Block chains are a technical wonder, but in this very competitive panorama, I have come to see social consensus and ecosystem around blockchains as with much its most important strategic asset. The social layer is important, but for different reasons depending on the chain.
Specifically, I have the hypothesis that “layer 0” for any blockchain ecosystem can only excel on a main mission. When I say “Capa 0”, what I am really talking about are the communities of people who support these networks. They are all, from enthusiasts to engineers, developers, investors, risk capitalists and volunteers. As public networks built with open source code, the strength of each ecosystem is mainly the community around it.
Despite their superficial similarities, communities and ecosystems that support Bitcoin and Ethereum are radically different. For a long time I have said that “Bitcoin is the asset. Ethereum is the platform.” In both cases, social consensus around these block chains is what keeps them together and makes each one ideal for their mission.
Bitcoin first. Bitcoin is a short -based value store. Better than the fiduciary currency. More reliably scarce than gold. Immune to politics and protected by a vast work infrastructure test. Bitcoin is in a constant battle for Mindshare with other cryptographic assets and, even more, against traditional fiduciary currencies and the assets issued in the Central Bank.
This is not the same as other value stores. There may be many types of government and corporate debt, and their values are linked to the probability of reimbursement. The closest analogy for Bitcoin is with gold, which does not pay interest or generates any cash flow. There is also no significant industrial demand for gold. The value of gold is simply that it is scarce and getting more from it is not easy.
A particularly important feature of this cryptographic ecosystem is that it is a zero sum game. If you admit that there may be more than one cryptocurrency used as a value warehouse, it is on a slippery slope because there can be an infinite supply of identical copies of Bitcoin. If there can be two, there may be thousands. If that happens, Bitcoin’s value is uncertain and probably low.
At this time, there are no other cryptocurrencies that have a value even remotely close to that of Bitcoin. Assets such as Litecoin, Bitcoin Cash, Dogecoin and others represent a small fraction of Bitcoin market capitalization. The only asset in the same General League is the ether, and I would say that it should be less like a cryptocurrency and more as a participation in a computer ecosystem.
The result of this logic is an exclusively aggressive approach to the mentality. The Bitcoin value must be sustained by a constant metic war against other cryptocurrencies. Move through R/Bitcoin, and you will find a flow of memes that aim to reinforce the value of Bitcoin. The typical content includes terrible warnings about the degradation of the US dollar with quantitative flexibility, the serious federal debt of the United States, the horrors of inflation and enthusiastic predictions for future prices. That quantitative flexibility did not cause inflation and that low to moderate inflations do not inflict measurable economic damage no matter in that context: political damage, yes, no economic damage. (See here and here)
A typical Bitcoin meme includes a reminder that a long time ago, a dollar would buy a full bag of groceries. The involvement is that they are stealing you through the gradual printing of money. This meme has never resisted the most basic exam. Moderate inflation is well, necessary and infinitely better than deflation. We are much better than when a dollar could buy a bag or edible, but recognizing that the narrative would undermine. However, it doesn’t matter. Never let the facts stand in the path of a good story.
To maintain its value, Bitcoin needs a very assertive social consensus. And that has to continue for a long time. The use of Gold as a global reserve of shared value in 650 a. C. in the old Türkiye, so they have a significant advantage. And although there are other precious metals, none of them has approached gold in terms of total market capitalization. The gold market cover is 10 times greater than market capitalization for silver.
The social ecosystem that Ethereum supports is different. First, Ethereum is the world computer. Ethereum is a positive sum ecosystem where people are encouraged to build and extend. The discussion and tone of R/Ethereum is, again, a good proxy for the entire ecosystem: it focuses on engineering, development and new applications.
Ethereum, like Bitcoin, has an equally passionate zero layer ecosystem and is so dominant compared to other “intelligent contract” blockchains such as Bitcoin is for other pure cryptocurrencies. Ethereum’s domain is visible in asset market capitalization, but also in its part of tokenized assets. Ethereum is the dominant ecosystem for most “real world” assets and most established as well. With more than 100 layer 2 networks in operation, Ethereum has 20 times more “network extensions” than any other ecosystem, including Bitcoin and Solana.
Both Bitcoin and Ethereum ecosystems have burning believers who see things differently from the dominant narrative. There is a small but resistant application layer that is being built in Bitcoin. Bitcoin will soon have its own layer two networks, including some that are compatible with EVM.
Similarly, there is a passionate group of Ethereum believers who think that Ethereum should be the network computer and an asset based on scarcity. EIP-1559 (Ethereum improvement proposal), which was adopted in August 2021, reduced the rate at which the gas rate model was issued and changed, so some ETH is burned with each transaction. The result is that the amount of ETH in circulation is increasing at a slower pace than Bitcoin and, in some cases, even decreasing.
None of these are necessarily a bad idea and, at least in theory, any ecosystem could be a host of both types of activity. In practice, the cultural requirements of each ecosystem are so different that they really cannot excel in more than one function at the same time.
In the real world, currencies such as the US dollar are more effective as a means of change, but not necessarily as a value reserve. You can use dollars to buy things, but a deflationary system that increased the value of the dollar, over time, would be catastrophic for the economy, since it forced real interest rates. As Ben Bernanke discovered, trying to stimulate an economy when inflation is low is very difficult. The same problem makes Bitcoin inadequate as currency even while protruding as a value warehouse.
With Ethereum, we will see how well the current Blockchain boom develops in the coming years. If the ecosystem retains its dominant proportion of the new tokenization of intelligent assets and contracts, I think we can declare it winner in the main mission. Bitcoin has a longer game than playing, but we see a growing correlation with gold, that can be an indicator that real world investors are buying the digital shortage argument.
Anyway, it could be several more years of experience in the real world before I can try (or refute) my theory. This also means that the metic war on Twitter between ecosystems does not disappear soon.
The opinions reflected in this article are the author’s opinions and do not necessarily reflect the opinions of the Global EY organization or its member companies.
