Bitcoin: its future as a platform and protocol

The bitcoin logo

The bitcoin logo (Photo credit: Wikipedia)

I recently started to spend some more time on the Bitcoin ecosystem and while I have not yet fully wrapped my head around all of the opportunities and challenges (or even developed an investment thesis), I wanted to write down some early thoughts and observations.

Thoughts on the current ecosystem

The recent Bitcoin rally might be just the tip of the iceberg, as the crypto-currency may rise to even higher prices driven by destabilized national currency systems, greed and speculation, as well as illegal activity (i.e. the best way to get money out of China). Simon Winder has an interesting analysis how high Bitcoin can go.

While the majority of mainstream attention has focused on Bitcoin as a currency, Bitcoin may have a more interesting future as a protocol (see Albert Wenger’s post “Bitcoin as a Protocol”). At its core, Bitcoin provides a digital ledger that’s continually updated and synchronized in real time. Any participant can make an entry in the ledger, recording transactions from one participant to another participant. In this way, Bitcoin provides an unalterable framework for Proof of Ownership that can be used not only as currency, but also in a range of interesting applications like voting, property, contracts, domains, and securities.

It is still very early days for the platform but the two biggest opportunities for Bitcoin seem to be right now:

  1. Disrupting traditional institutions that we used to rely on for trust-related services, such as banks, registrars, etc. The app Proof of Existence uses the Bitcoin network as an ultra-secure notary service. But imagine even broader use cases (as outlined here) such as:
    • A will that automatically unlocks (without attorney intervention) when the heirs agree that the parent has passed away
    • A wire escrow that goes through when any arbiter agrees that the seller sent the goods to the buyer
    • A wallet that is socially secured by friends or family
    • A crowdfunding project that pays out after reaching various milestones, based on the approval of the backers

2. Drive down transaction fees: This infographic compares the cost of sending $1K from the U.S. to Europe (for example, as a down payment for a vacation rental). Here’s the breakdown on transaction costs: Bitcoin – $15, Credit card – $50, and bank wire – $40-80.

The future of Bitcoin

Numerous questions are yet to be answered surrounding Bitcoin’s future as a currency and as a platform. The speculative and volatile nature of Bitcoin currency might be good for the short-term as it has generated tons of awareness in the mainstream media. However, will this volatility ultimately hurt the adoption of the overall Bitcoin platform in the long run? Bitcoin might only succeed if people start using it for daily transactions and a high volatility of the underlying currency would hurt that adoption.

Likewise, will heavy-handed regulation make it hard for Bitcoin start-ups to survive in the U.S. and will there be new Bitcoin ecosystems emerging outside of the Valley? We’ve already seen several new start-ups setting up shop in Canada to escape U.S. regulations, including the world’s first Bitcoin ATM in Vancouver.

I also wonder if the virtual/crypto currency space is a winner-takes-it-all market, or will we see many other alternatives emerge? Already today there’s Litecoin, Peercoin, and Primecoin, to name a few. Will we see numerous virtual currencies co-exist, perhaps segmented along geographical/regional or industry/markets? In a recent post, Simon Winder compared Bitcoin to Friendster – a first mover, but imperfect. The question then is, who will be MySpace, who will be Facebook?

 

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  • http://www.peterberger.net/ Peter Berger

    Great to see this experiment unfold at such explosive speed … if anything, Bitcoin has already succeeded putting more than a critical mass of smart people on the same page re/ possibilities of both cryptography and digital currencies.

    Unsure if Bitcoin itself can be sufficiently stabilized to ever serve as a currency, given it’s designed to be a value store, not a currency (implying sufficient liquidity to reliably support transactions at predictable prices) … plus it’s a little awkward that the general recommendation to store Bitcoins securely ultimately seems to revolve around paper, in a bank safe. :)

    A note re transaction fees you mentioned … that is not due to an inherent strength in Bitcoin (conversion from currency to Bitcoin and back currently adds much more “costs” in uncertainty and time than is covered by the $15) but comfortable inefficiencies in banking. Ainslie is omitting even cheaper alternatives such as Transferwise.

  • bwertz

    agree with your comments – and good point that uncertainty costs might be much larger than actual transaction fees

  • http://www.startupmanagement.org/ William Mougayar

    Simon’s article was good because it put the various currencies at par with each other. I had no idea that you’d be hard pressed to liquidate more than 50 BTC at a time. That sounds like a choking factor responsible for its rising prices, no?

    Isn’t it conceivable that we’ll end-up with a handful of these crypto currencies, and not a single one?

    Everytime I get into a BTC discussion, I end-up with more questions than answers. I want it to work, because we had a taste of this in the 90′s with the CyberCash, DigiCash, eCash etc. We’ve had that vision for a while. So, I wonder why can’t we on-board ourselves into the cyber currency world without uncertainties and volatility?

    If Bitcoin has flaws, can they be fixed? If Litecoin and Peercoin are a release valve, let them inter-operate, and let’s have that universal digital wallet that I even talked about back in 1996. Let’s have these exchanges, payment gateways, APIs, apps, middleware, etc.

    And final question,- should we rather be building a cyber currency ecosystem, instead of a Bitcoin ecosystem? It seems like the Bitcoin train has left the station. Any average consumer with the right mind will think very hard before buying something that has appreciated ten times in less than a year, and continues to defy gravity (from a currency value point of view).

  • bwertz

    as you say, more questions than answers at this point

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  • onejayzhao

    nice writeup – although a lot of investments are pouring towards bitcoin infrastructure (as it should be), I expect the big winner would come out by using bitcion beyond the form of currency but a trust system. We are still early for that yet.

    On the other note, my view is that it can’t be “winner-take-all” – we might well see a future with multiple crypto-currencies along side the current fiat system. Different nature of the those currencies (cryptpo and fiat) decide the use of these: people might use bitcoin for international monetary transfer, use USD to buy hotdog on the street (more convenient) and might use/perfer litecoin for e-commerce transactions (faster confirmation), just as people drink coke, water or redbull – all are beverage but for different purpose.

  • bwertz

    several virtual currencies definitely seems to be the most likely scenario

  • http://www.twitter.com/aainslie Alexander Ainslie (@AAinslie)

    Boris, Thanks for linking to the transaction fees infographic on my Scribd. This following is a good, useful, read on the subject of the #Blockchain-as-a-Protocol:

    How the #Bitcoin #protocol actually works /by @michael_nielsen http://bit.ly/1gh835s

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