It’s no mystery that Bitcoin isn’t the only crypto-currency, so what should you think about all these alternatives — or alt-coins — and why is Bitcoin any different, better, or less scammy?
In a previous video, we already discussed why Bitcoin is not a scam and why so many alt-coins are actually Ponzi schemes. That fact has become even more painfully obvious with the recent release of many so-called “meme-coins” that don’t even try to claim they have any utility. Sadly, many celebrities and politicians have effectively stolen money from their devoted followers and speculators alike by cashing in on this trend, and all of this noise has further muddied the waters and engendered distrust in the entire idea of crypto-currency in the first place — Bitcoin included.
Having said that, this video focuses more on the technical arguments against traditional alt-coins, most of which do usually claim to have some utility.
Is Bitcoin outdated?
Many promoters of alt-coins will tell you that Bitcoin is outdated from a technical perspective. As the first widely adopted crypto-currency, it’s a great v1, but Satoshi could not possibly have gotten it perfect on the first try, and so — they argue — there needs to be continued innovation in the form of alt-coins.
This viewpoint comes from a flawed understanding of the history of Bitcoin, which really stretches all the way back to the 1970s when public-key cryptography was first invented. From there, decades of research and innovation played out, resulting in projects such as DigiCash and Hashcash in the 80s and 90s, both of which can be viewed as early predecessors of Bitcoin. In this context, Satoshi was actually standing on the shoulders of giants when he launched Bitcoin after nearly 40 years of research in the space by legends such as Whitfield Diffie, Martin Hellman, and cypherpunks like Adam Back. Bitcoin could have proved to be just another project in a long line of failures, and at the time there was really no way to tell that it was special.
But from an alt-coin promoter who is aware of the history, you may encounter a more sophisticated argument. For example, you may hear that Bitcoin’s proof of work protocol is unnecessary and wasteful compared to proof of stake, or that Bitcoin is too slow, or that Bitcoin doesn’t provide some key feature, like anonymity. In all these cases, the solution offered is the same: you should buy some alt-coin instead of Bitcoin because it’s better and represents a bigger investment opportunity.
We’ve already discussed at length why Bitcoin shouldn’t be viewed as an investment, so for now let’s just focus on the technical claims of these arguments.
Proof of stake vs proof of work
With regard to proof of work, we covered how it isn’t a waste of energy in the Is Bitcoin Evil? video, so why do people feel the need to offer proof of stake as a solution to something that isn’t really a problem? First, let’s define what it is. Proof of stake is a consensus mechanism used by alt-coins, such as Ethereum, where users validate new transactions by “staking” a certain amount of cryptocurrency for the right to do so. The more you stake, the more authority you get in choosing which transactions make it into new blocks. This eliminates the need to run a costly hashing function like SHA-256 in Bitcoin’s protocol, and it helps solve the problem of scaling the network to millions of transactions per day, or even more.
On the surface this seems great, but unfortunately it leads to centralization of power into the hands of a few who already own the most coins — in other words, the wealthy elite. The proof of stake consensus mechanism is essentially a recreation of the power structure found in the traditional financial system, where the largest holders of fiat balances and assets wield the most political power.
Unlike proof of stake, proof of work anchors Bitcoin to reality, because real-world energy use is unforgeable from a physics standpoint. This is the only decentralized way to prove that something actually happened before something else in a digital system. If you’re interested in more about why this matters — and how Bitcoin should really be thought of as a time-chain instead of a blockchain — watch Jack Mallers’ excellent presentation from Bitcoin Atlantis 2024. (This one has a bit of language, so use discretion with where you watch it.) If you prefer the same content in article form, read Bitcoin is Time by Gigi. The summary is that, in order to prove that someone can spend money, we need to be sure they haven’t already spent it — and this is known as the double-spend problem in monetary theory.
Proof of stake solves this problem by placing the power to decide the order of transactions in the hands of a few, and this makes it vulnerable to centralization, corruption, and censorship.
The blockchain trilemma
And so we start to see a general principle, one that is described by what blockchain researchers call the blockchain trilemma. The blockchain trilemma refers to the challenge of achieving three critical aspects of blockchain technology: security, scalability, and decentralization. It suggests that optimizing one aspect often compromises the others, making it difficult to achieve all three simultaneously. In the case of proof of stake, the idea is to optimize scalability, but it comes at the expense of decentralization.
As many alt-coins come and go, it becomes increasingly obvious that Satoshi was well aware of these trade-offs, and that he carefully architected Bitcoin and chose the consensus parameters to strike a balance between these aspects of the problem.
Is Bitcoin too slow?
But is Bitcoin really too slow to become a medium of exchange? Bitcoin skeptics and alt-coin promoters like to agree on this point. For example, you might hear something like: I can’t buy a coffee with Bitcoin like I can with a credit card, and even if I could, the transaction would be too slow and too expensive.
So should Bitcoin be compared to something like a credit card? On the surface, this comparison is understandable, because credit cards kind of feel like digital money — and that is what Bitcoin claims to be, after all. Credit card networks like Visa and Mastercard are accepted everywhere and can process tens of thousands of transactions per second. Bitcoin, on the other hand, is accepted by very few merchants, and at best can only process about 7 transactions per second — and even then, transactions can take over 30 minutes to settle. By all accounts, Bitcoin is worse as a medium of exchange compared to credit cards, so how can Bitcoin take over as money?
This is actually a fairly easy objection to address, because comparing Bitcoin to credit cards is apples to oranges. A more appropriate analogy would be looking at Bitcoin compared to the Federal Reserve Wire Network, commonly known as Fedwire. Any time you send a wire transfer at your bank, you’re actually using the Fedwire system, and as you’ve probably been warned, you can’t reverse wire transfers — they’re considered final-settlement. In other words, sending Bitcoin is more akin to sending a wire transfer, in that both technologies offer final-settlement, and this is not typically a feature of a high-volume payment rail such as credit cards. For more details on the difference between the two, read chapter 9 in Gradually, Then Suddenly by Parker Lewis.
If you take a deeper look at the traditional financial system — or trad-fi for short — credit cards actually operate at a higher level, or layer, in the system, and they rely on underlying layers like Fedwire to function. The reality is that when you make a credit card transaction, the merchant doesn’t immediately receive the funds, or even have final-settlement, for weeks or months after the transaction. The banks actually batch the transactions and settle the net balances over Fedwire, which, ironically, also has a peak capacity of about 7 transactions per second. If you’ve ever paid to send a wire transfer, you know that Fedwire can take several days and cost something like $30. This is actually slow and expensive compared to Bitcoin, which currently offers final-settlement in about 30 minutes for just a few bucks.
Layered money and Lightning
Just like trad-fi, Bitcoin has an active community of businesses and developers committed to creating functionality at higher layers, like the Lightning Network, which is sometimes referred to as a “layer 2 solution” because it sits on top of the Bitcoin network. Lightning payments are a closer analog to credit card transactions, and because the Lightning Network is decentralized, the network actually has no theoretical maximum throughput, unlike the centralized servers that Visa and Mastercard operate.
Granted, Lightning payments are not ubiquitously accepted by merchants yet either, but neither were credit cards in the early days of the technology. It took decades to deploy point-of-sale systems that could accept credit card payments, and it’s unfair to hold Bitcoin payments to a different standard — though wide-scale acceptance will likely be faster due to the digital nature of our modern economy. If you’re interested in more details about the history of money and what people have used as a medium of exchange in the past, read chapter 2 in Broken Money by Lyn Alden and chapter 2 in The Bitcoin Standard by Saifedean Ammous.
So to summarize: financial systems operate in layers, and the idea that Bitcoin — or any other crypto-currency — can or should be able to solve all the use cases of money in a single layer is not practical, as it inevitably leads to unacceptable compromises. The traditional finance system is a working example of a layer-based approach, and there’s nothing wrong with this type of solution.
No second best
That isn’t to say Bitcoin is perfect and will never need changes, but the ossification of the protocol over time is a feature, not a bug. It results in confidence that certain aspects of the protocol, such as the supply cap, will be the same today as they are tomorrow, and even in 100 years. Alt-coins that promote true anonymity, like Monero, can’t make this claim, and as such they’re unsuitable as money because they aren’t provably scarce. The same types of argument can be used for any other so-called enhancement by alt-coins.
For more details on why Bitcoin is unique, check out Michael Saylor’s talk called Bitcoin: There Is No Second Best, and watch Bitcoin University’s video called Is Kaspa the Next Bitcoin? For more details on proof of work versus proof of stake, read chapter 24 in Broken Money.
In the end, Bitcoin is the next Bitcoin, and there is no second best.