The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Andresen has repeatedly tried to increase the size of Bitcoin's blocks, but all his proposals to do so have failed to gain traction with the operators of the nodes.

Only Bitcoin's rules control Bitcoin, and the possibility of changing these rules in any substantive way has become extremely impractical as the status‐quo bias continues to shape the incentives of everyone involved in the project.

Facing any digital currency built after Bitcoin is a deep existential crisis: because Bitcoin is already in existence, with more security, processing power and an established user base, anybody looking to use digital cash will naturally prefer it over smaller and less secure alternatives.

These teams are publicly known individuals, and no matter how hard they might try, they cannot demonstrate credibly that they have no control over the direction of the currency, which undermines any claims other currencies might have to being a form of digital cash that cannot be edited or controlled by any third party.

In other words, after the Bitcoin genie got out of the bottle, anybody trying to build an alternative to Bitcoin will only succeed by investing heavily in the coin, making them effectively in control of it.

This presents a dilemma facing designers of alternative currencies: without active management by a team of developers and marketers, no digital currency will attract any attention or capital in a sea of 1,000+ currencies. But with active management, development, and marketing by a team, the currency cannot credibly demonstrate that it is not controlled by these individuals. With a group of developers in control of the majority of coins, processing power, and coding expertise, the currency is practically a centralized currency where the interests of the team dictate its development path.

This problem is more pronounced for digital currencies that begin with an Initial Coin Offering, which creates a highly visible group of developers communicating publicly with investors, making the entire project effectively a centralized project.

The Decentralized Autonomous Organization (DAO) was the first implementation of smart contracts on the Ethereum network. After more than $150 million was invested in this smart contract, an attacker was able to execute the code in a way that diverted around one‐third of all the DAO's assets to his own account. It would be arguably inaccurate to describe this attack as a theft, because all the depositors had accepted that their money will be controlled by the code and nothing else, and the attacker had done nothing but execute the code as it was accepted by the depositors. In the aftermath of the DAO hack, Ethereum developers created a new version of Ethereum where this inconvenient mistake never occurred, confiscating the attacker's funds and distributing them to his victims. This re‐injection of subjective human management is at odds with the objective of making code into law, and questions the entire rationale of smart contracts.

If the second largest network in terms of processing power can have its blockchain record altered when the transactions do not go in a way that suits the interests of the development team, then the notion that any of the altcoins is truly regulated by processing power is not tenable. The concentration of currency holding, processing power, and programming skills in the hands of one group of people who are effectively partners in a venture defeats the entire purpose of employing a blockchain structure.

Bitcoin can only make this claim after growing in the wilds of the internet for nine years without any authority controlling it, and very ably repelling some highly coordinated and well‐funded campaigns to alter it.

In comparison, altcoins have the unmistakable friendly culture of nice people working together on a team project. While this would be great for a new start‐up, it is anathema to a project that wants to demonstrate credible commitment to a fixed monetary policy.

There is a reason real‐world businesses don't issue their own currency, and that is that nobody wants to hold currency that is only spendable in one business. The point of holding money is holding liquidity which can be spent as easily as possible. Holding forms of money which can only be spent in particular vendors offers very little liquidity and serves no purpose. People will naturally prefer to hold the liquid means of payment, and any business that insists on payment in its own freely‐trading currency is just introducing significantly high costs and risks to its potential customers.

compared to liquid money so customers know exactly what they are getting and can make accurate economic calculations. Should any of these supposedly revolutionary decentralized currencies offer any real‐world valuable application, it is completely inconceivable that it would be paid for with its own freely trading currency. In reality, after examining this space for years, I have yet to identify a single digital currency that offers any product or service that has any market demand. The highly vaunted decentralized applications of the future never seem to arrive, but the tokens that are supposedly essential to their operation continue to proliferate by the hundreds every month. One cannot help but wonder if the only use of these revolutionary currencies is the enriching of their makers. No coin other than Bitcoin can lay a credible claim to being outside the control of anyone else, and as such, the entire point of utilizing the extremely complex structure underpinning Bitcoin is moot. There is nothing original or difficult about copying Bitcoin's design and producing a slightly different copycat, and thousands have done this so far. With time, one can expect more and more of these coins to enter the market, diluting the brand of all the other altcoins. Non‐Bitcoin digital currencies are, in the aggregate, easy money. No single altcoin can be considered on its own merits, because they are all indistinguishable in what they perform, which is also what Bitcoin performs, but v...