Skip to main content

The motivation behind this article

So, if a solution to this problem already exists, what is the purpose of this article?

Bitcoin promised to be a peer-to-peer electronic cash system, but as we have seen in recent years, Bitcoin no longer fulfils that promise.

You read and hear virtually everywhere that Bitcoin is a peer-to-peer payment method, i.e. a direct transaction between payer and payee. As previously demonstrated, this is technically impossible for a digital money system. Peer-to-peer merely describes the type of network used for communication between the Bitcoin network’s operators, not the manner in which payments are settled between two parties (as is possible in the case of gold).

However, this part was not the motivation for this article, but rather the assertion that Bitcoin is an “electronic cash system”. Bitcoin cannot be considered an electronic cash system suitable for micropayments if it lacks several of the essential features of cash, such as:

  • no scalability limits
  • instant transactions
  • final transactions (once cash is handed over the transaction is final)
  • no transaction fees (or consistently very cheap)
  • energy efficient
  • untraceable

All of these characteristics are needed for a monetary good to be viewed as a serious alternative to the current fiat monetary system. If not, it’s just another asset class (albeit a superior one to all the other asset classes, as Bitcoin is quite evidently an above-average store of value so far). Nevertheless, based on all of Satoshi’s publications, we may conclude that he never intended to create a new asset class, but rather a decentralised money system with all the characteristics of sound money (i.e. a money system that cannot be devalued). Satoshi probably just didn’t expect such a high demand for Bitcoin, so that one day it will become less attractive as a medium of exchange and mainly be used as a store of value.

Since the very essence of money is its utilisation, we must facilitate these cash-like characteristics to the greatest extent possible. As Dr. Saifedean Ammous says in his book The Bitcoin Standard (page 155):

As money is acquired not for its own properties, but to be exchanged for other goods and services [...]

Or as Ludwig von Mises puts it:

[...] Money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it.

Everything else is not money.

One could argue that (1) Bitcoin need not be a good medium of exchange in order to be a good store of value, or that (2) we place too much weight on Satoshi’s intentions. Let’s examine these two arguments separately:

  1. Yes, it is true that a technology does not necessarily have to be used exclusively for the reason for which it was designed. If a technology is also well-suited for a different purpose, of course it can be employed for that purpose as well. And in the case of Bitcoin, it has performed exceptionally well as a store of value thus far. But if Bitcoin can only be used in a limited capacity as a medium of exchange, it cannot replace the fiat currency systems. Because for this it would have to exhibit the cash-like characteristics listed above. One does not drive global adoption of Bitcoin by investing one’s savings in Bitcoin and waiting for its appreciation, but by using it for day-to-day payments and educating others about the problems and solution to our broken monetary system.

  2. It is not necessary to be a fundamentalist of the Bitcoin white paper to believe that the medium of exchange function is as vital for a monetary good as the store of value function. The real issue that has led to the whole Bitcoin (BTC) vs Bitcoin Cash (BCH) debate is that Bitcoin by itself can only be good at one of these two functions. And logically, the market chose BTC, because there are already plenty of good media of exchange out there, but there is no comparable store of value to Bitcoin that has all the characteristics of sound money. But what we seek is a monetary good that is at least as good as Bitcoin at storing value and also possesses the features of cash. Because, regardless of Satoshi’s viewpoint, the ability to be a scalable medium of exchange is crucial for a global money system. There’s absolutely no reason why somebody wouldn’t want a money system to be a good medium of exchange so long as the store of value function isn’t adversely affected. To the contrary, if a superior store of value is also a superior medium of exchange, this will increase usage and thus adoption, which in turn will be reflected in the price. In other words, even someone who owns bitcoin primarily for the appreciation of its value should be a strong proponent of the medium of exchange function, because it accelerates the intended process.

Unfortunately, Bitcoin will never be a good medium of exchange on layer 1 (i.e. with its main blockchain). Because of this, thousands of Bitcoin alternatives as well as layer 2 solutions have emerged, with many of them attempting to remedy Bitcoin’s scalability issue. To acquire some of these cash-like characteristics, Bitcoin’s competitors have had to cut back on either security or decentralisation, which of course has not proven to be a successful tactic.

Sadly, layer 2 solutions are not an effective remedy, as all known layer 2 concepts and solutions introduce new shortcomings, such as:

As this article focuses primarily on Bitcoin as the solution to the broken monetary system, we have paid special attention to the Lightning Network in the above list, as it is currently the most promising and widely used layer 2 technology for Bitcoin.

To fix the broken monetary system, we need a solution that can easily scale globally (i.e. be used by everyone on earth without reaching its limits). If a technology cannot achieve this, it is not a solution! Because a system that can only be used by a small fraction of the global population means, conversely, that it is not a solution for the majority of people, leaving them defenceless against the effects of the fiat monetary system.

If the Lightning Network could easily scale globally, this article would be superfluous. However, according to its creators, the Lightning Network is struggling to meet this important requirement. Let’s look at the much-discussed passage from the conclusion of the Lightning Network white paper (page 55):

If all transactions using Bitcoin were conducted inside a network of micropayment channels, to enable 7 billion people to make two channels per year with unlimited transactions inside the channel, it would require 133 MB blocks (presuming 500 bytes per transaction and 52560 blocks per year).

We now have 8 billion people on earth, which would increase the assumption from 133 MB blocks to around 150 MB blocks. In addition, we believe there are several reasons why two channels per year is not realistic. A more realistic scenario would be one channel per month, which would increase the required block size to over 900 MB.
Even if we were to use proposed solutions such as batch opening, channel factories, splicing, etc. and were able to reduce the on-chain footprint by 90%, blocks of at least 15 MB or realistically closer to 90 MB would still be required, which is many times the current block size of Bitcoin.
With or without on-chain footprint optimisations, it always affects either the decentralisation (and thus security) or the usability (making the Lightning network inaccessible to many people) of the Bitcoin network.

All of the above is why we have serious doubts about the technological feasibility of developing a layer 2 solution that is as secure, decentralised, and accessible as the underlying layer 1; otherwise, the layer 2 solution could simply be used as the main blockchain. But if it’s not as secure, decentralised, and accessible as the layer 1, it poses new risks for the users of the system. For this reason, we do not believe that layer 2 technologies are a future-proof solution to this problem.

This implies that all previous efforts to make a decentralised system scalable (whether layer 1 or layer 2 solutions) have had to cut back on either security and/or decentralisation.

However, Bitcoin is a great example of the importance of decentralisation and security in a money system. Every serious bitcoiner (some call them Bitcoin maximalists) understands that there is no other cryptocurrency that is as decentralised and secure as Bitcoin, which are the two most critical features of a future-proof money system.

In addition, features such as censorship-resistance, stability, permissionlessness, neutrality, incorruptibility, etc. are essential for the success of a DLT-based solution. Because of all these characteristics, it is virtually impossible for powerful (groups of) individuals, organisations, governments, companies, billionaires, etc. to exert significant power over Bitcoin. Because of these characteristics, nearly 14 years after its release, Bitcoin remains the most valued decentralised digital money system, despite its flaws.

So imagine where we could be right now if Bitcoin possessed each of the following characteristics:

BitcoinDesired money system
Scala-bilityBetween 2 and 6 transactions per second in the past 7 yearsAt least ≈ 43,000 transactions per second to be able to compete with the current digital fiat transaction volume (and even more in the coming years); Ideally no limit
SpeedOn average at least 5 minutes (with a blocktime of 10 minutes)Under 5 seconds for most (>90%) transactions (10 seconds maximum)
FinalityBetween 1 and 16 hoursImmediately (only depending on the speed of the transaction)
FeesThe daily median transaction fee has been between a few cents and US$34 in the past 7 yearsNo transaction fees cause spam and aren’t economically viable for a DLT system; however, fees should be predictable and no more than 0.1% of the transaction amount (with a hard upper and lower limit)
Energy usage2,188.59 kWh / transaction (as of April 25, 2022) [total energy consumption of the Bitcoin network is still less than the banking system]The absolute bare minimum (only what is necessary for the verification and processing of transactions)
PrivacyBad by default, but tech-savvy people can improve itMedium privacy by default and strong privacy on demand (similar to Litecoin’s MWEB)

We are firmly convinced that the global adoption of Bitcoin is much slower than it could be due to its lack of these cash-like characteristics and its poor user experience, and that this is why so many companies have ceased accepting Bitcoin as a payment method.

Therefore, in order for a digital money system to be a viable alternative to the fiat monetary system, it must not only be able to withstand all influences from governments, organisations, companies, etc. but also meet all the requirements of a future-proof money system.

So, what exactly are the requirements for a future-proof money system?