Bitcoin, Ethereum, and USDT have consistently held the top three positions in the cryptocurrency industry market value for quite some time after their emergence. It makes people wonder, what is the reason for the market choosing them?
Before considering this question, we need to review the original goals of these three cryptocurrencies.
Bitcoin is the first cryptocurrency to achieve decentralization and prevent double-spending. Through peer-to-peer payments, it eliminates the management of any centralized institution and aims to be a currency solution that can replace traditional paper money.
Ethereum is the first cryptocurrency to utilize Turing-complete smart contracts on the blockchain. It has become a decentralized application platform that can replace the operation and control of large corporations. Its goal is to become a world computer and decentralized application platform.
USDT is the first cryptocurrency backed and pegged to the US dollar. By being linked to sovereign credit currencies, it aims to leverage the advantage of stable purchasing power and become the settlement unit in the cryptocurrency industry.
Since the emergence of these three, they have always faced their respective challenges, and the competition and challenges against them have never stopped.
Why can centralized USDT stand out?
First, let's take USDT as an example. Because its anchoring relies on the management of a single institution, it does not align with the core idea of decentralized cryptocurrencies. So the industry has tried to explore a decentralized stablecoin system, such as various algorithmic stablecoins. However, algorithmic stablecoins have been proven to be unable to maintain long-term stability.
Algorithmic stablecoins cannot simultaneously meet the requirements of large-scale liquidity, decentralization, and stable coin value. Therefore, the industry had to ultimately choose stable coin value and large-scale circulation, at the expense of decentralization. This also leads to continuous concerns from users about USDT, especially during times when the industry sees the emergence of fraudulent projects and stricter regulations.
However, the biggest risk for stablecoins like USDT, which are anchored to fiat currencies, lies in the fragility of the fiat credit system. The crisis in centralized finance and the fiat currency system is one of the key reasons for the birth of Bitcoin. This is also an important reason why stablecoins like USDT, which are anchored to fiat currencies, cannot surpass Bitcoin: we need a high-quality asset to hedge against the collapse of the fiat credit system.
However, it is contradictory that USDT, as another centralized monetary system, goes against the spirit of mathematics and code that is everything in the crypto world. Nevertheless, it is still able to maintain its position among the top three in terms of market capitalization. This raises a thought-provoking question: why can USDT firmly establish itself in the crypto industry that values decentralization?
The lack of purchasing power stability in Bitcoin makes USDT an opportunity
In order to answer this question, we must explore a significant issue that Bitcoin faces from the perspective of currency quality evaluation: purchasing power stability.
Bitcoin OG and renowned economist Lawrence H. White have pointed out that Bitcoin's price volatility makes it difficult to become a universally accepted medium of exchange in terms of maintaining purchasing power. He compared the purchasing power stability of Bitcoin and gold, noting that although Bitcoin and gold are both inflation hedging tools, their supply mechanisms are quite different.
Gold has better purchasing power stability because its supply can be adjusted according to market demand. When demand increases, price increases incentivize more gold mining, increasing the supply of gold and stabilizing prices. The gold standard also demonstrated this point, as when the United States rejoined in 1879 and left in 1914, the price difference was only 1%.
In contrast, Bitcoin's supply increases in a predetermined manner and does not respond to demand. The increase in BTC price might trigger more mining activities, but it will not generate more bitcoins, which would be a significant drawback for it to become a popular medium of exchange: prices would fluctuate more extremely.
Crypto pioneer and B-Money inventor WEI DAI, who shares the same viewpoint, recalled in his own article that he did not pay attention to Satoshi Nakamoto's email at the time because Bitcoin's whitepaper did not include any design for a stable currency value. WEI DAI said: "This could be partly my fault as well, because when Satoshi sent me the email asking for my comments on the draft he was working on, I didn't reply. Otherwise, I might have been able to persuade him not to use a fixed quantity of money."
Bitcoin relies on a simple model of halving the total supply every four years, which has created a global expectation that a non-sovereign asset will become increasingly valuable. However, this also means that Bitcoin does not have any design for purchasing power stability, which allows centralized but dollar-anchored stablecoin USDT to survive and thrive in the crypto world.
Presumably no user would really be willing to use a highly unstable commodity as a daily settlement currency in their daily lives. Moreover, the expectation of Bitcoin's appreciation also makes users more inclined to store it rather than use it for daily consumption, limiting its circulation.
Modifying the monetary economic model of Ethereum
If the lack of purchasing power stability design of Bitcoin allows the centralized USDT to take advantage, then another flaw of Bitcoin: technological immaturity and excessive conservatism is an important reason why Ethereum can leap into the second position in market capitalization.
Ethereum has far surpassed Bitcoin in the decentralized application ecosystem, creating DeFi and NFT ecosystems that lead and change the industry. It even led to most public chains that attempted to challenge Ethereum, in order to continue to attract users, ultimately having to be compatible with EVM.
The success of Ethereum's application ecosystem is self-evident. In addition to empowering the value of ETH through the application ecosystem, the entire Ethereum community has also undergone a major upgrade with EIP-1599. ETH can now be burned, forming a deflationary economic model.
Today, believers in Ethereum challenge Bitcoin by using the mechanism of deflation brought by ETH burning and the superiority of Ethereum's application ecosystem over Bitcoin. They even call ETH a super sound currency, but they avoid discussing Ethereum's modifiable monetary model, the serious impact on ETH after transitioning from PoW to PoS, and the gradual centralization of its network nodes.
Ethereum attempts to replace Bitcoin's dominant position in currency, but it doesn't have the fundamental values of Bitcoin: decentralization, fairness, and immutability of the economic model. The changes in ETH's monetary model and its attempt to align with Bitcoin's currency value trend also indicate that the design of the monetary economic model is crucial to the long-term development of blockchain, and it may even be the most important foundation.
Partial Bitcoin community following Ethereum's path
Although the pioneering nature of Bitcoin, extreme decentralization, immutability of the monetary economic model, and pure commodification of the PoW mechanism allow Bitcoin to always occupy the industry's first position, some members of the Bitcoin community have been trying to expand the application ecosystem of Bitcoin.
From the Taproot upgrade to the recent Ordinals, they have enabled the possibility of expanding the Bitcoin application ecosystem. The market excitement generated by these upgrades demonstrates the user's expectations for the Bitcoin application ecosystem. Various Bitcoin-based scaling projects and upgrade plans have also emerged and become active.
If we want to follow the decentralization and security features of Bitcoin, it is difficult to achieve a Turing-complete application ecosystem like Ethereum due to the limitations of the current UTXO technology. We can only rely on less decentralized layer-two solutions. However, if we upgrade the application direction of Bitcoin, it will inevitably affirm the Ethereum's roadmap, which means a shift in the long-standing narrative of "digital gold" for Bitcoin: imitating the development roadmap of application platforms driven by Ethereum technology, rather than simply ignoring it as before.
A cryptocurrency with the same conditions in terms of monetary core, market value scale, and degree of decentralization would be better with a highly programmable application ecosystem. At least from the current situation of Bitcoin and Ethereum, monetary properties are the absolute foundation, and the prosperity of the application ecosystem comes second. For a high-quality monetary core, integrating application technology can be smooth and simple. However, for a project that solely focuses on the application layer and neglects the core monetary model, changing the incentive rules is as difficult as changing the soul.
Their respective flaws contribute to each other's prosperity
Looking back at the centralized management of USDT, the modification of the currency model of Ethereum, and the technical limitations of Bitcoin's lack of purchasing power stability and application ecosystem, it is precisely because of the flaws in their existence that they have achieved each other's prosperity.
If the purchasing power of Bitcoin is stable enough to guarantee decentralization while achieving high programmability, then the glory must belong to Bitcoin, and USDT and ETH will not achieve the success they have today.
It can be imagined that what we need is a currency system that is more stable in purchasing power than Bitcoin, and at the same time, it can achieve a similar or even surpass the application ecosystem of Ethereum based on or even surpassing all the advantages of Bitcoin. This may be the ultimate form of the entire cryptocurrency industry, giving birth to a great narrative and revolutionary project that is larger than the combined market capitalization of USDT, Ethereum, and Bitcoin.
In the future, we may continue to exist in a cryptocurrency world where Bitcoin, Ethereum, and USDT coexist and are full of contradictions for a long period of time. Or, there may be a cryptocurrency project that can solve their respective flaws, inherit the decentralization of Bitcoin, the purchasing power stability of USDT, and the high programmability and scalability of Ethereum, leading the industry development and realizing the ideal world that cryptopunks have been dreaming of.
Reference:
【 1 】https://www.ledgerinsights.com/swiss-national-bank-bitcoin-fiat-currencies/
