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  • Benjamin de Waal

Interview with a Bitcoiner

Updated: Dec 27, 2020

Preamble

In November of 2019, my employer decided to create an interview with me to be published on the company website. We did this in the form of questions from our Head of Corporate Communications which I then wrote detailed answers for.

My answers were heavily edited, chopped up, and reduced in scope along with the translation to German from my English original and while I don’t feel that they misrepresented my position in any way (or I wouldn’t have approved it), I do feel that the full answers I wrote are a much more accurate representation of my thoughts. Accordingly, I am publishing them here in their original unedited form. Note that I have translated the original questions from German to English.

Interview

Ben, you’ve been a “Bitcoiner” from day one. The development of the Bitcoin price is often compared to the Gartner Hype Cycle. Where do you think Bitcoin’s price currently is on the cycle? Are we past the “trough of disillusionment”?

The exchange rate of Bitcoin (I don’t like the word “price”) is indeed often compared with the Gartner Hype Cycle. However, I think this is a terrible comparison. The Hype Cycle is intended to model how much “hype” is around a new technology and show the phases of adoption that technologies go through. During the initial phases, a new technology gathers a lot of attention as people jump on to start using it without clearly thinking about the real potential. Later, people find that it isn’t living up to their expectations and so usage falls significantly and people speak negatively about it. Finally, an understanding is reached of the actual productive use cases, and the technology is adopted in a more fitting way.

While adoption of and interest in Bitcoin’s fundamental technologies could be modelled in this fashion, there is no indication that Bitcoin’s exchange rate should follow that pattern along with the technology.

Given how little Bitcoin has been noticed or adopted in the wider technology community as yet, I’d say that if the Hype cycle can be used at all, we’re still in the early part of the “Technology Trigger” phase. This is largely because due to false understandings being spread about Bitcoin’s technology, the majority were (and many still are) focused on the incorrect idea that a “Blockchain” is the key technology of interest. “Blockchain” as a technology may indeed be on the first downward slopes of the “Trough of Disillusionment” phase when modelled using this diagram, but that’s a separate topic to Bitcoin.

It’s also probably important to note that I don’t believe that the Gartner Hype Cycle is even very useful for modelling actual technological uptake. While some technologies can be neatly fit on to this kind of diagram, many others are very poor fits, and so there should be no expectation that any technology is necessarily able to be neatly fit on to this kind of chart.

A major topic parallel to that is the mainstream acceptance of Bitcoin. So far it seems that mainly the “innovators” and “early adopters” are engaged. In your opinion, what needs to happen for the majority of others to jump in? Can this step be forced or will it just happen by itself?

Bitcoin’s value (not exchange rate but fundamental value) comes from its inherent properties as a better form of money. Because of this, it really is just a matter of time before it naturally becomes the currency that people would rather hold than other currencies. This could however take a very long time – many generations – to happen if there isn’t active development on the Bitcoin ecosystem.

Right now, other than long term savings, currency speculation (gambling), and some level of transaction anonymity there isn’t a strong incentive towards Bitcoin for the majority of people in modern democratic countries with relatively stable economies. In more oppressive parts of the world, or places where the economy is much more unstable, there are additional incentives including the ability to transact without censorship, and avoiding hyperinflation.

Some reasons that many people haven’t adopted Bitcoin yet include the difficulty of acquiring Bitcoin to begin with, concerns about how to safely store their Bitcoin once they have it, and a general feeling that once they have it, they can’t really use it anywhere.

I would argue however that the main reason the majority have not yet started using Bitcoin is because they don’t really know anything about it. They’ve heard some things about people getting rich from “magic internet money” and that criminals use it for conducting transactions online, but aren’t aware of both the advantages that Bitcoin offers as well as the disadvantages and risks around the currency that they currently use.

People don’t adopt technologies without having a reason to do so. Bitcoin is often presented as either a speculative asset or a payment network. For many people, currency speculation isn’t something they want to be involved in, viewing it as a form of gambling with a significant potential for loss, and so this is uninteresting for them. Also, since cash, debit cards, credit cards, PayPal, and many other newer technologies are extremely efficient and effective payment networks, they see no value in using Bitcoin in this area either.

I think therefore there are two complementary approaches that can be actively taken to speed up adoption.

The first is to increase education. Education around the absolute basics of what Bitcoin is and what it is not should not be ignored. As long as websites offer payment options where “Bitcoin” is listed side by side with “PayPal” and “Credit Card”, the false assumption that Bitcoin is a payment network will remain prevalent. Beyond the basics of Bitcoin itself however, education needs to cover general economic principles that most people are unaware of such as the properties of money and how markets describe the value of goods and services. It’s only then that people can understand not only that Bitcoin really is money rather than a simple traded asset, but why it’s in fact a better form of money than others.

The second is to reduce the friction in the use of Bitcoin for typical daily currency purposes. At the moment, the majority of places where you spend money on goods and services, the ability to use Bitcoin is not an option. When it is an option, it may be slower, more expensive, or more difficult than using other currencies. This is true for both the merchant and the customer and so both are incentivised against it. There are many places where this friction can be reduced. In the case of a simple purchase of goods in a shop, we see opportunities for improvement from the wallet application that the customer uses to make the payment, through the payment technologies by which the Bitcoin transaction is performed, to the merchant’s accounting and reporting software. Even before making the purchase, the customer must have already acquired some Bitcoin from somewhere, whether they were paid for goods and services themselves, or exchanged some fiat money for it. Frictions exist throughout these and many other processes as well.

For many, it is still too complicated to buy Bitcoin and store them in an own wallet. When will holding Bitcoin become as normal as owning a bicycle?

This will only happen when people have a reason to want to hold Bitcoin. As already said, people only adopt a technology when they have a reason to do so. The reason could come in the form of negative pressures pushing people away from their existing currencies – such as a severe economic recession / failing economy or political regimes taking hold that use the ability of sovereign currencies to control and manipulate the people – or in the form of positive pressures pushing people in to Bitcoin such as the simplification of many currently complex or expensive processes caused by the necessity for middle-men in the fiat economy.

The first form – negative pressures – doesn’t require any particular development or improvements to the Bitcoin ecosystem, as the Bitcoin currency already has the necessary properties of sound money to be the fallback in these cases.

The second form – positive pressures – require that new tools are built around the Bitcoin ecosystem that allow for these simplifications and efficiencies to be implemented. That is currently the most active area of development in the Bitcoin ecosystem, where many tens of thousands of companies and individuals around the globe are building payment systems, currency gateways/exchanges, “sats-back” (cash-back) systems, and more.

It is my personal belief – shared with many others – that if global adoption can be inspired through positive pressures, we can avoid the inevitable collapse of the global economy that would be the natural result of too many negative pressures. In the end, Bitcoin adoption is ubiquitous in both cases, but if the catastrophic global human suffering of a complete global economic collapse can be avoided, I think it’s obvious that it should be.

What needs to happen, for Bitcoin’s price volatility to decrease?

Volatility in other currencies is carefully controlled and managed by central banks adjusting the supply. The European Central Bank for example describes their main task as being “to maintain the euro’s purchasing power”.

Bitcoin doesn’t have and – by definition – can’t have deliberate supply adjustments. As a result, it will naturally follow economic growth and decline. If Bitcoin were the only global currency, this would simply result in a stable economy with deflationary pressure reducing spending during growth and inflationary pressure increasing spending during decline, ensuring that growth and decline are kept in check by economic pressures.

However, Bitcoin isn’t (yet) the global currency of the world. Instead, it’s a $150-billion US dollar market, which may sound large, but puts it around 4% the size of the total German economy. Because of this small size, it can be disproportionately affected by trading markets where the currencies of larger economies would barely move a tenth of a percent with similar flows.

This perceived problem however will simply solve itself over time. Bitcoin’s supply algorithm ensures that supply of new coins decreases over time, which in a classic supply and demand model leads to an increase in value. Right now, people don’t use Bitcoin as a unit of account and this means that no one needs or wants to have any specific amount of Bitcoin, but instead specific values of Bitcoin as measured in currencies that are units of account. This means that a supply decrease and corresponding value increase will not generally make anyone concerned about their inability to get as many Bitcoin as before, since they are still just as able to get the same value.

This increase in Bitcoin’s value over time means that the amount of external money required to move the market value also increases. This naturally begins to limit volatility. By the end of the 2020s, it is likely that Bitcoin will be less volatile than many national currencies.

Will it eventually become normal to buy a cup of coffee in your lunch break with Bitcoin or will Bitcoin rather be used for large value transfers such as international bank settlements?

This is a matter of the payment technology used and not the currency. Bitcoin’s “built-in” payment technology is base layer transactions written directly to Bitcoin’s blockchain. This is relatively inefficient, slow, and expensive because space in a block is an inherently valuable and limited resource.

Therefore, buying a cup of coffee with a base layer transaction is something that – while possible in the past and currently at many fine cafés and bars around the world – isn’t going to continue in to the future. Thankfully, other payment technologies also exist. The most promising of which is called the Lightning Network. Lightning enables transactions to happen between participants without writing each individual transaction to the blockchain through a network of interconnected channels. Each participant is only connected to a few other Lightning Nodes, but payments can be routed – without trusting intermediaries – through the network to any other participant.

In October, I attended “The Lightning Conference” in Berlin. At the conference itself, I bought several coffees and quite a lot of very good ice cream by “Chipi Chipi Bombón” exclusively using Bitcoin over the Lightning Network. In the evening, I enjoyed some beer at Room 77 in Kreuzberg and had my dinner delivered by “Food for Coins”, also both paid for the same way.

As these technologies begin to mature, it is reasonable to expect that this will become much more common and natural and should eventually be an option everywhere instead of only a few specific forward-looking shops.

What do you think: is Bitcoin “digital gold” or rather something like a new currency? And which way will it develop further?

This question is making a distinction that doesn’t exist!  Digital gold is a new currency.  Gold made a great currency until the interconnected and global nature of the world made it impractical due to problems in its divisibility and weight (and later, its inability to be moved digitally).

The unbacked fiat currencies we have today are not the norm throughout history. They’re an experiment that has been tried a few times throughout the centuries and each time it has failed badly. Our current system has lasted longer, but only through excessive manipulation that has led to significant financial crises and a lot of hardship for many people.

Returning to Bitcoin – as digital gold that doesn’t suffer the same shortcomings as physical gold – is more like every other kind of currency we’ve had throughout history that hasn’t suffered the problems we see under the current fiat system.

How will Bitcoin mining change once all Bitcoin have been mined?

Because the supply of new Bitcoin halves approximately once every four years (210000 blocks), it will be over a hundred years still before the supply of new coins is finished. However long before then, the supply of new coins in each block will reach a level where it’s much smaller than the transaction fees included in the block. From that point onwards, the supply of new coins becomes much less relevant to the miners and instead their income is based on filling the blocks with fees.

Very little is likely to change in the fundamental business of mining itself, however there will be economic incentives for some different behaviour and so we are likely to see that several tricks used by miners – such as mining empty blocks on the back of full ones – will stop being used as they no longer provide useful revenue. Miners are also likely to become much more involved in the other aspects of the Bitcoin ecosystem than they are currently as they will be more incentivised to promote a strong fee market.

How do you see the roles of Bitcoin, Bitcoin Cash, and Bitcoin SV in the future? In the end, will there be only Bitcoin?

In the end, yes, there will only be one Bitcoin. Economically, proof of work within Bitcoin is a technology that converts energy in to monetary tokens. If there is more than one type of monetary token with different values, it stands to reason that the work being expended will migrate towards the most valuable one.

The only reasons that there are opportunities currently for miners to switch chains and potentially make profit off each is the volatility of the markets, economic hedging to influence the market values, and the immature state of the mining industry where technology changes are still able to provide significant advantages. As the markets grow and mature, these reasons will disappear and the less valuable chains with them.

Bitcoin Cash and Bitcoin SV also both suffer from scalability issues. By attempting to simply increase the block size to keep up with demand, they are inherently decreasing the cost of the limited resource of space in a block. As block space is inherently valuable as an immutable data store, there is no size at which it would not be filled to capacity if the cost is low enough. Once the nominal cost to store data in a block is decreased beyond the cost that a node operator pays for the bandwidth and storage requirements for that block, economically rational node operators will simply switch their nodes off and the irrational ones will follow once they have no money left for upgrading their bandwidth and storage.

Therefore, despite the idea that these forks had of increasing the block size to solve scalability issues, they instead actually created scalability issues that Bitcoin doesn’t suffer from.

Even aside from the economic game theory, it is now clear from current levels of adoption and discussion around Bitcoin that the network effects of Bitcoin would be more than enough to sustain it against competition from alternative cryptocurrencies even if those cryptocurrencies had all of the properties that Bitcoin does. Since no competing cryptocurrency is able to satisfy all of the properties that Bitcoin does, this essentially guarantees their failure against Bitcoin.

Don’t some cryptocurrencies offer faster transactions and lower fees than Bitcoin without using second layer technologies like the Lightning Network?

Any improvements in speed or fees at the base layer only come at the unacceptable cost of drastically lower security. It is trivial to create a financial transaction system that is faster and cheaper than Bitcoin, but not without introducing large security risks.

The easiest way for example is to remove the need for a blockchain entirely and just write everything in to a single database that you store on Amazon Web Services. This is much faster and much cheaper than Bitcoin; however, the moment that a hacker gains access to it, the entire system is compromised. Even worse, someone with the authority to access it may do so out of greed. A system like that requires trusting that those with authority aren’t going to commit crimes, and that those who build the security for the system are able to do so perfectly.

This is equally true for traditional financial systems. Banks charge high fees and interest rates on loans greater than the interest rate on deposits precisely because it is a costly exercise to maintain the many different checks and balances in place to ensure the system is as secure as it can be. Even with all of that, Banks have been compromised – both physically and electronically – many times in the past and will always continue to be as long as they are such enticing targets for criminals.

Bitcoin is built in such a way that no one has the ability to cheat the system. There is no centralised authority making decisions and no central database of information. That means that there is no one who may abuse their authority and no target for hackers that can break the system. When talking about other cryptocurrencies, some or all of these assumptions may not be the case and just because a blockchain is used, it doesn’t make it truly decentralised.

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