The author of this article, Jimmy Song, was originally compiled by Cobo and does not represent the views of Cobo
For every newcomer to digital currency, digital currency is undoubtedly a crazy market. In the past few months, you have probably witnessed countless pumps and crashes. There are as many as 2,600 digital currencies that look dazzling and confusing: what are the differences between these currencies? How to distinguish one currency from another? Most importantly, how can investors know the long-term value of a coin?
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real innovation
To truly understand Bitcoin’s value proposition, one needs to step back and look at its history. There are always new ICOs or altcoins popping up claiming they can solve Bitcoin’s problems and replace it. Virtually every altcoin, ICO coin, or fork thinks they are innovative on some issue. But they all ignore the fact that the biggest innovations already exist.
The real innovation is the decentralization and scarcity of digital currencies, and Bitcoin is the first and only digital currency to achieve this innovation. All other so-called innovations, such as shorter block confirmation times, various PoX consensuses, Turing completeness, new signature algorithms, transaction ordering rules, and even anonymity, are all based on Bitcoins innovations. Just a small change.
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(Image source: CoinMarketCap, time: May 2013)
ICOs are nothing new. As early as 2013, Mastercoin raised more than 5,000 BTC through ICO. As you should have guessed, it also has a pre-mining mode. Because the environment was not optimistic at the time, Mastercoin was later transformed into the current Omni; Factom raised more than 2,000 bitcoins through ICO in 2015, but then ran out of funds and had to conduct additional rounds of financing; in other words, all These exciting projects all ended up ill-fated and offered little practical value.
network effect
network effect
Since Bitcoin has the largest network, it is also the biggest beneficiary of network effects, while other coins are basically only in a state of catching up. This is because the network effect of Bitcoin is strengthened over time, and people using the Bitcoin network will in turn promote the optimization of Bitcoin network standards, thereby attracting more and more people to join the network.
With the continuous strengthening of the Bitcoin network, some advantages accompanying its characteristics have gradually become prominent. Moreover, sometimes seemingly inefficient features can have beneficial secondary effects.
For example, a car cannot fly in the sky or run in water because its characteristics of driving on land are constantly being enhanced, and some additional functions are missing to make the car more usable. For example, compared with ships and airplanes, cars are smaller Parking is easier, and maintenance costs and fuel are lower.
These features have stood the test of time, justifying them in a subtle way. You dont want to be the first person to fly in a car, because the security is unknown, and the security of Bitcoin has withstood the test of time, and no other new currency can compare to Bitcoin in terms of security. Bitcoin has the richest reward mechanism (mining) in the world, which encourages people to find security holes. Bitcoin’s security has withstood the greatest test — time. In terms of security, no digital currency can prove to be more secure than Bitcoin.
In the long run, the shortcomings of some new features have gradually been exposed. For example, Ethereums Turing completeness makes the entire platform more vulnerable (see the DAO vulnerability and the Parity vulnerability). In contrast, Bitcoins smart contract language Script has abandoned Turing completeness for the same reason.
The centralized decision-making layer of Ethereum usually adopts coercive measures such as artificial rescue and hard fork to deal with these vulnerabilities. In other words, network effects, the test of time, and centralization make altcoins more vulnerable.
decentralized
decentralized
Another feature of Bitcoin that other currencies do not have is: decentralization. Here, decentralized means that Bitcoin has no single point of failure. Other currencies have a founder or organization that has important influence and control over the currency. Forced hard forks are an example of centralization.
The advantage of centralized digital currency is that it can respond quickly according to market demand. From a business point of view, centralization is naturally a good thing, and profits can be made by providing users with better products and services. Centralized business can respond quickly and adjust quickly according to market demand to earn more profits.
For currencies, centralization is not a good thing. First of all, as a means of value storage, it needs to maintain stability, which also means that its characteristics must remain unchanged or even continue to improve. Changes can destroy certain properties of digital currencies (such as increased supply, inflation, changes in security), which will affect their use as a store of value.
Second, centralized currencies often tend to change the rules when they encounter catastrophic events. The economy of the 20th century is a history of central banks gradually reducing the value of fiat currency stores. The average lifespan of fiat currency is only 27 years, despite being backed by a powerful entity such as the government and used as a medium of exchange nationwide. For a currency, functionality, quick response, and application are less important than scarcity and immutability.
Digital currencies and ICO tokens other than Bitcoin are centralized. ICO Obviously, the subject of ICO issuance must be a centralized institution. They issue tokens, so naturally they can also change the purpose and incentive mechanism of tokens, and can also issue other tokens.
Altcoins have the same problem, though perhaps less obviously. Usually, the creators of altcoins are also in charge, and they have rights like governments. Taxes, inflation, consensus changes are usually decided by the founders. As a holder of an altcoin, in addition to the current ruler, you have to trust that the future ruler will not confiscate, tax, and inflate your coins. In other words, there is no essential difference between altcoins and ICO tokens and fiat currencies, and you do not have full control over your own coins.
This is the serious problem facing Bitcoins biggest competitor Ethereum. Regardless of the metric, Ethereum’s centralized control is serious. Ethereum users have experienced at least 5 forced upgrades. The wrong decisions made on the DAO were also rescued. The centralized control of Ethereum can be seen from the early large-scale pre-mining.
Bitcoin is different. One of the most admirable things Satoshi Nakamoto has done is disappear. In the early days of Bitcoin, he was responsible for most of the development. Now, all parties involved in Bitcoin have a certain right to speak in the operation of the network. Every upgrade is spontaneous (soft fork), and there will be no coercive behavior to allow others to hold Bitcoin. In other words, there is no probability of a single point of failure. Even if all the developers were to suffer, Bitcoins open source code could still be used by users. In the Bitcoin network, you are only responsible for your own coins.
in conclusion
in conclusion
You might say: there are so many altcoins out there, and they’re eating into Bitcoin’s market cap.
First of all, market capitalization itself is an indicator that is easy to manipulate; second, the market is often full of various noises, and it takes a long time to return.
Bitcoin is different from other altcoins due to network effects and centralization. This is not to say that Bitcoin will never be replaced, otherwise it would be too confident and optimistic.
But after studying the history of digital currency, a clear conclusion can be drawn: Bitcoin will not be easily given up, and it is not cost-effective to sacrifice network effects and decentralization to seek a new function.
What conditions are needed to replace Bitcoin? Either there needs to be an innovation as significant as bitcoin, or a bug can be found that makes bitcoin less secure. It is impossible to catch up by just adjusting a few small functions. Even a major feature like anonymity may not work because Bitcoins network effects have created a unique ecosystem.
Decentralization is difficult to achieve, and the endless stream of altcoins has not yet found the right path. And finding a decentralized path for a coin sounds central. Its hard to imagine any founder wanting to be truly decentralized because they want to maintain control, whether emotionally, financially, or relationally.
Bitcoin is different because Bitcoin creates a whole new category. Unlike centralized currencies, Bitcoin is market-driven, immutable, and difficult to be controlled by others. These are the characteristics that a good value storage method should have.
As optimistic investors, everyone hopes to find a better option than Bitcoin and become a participant in the early blockchain revolution. However, good wishes cannot change reality. In the past seven years, thousands of coins have failed to replicate these characteristics of Bitcoin, and they just prove that Bitcoin is the real revolution.
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