Crypto trading has taken the back seat in the digital economy in 2022, with the market remaining under the bears' control for most of the year. Furthermore, traders have seen their faith rocked by the consecutive failures of centralized exchanges. These intermediary marketplaces have been the powerhouse of the industry since its humble beginnings. Now, they seem to crumble under mounting allegations of scams, lawsuits, and solvency concerns. Meanwhile, they make a convincing case for the imminent decentralization of crypto…
Simplicity leads to security, and a more decentralized blockchain. If Bitcoin were more expressive, it wouldn’t be effective as a global, neutral monetary network.
There are now over 17,000 cryptos listed on CoinMarketCap. As always, nearly all of these coins, tokens, and blockchains advertize themselves in comparison to the very first.
Faster than Bitcoin. Flashier than Bitcoin. Better returns than Bitcoin. Environmentally-friendlier than Bitcoin. We know the script.
Yet everything comes at a cost. Where other blockchains purport to provide upgrades to Bitcoin’s old, stale, and sluggish blockchain, they merely present tradeoffs.
Altcoin trade-offs usually involve a sacrifice of network security and decentralization. These qualities are, of course, the entire premise of Bitcoin and “crypto” – yet aren’t very effective buzzwords from a marketing perspective.
Why? Because of these metrics, altcoins simply cannot compete with Bitcoin in any meaningful way. The primary cryptocurrency is optimized for maximal distribution of its ledger, as part of its purpose-built mission to be uncensorable, stable, sound money.
Like anything, this design choice necessitates trade-offs of other attractive qualities such as speed, functionality, and even profit. In other words, they make Bitcoin boring.
This article will explain why the aforementioned features are mutually exclusive with the decentralization Bitcoin strives for. It will simultaneously argue why Bitcoin’s trade-offs are necessary for it to work while highlighting why alternative chains like Ethereum can’t do the same job.
Why Bitcoin Is Slow
Bitcoin’s blockchain can only process an average of 7 transactions-per-second (TPS). That’s microscopic when measured against traditional payment processors like Visa, which manage 1700 TPS and claim a capacity of 24,000 TPS. In any case, Bitcoin is far too slow – at the base layer – to manage fast and affordable transactions at a global scale.
Theoretically, the solution to this problem is quite simple: to make Bitcoin faster/ more scalable, just increase its block size.
Blocks are the data structures that store and record every transaction that has ever taken place on Bitcoin’s ledger. These blocks are sequenced in a chronological and linear “chain,” commonly known as a blockchain.
Two core variables surrounding the blockchain determine its transaction speed: block size, and block speed. Block size refers to the available memory space to store transactions in each block, while block speed is the rate at which new blocks are produced. For Bitcoin, blocks are 1 megabyte large at a maximum and are produced once every ten minutes on average.
Unfortunately, loosening either of these restrictions is off the table for Bitcoin. Increasing block size/ speed in any meaningful way would make it far too difficult for average people to run a Bitcoin node.
Nodes and Node Count
To clarify, “nodes” are Bitcoin users that keep the network decentralized and functional. They enforce the network’s software rules that other users and miners must follow, while also storing a full copy of Bitcoin’s blockchain, dating back to the very first transaction.
According to Bitnodes, there are at least 15,000 global users running Bitcoin nodes, maintaining the rules, and verifying transactions. One Bitcoin core developer – Luke Dashjr – maintains that there are actually over 100,000 nodes, but not all are visible.
By keeping blocks limited in size and slow to mine, Bitcoin’s blockchain remains small enough for average people to store. It also keeps it within their upstream capacity – which is needed for nodes to quickly upload new blocks to their peers.
Currently, Bitcoin’s entire blockchain is about 380 GB large. This size will increase with time, but at a slower rate than affordable storage, technology will expand.
Thankfully, solutions exist today which allow Bitcoin to cost-effectively speed up transactions without bloating the blockchain. These include layer-2 solutions like the lightning network, and sidechains with faster block times such as Liquid and Rootstock.
Why Bitcoin Lacks Functionality
When YouTube’s famous CEO and entrepreneur Gary Vaynerchuck was introduced to both Bitcoin and Ethereum in the mid- 2010s, he clearly preferred the latter.
“What I love about Ethereum is that it’s so much more agnostic than currency,” he said to a fan. “That’s us doing lease deals with each other – it’s way beyond that.”
Today, Ethereum has established itself as the only other “primary” or mainstay crypto besides Bitcoin. Some even conceive of it as a competitor to Bitcoin’s market dominance.
Why? Because Ethereum promises a host of blockchain-based decentralized applications besides just money. Most popular among these have been decentralized finance (DeFi) and non-fungible tokens (NFTs). Ethereum allows for these applications using smart-contracts – self executing code that enables complex transactions to occur automatically when certain conditions are met.
However, smart contracts are much more difficult to create on Bitcoin than Ethereum. That’s because Bitcoin uses a “Turing incomplete” programming language, which significantly reduces the computational complexity of problems that the network can solve.
For Ethereum – which is intended to be a playground for various decentralized applications we’re yet to imagine – Turing completeness is necessary. However, Bitcoin – which is purpose-built to allow for simple monetary transactions – is best kept Turing incomplete.
This is for two reasons. Firstly, by keeping programming options limited, developers can deterministically predict how Bitcoin will react in a limited scope of scenarios. Secondly, less complex transactions take up less space on the blockchain, allowing more simple transactions to fit into a block. In this way, Bitcoin maximizes its efficiency as money while minimizing performance issues.
Remember: Bitcoin was created in the aftermath of the 2008 global financial crisis as a remedy to the economic damages caused by fiat money and central banking. Satoshi even took note of this in a reference he placed in its genesis block.
This is an issue of global import that Bitcoin must not fail to solve. Adding computational complexity to the network only increases the risk of that failure.
Some may believe that these risks are overstated, but they’re far greater than most are aware. Due to its advanced functionality and transaction speed, running an Ethereum full node requires over clearly of storage than a Bitcoin node, despite the chain being half as old. What’s more, running an Ethereum archival node already requires almost 10 terabytes of space.
This difficulty of storing all data related to the Ethereum blockchain has caused much of its functionality to rely on sourcing data from large, centralized, easily targeted databases. As Signal founder Moxie Marlinspike explains of the popular Ethereum wallet MetaMask:
“MetaMask displays your recent transactions by making an API call to etherscan, displays your account balance by making an API call to Infura, [and] displays your NFTs by making an API call to OpenSea (…) To make these technologies usable, the space is consolidating around… platforms.”
In summary, Bitcoin restricts functionality unrelated to its dedicated purpose to ensure its servers (nodes) stay distributed. This makes the network unfeasible to take down – even by governments.
Why Bitcoin Is Less Profitable
Well, this is a funny criticism. Isn’t Bitcoin appreciating at an average of 100% per year? Didn’t Goldman Sachs call it the top capital market of 2021? How could Bitcoin be “unprofitable”?
Take it from Raoul Pal – CEO of Global Macro Investor, and vocal crypto community member. Though Bitcoin gripped his interest in 2017, today he only owns 1 BTC and has shifted almost all of his crypto investments to Ethereum and other altcoins.
The investor has previously stated that there is theoretically “no reason” to invest in Bitcoin. Instead, he encourages investing in altcoins during the crypto bull market, and in stablecoins during the bear market for maximum profit.
In a way, Pal is correct: Ether has outperformed Bitcoin by 250% since inception, especially in 2021. Even other altcoins like Solana and Terra managed to dwarf Bitcoin’s gains.
Of course, this reality must be recognized for what it is: crypto projects clinging to Bitcoin’s coattails.
A Rising Tide
“Crypto” bull markets do not fall out of the sky. In 2013, 2017, and 2021, all were spurred by Bitcoin’s halving cycle. The halving cycle is the function whereby Bitcoin’s supply issuance (block subsidy) is cut in half approximately every four years. Their occurrence has always coincided in a supply shock that sends Bitcoin’s price soaring the following year.
Of course, with so many altcoins in the space (which often have dedicated marketing teams), new investors drawn in by Bitcoin’s parabolic gains can be distracted easily. Unwary of the meaningful differences between the likes of Bitcoin and Shiba Inu, they end up spreading their money across different coin projects.
However, because other coins have smaller market caps than Bitcoin, they see greater returns for an otherwise equal investment of capital across the market. This makes them “more profitable” than Bitcoin when markets are bullish.
Proof of this phenomenon lies in the very thing that should make investors hesitate before trading all of their Bitcoin for Doge. That is, when Bitcoin falls, other coins fall too – and harder.
Michael Saylor – CEO of MicroStrategy – is one of the world’s single largest Bitcoin investors. He theorizes that Bitcoin’s volatility is largely due to how deeply tied its investors are in leverage trading the volatility of other cryptocurrencies.
“If you look at minute-by-minute trading patterns of Bitcoin versus ETH, they’re trading in lockstep almost every sixty seconds,” he told Saiffedean Ammous on the Bitcoin Standard Podcast. “You’ll see a dump in the market in ETH, and it’ll be reflected in Bitcoin in thirty seconds”.
Some altcoins stay relevant long term, even after a bear market. Most, however, cannot stay afloat without Bitcoin succeeding under them. As Warren Buffet once said: “Only when the tide goes out do you discover who’s been swimming naked?”
There’s another reason some coins’ prices may perform better than Bitcoin’s – one strictly related to design choice.
In August, Ethereum implemented EIP-1559, an upgrade that continuously burns a large portion of the Ether supply. This significantly reduces its net inflation, helping each unit hold its value over time, similarly to Bitcoin with its 21 million supply cap.
However, Ethereum and other coins are quickly becoming deflationary currencies. In other words, they actively burn more token supply than is regularly minted or mined. Therefore, in comparison to Bitcoin’s “digital gold” or “sound money” label, Ethereans have taken to calling Ether “ultrasound money”.
While effective for pumping a coin’s price, the design choice is impractical for providing an affordable network. After all, the way networks like Ethereum gather coins for burning is through transaction fees. To make Ether meaningfully deflationary, it has to impose transaction fees that are highly burdensome for small transactions.
The results aren’t pretty: Ethereum gas fees are regularly $20 or higher these days, compared to Bitcoin’s average transaction fee of just $1.27.
If Bitcoin were to adopt a similar deflationary mechanism, it would likely see similar increases in transaction fees that make it infeasible as a monetary network.
Bitcoin’s design isn’t outdated or obsolete: it simply prioritizes maximal security and decentralization before carefully considering other upgrades. In that sense, it’s a highly conservative network and community.
The primary cryptocurrency doesn’t have to be feature-rich. It only needs to perform the basic yet unprecedented function it was created for – to be peer-to-peer, censorship-resistant electronic money. If it can do that, it will continue to last and grow, while carrying the many flashier altcoins on its back.