ethereum based) to build brand new financial services that are decentralized.  Ethereum and Smart Contracts are not new, it is just that the penny has dropped for using them to build financial services for this decentralized financial dimension (rather than all the other silly app ideas Ethereum has been used for in the past).  Ethereum combined with the use of overcollateralized stable coins (specifically DAI) to remove price volatility, makes it possible to build a fully fledged financial system that is decentralized - one that lives in parallel to the centralized financial system we have today.  Additionally, stable coins provide the bridge or connection point between the centralized and decentralized financial dimensions.

Take for example an Exchange like Binance or the NYSE.  These are centralized.  Ultimately, the small group of people or single person in charge of these organizations will make the final decision on how they work and who they will work with.  A Smart Contract can do exactly these same things, with the added benefit that it is immune to censorship.  This means that an entire Exchange can be completely deployed within the boundaries of a Smart Contract in this decentralized financial dimension and provide all the features of an Exchange in a completely autonomous and incorruptible manner.  Once the Smart Contract is deployed, that is how it will work forever (unless the consensus decides to hard fork of course, which is a much more democratic turn of events).

The first of these DeFi Exchanges, or DEXs, have seen immense adoption across the Crypto community and have given rise to the development and adoption of other decentralized services collectively referred to by the ghastly name of “Money Legos” (I mean, Lego is just way too sacred to allow the term to be claimed like that!). These “Money Legos” when combined are designed to provide complex services like lending and liquidity management for the decentralized financial dimension to name a few.  All the core building blocks that you need in a fully-fledged financial system.  It will not be long before you see the first completely decentralized bank using a combination of these “Money Legos” to offer its services to the market, except, it does not have a banking license issued by a central bank.  The bank itself will probably be funded by its own ICO, and it can be used as the foundation to build the user experiences that consumers and businesses in today’s centralized financial dimension have learnt to expect, and then outclass them completely.

Like the analogy with the car and the plane, in some cases it makes sense to use both at the appropriate time to get from A to B.  You might take the car to the airport, fly somewhere, and then take a car to your destination after you land.  I see a future where both the centralized and decentralized financial dimensions work together to provide a more stable financial system for the world.  We cannot deny how successful Bitcoin has been with the “gold use case” of the less frequent, larger, settlement type transactions with the likes of TransferWise for example.  They are a great early example of the centralized and decentralized financial dimensions working together with only the very first building block of the decentralized dimension. 

When I say, “It’s over for Bitcoin”, I mean the fight for proving the use case for Bitcoin is finally over, and we know undoubtedly that it is useful and here to stay.  We are on to the next thing now of building a decentralized financial system on top of it.  In the past 20 years we have seen the erosion of personal privacy, the near collapse of the financial system and an increase in censorship and control, all by centralized authorities.  Over the coming decade, the willingness for the world to fight back against that trend will tell how far down this decentralized rabbit hole we go.

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