The Winner of Blockchain: Layer 2 is a Bigger Deal & Cotton Candy

By; Gustavo A. Calderón, President, Acquisition Workforce, Inc.
gcalderon@acquisitionworkforce.com
Mobile: 571-436-7600

Yes, there’s an undisputed winner! Revealed below, but first, to understand the technology landscape known as Blockchain, we must get our bearings by noting a few critical events in the history of Bitcoin. As a parenthesis, there’s no uniform convention for bitcoin capitalization. However, more often than not, Bitcoin capitalized refers to the protocol, and lower-case bitcoin refers to the coin. At a minimum, this is consistent with the bitcoin logo.

Bitcoin has been capturing the imagination of technologists, entrepreneurs, governments, NGOs, monetary sovereignty seekers, as well as scammers and fraudsters alike since the release of the first 50 bitcoins via the Genesis Block on January 3, 2009. The interest in bitcoin can be easily measured, vis-à-vis its value in US dollars. Bitcoin reached parity with the US dollar in February 2011. During the early years, few folks seemed to take notice of this internet currency except for perhaps, cypherpunks, crypto-anarchists, and a few Ph.D. computer science students. Some of the early and visionary bitcoin evangelists were in total awe as they knew that they had in their possession one of the most significant inventions of humanity. A scarce, internet-native, digital asset had been “discovered.” The circulation will never exceed 21 million bitcoins, and unlike fiat money or gold, it cannot be debased, duplicated, or created at will. The world’s “hardest money” had been invented. Among the top reasons people across the globe want to own bitcoin is the realization (and there are as many reasons for owning bitcoin as there are people are holding it) that owning bitcoin can shift the sovereignty of money from the state to the individual.

Early bitcoin evangelists had a tough time finding anyone that would be willing to listen to their views on how disruptive bitcoin could be to central banks and government-issued fiat money. Some people did listen, and a tiny minority took the time to read the Bitcoin White Paper but most still dismissed bitcoin (as is the prevailing sentiment today) as “money too good to be true,” and therefore, not to be trusted. A tiny and very wise minority of technologists, cryptographers, computer scientists, and open-minded economists knew an overnight breakthrough had not created this “electronic coin” (A term used in the White Paper). Instead, bitcoin was the culmination of the slow and steady progress of over twenty years of research and development in cryptography, the application of complex game theory, Austrian economics, privacy, human rights, incentive models, hard-core mathematics, as well as the multiple failed attempts at creating a digital currency. Of course, timing is everything. And, the timing of the release of the Bitcoin White Paper, on October 31, 2008, during a worldwide financial crisis was exceptionally fortuitous.

Some would say that bitcoin came out of obscurity when the price hit $100 US dollars. It is fun, albeit not very educational due to the many inaccuracies presented, to watch how CNBC covered bitcoin for the first time, live on air, on April 1, 2013. In all fairness, this coverage was not as “clueless” as Katie Couric and Bryant Gumbel’s take on “What is Internet.” Seven months later, on November 28, 2013, the price of bitcoin hit $1,000 US dollars, and by this date, 15 other cryptocurrencies were trying to dethrone bitcoin. 2013 was named the “Year of the Bitcoin” by Forbes. Have we reached significant adoption in the US? A late 2019 survey estimates that only 6.2% of Americans own “some” bitcoin. So, it’s easy to conclude that bitcoin is still relatively obscure.

In December 2014, Mastering Bitcoin – Programming the Open Blockchain by Andreas M. Antonopoulos hit the shelves. In this first book on Bitcoin, references to “other” blockchains were limited to Bitcoin “hard forks.” Beginning in 2014, Andreas defined the five pillars of open blockchains as (1) open, (2) public, (3) borderless, (4) neutral, and (5) censorship-resistant. Allow me to suggest that these five pillars are analogous to the five vital human organs, the brain, heart, kidneys, liver, and lungs. So, which one of your vital organs are you willing to give up for your cause? Give up one, and you’re dead, instantaneously. The same applies to an open blockchain project you are looking into as you should be aware from the outset if any of the five pillars are missing from the project. You see where I am going with the analogy, give up one of these pillars, and your blockchain project is dead, perhaps not as quickly as the human body would die, but it will die.

There are thousands of well-intentioned technologists touting their blockchain as a faster, better, more versatile, more scalable, more secure, and more environmentally friendly. Or, perhaps the selling point is showcasing how their blockchain does not need a coin, all in an attempt to get your time, energy, and money. My suggestion is, take these claims at face value so that you can first challenge yourself to understand whether or not the blockchain project in question embraces the principles of the five pillars, all five. If it does, great but proceed with care because creating and operating another “Bitcoin-like protocol” is a daunting endeavor. So, does it matter if the blockchain project you are considering is far from ever becoming a “Bitcoin-like project”? Well, it is up to you! But, remain vigilant and skeptical if the raison d’etre and the mission statement includes as many buzzwords as possible to sound like this:

“Our blockchain uses a programmable set of fixed consensus rules that enables millions of distrusting parties to reach agreement over the ordering of valid transactions to convey a single immutable truth in an adversarial environment that can withstand an unquantifiable number of attack vectors where a central party or trusted arbitrator or charismatic leader is not needed. But, wait, there more … our blockchain will realize its full potential as it establishes world-wide adoption with the network effects and social norms aligned to resist changing the rules.” ~ Yours Truly

This run-on sentence describes, of course, a Bitcoin-like protocol. Few enterprises, organizations, consortiums, or even governments will ever find it viable to muster the resources needed to embark on such a daunting endeavor.

I do not take exception or think it is cringe-worthy to hear a marketing pitch for “a better blockchain” project that discards one or more pillars. Let’s say that such a pitch does substantiate the use of cryptographic hash functions as a justification that it is a blockchain-enabled solution. So, does this loosey-goosey definition of blockchain matter? Provided there’s no fraud involved, I would say, no, not as long as there’s a meeting of the minds and a perceived mutual benefit derived between the seller and buyer or between the client and customer.

So, how did the word blockchain become so overused to the point that it is nearly meaningless? Perhaps it is because many people incorrectly view bitcoin as the first “use case” for blockchain. The Bitcoin protocol was not built as a necessary first step, after which Satoshi then asked, what can I do with this nifty blockchain tech? The undisputed evidence is in plain sight for anyone that takes the time to study and understand the Bitcoin open-source code. Bitcoin, the protocol, was created in unison with bitcoin, the coin. Satoshi had a single vision and purpose of creating a scarce digital currency native to the internet untethered from the physical world.

“Scarcity on the internet was a one-time discovery. It was a one-time invention and it cannot be repeated because resistance to its replicability is the invention. Bitcoin’s history and unique position is what makes it truly scarce and resistant to change and these first ten years will not repeat themselves for any alternative token.”

Quote from the book, Bitcoin: Sovereignty Through Mathematics
by Knut Svanholm (May 2019)

Many blockchain enthusiasts also incorrectly believe bitcoin is just a digital construct enabled by a very versatile technology. Remove coin from the digital construct and enter, fill-in-the-blank, and presto, we can create hundreds of other use cases. This misunderstanding explains what led to the creation of the “Blockchain Not Bitcoin” meme.

Jimmy Song does not mince his words in “Why Blockchain is Not the Answer.”

Also, listen to this podcast episode What Bitcoin Did #113 -The Blockchain Revolution Myth with Jimmy Song

Bitcoin had over twenty years of development before its launch, plus ten years running of countless hours spent on additional core development enhancements. Coupled with its network effects and the ever-increasing worldwide investment in infrastructure (security, scaling, trade, payment, privacy, and adoption) solidifies Bitcoin’s preeminence as “the” open blockchain protocol.

For those of us that accept the five pillars as essential for the feasibility and survivability of open blockchains, Bitcoin is the undisputed winner!

What fueled the hype surrounding of Initial Coin Offerings (ICOs) and the steep rise of cryptocurrency prices? It is always the same human behavior, regardless of the bubble. Confirmation biases, speculation, and greed. It is easy to understand how irresistible it can be to print money. What every single ICO has done and continues to do is to create their own money. If you are in the business of creating money, load up on lawyers as there are few things more regulated by governments than money. In the US, agencies such as SEC, CFTC, FinCen, OFAC, and of course, the IRS have their jurisdictions delineated, and they are slowly starting to get the funding they need to start scrutinizing the “behavior and use” of the crypto issuers and crypto users. Every coin and token in circulation, whether it went through an ICO or not, will be subject to the same regulations.

The ICO craze pumped the prices of cryptocurrencies all the way to the stratosphere and along the way it helped push the price of bitcoin to $10,000 US dollars on November 29, 2017 and from there the price hit an all-time high of $19,891 on December 17, 2017. A year later, the bitcoin price had dropped by 80%, and of this writing it is up 165% from the December 2018 lows. According to Bloomberg, bitcoin finished the decade as the best-performing asset.

If you accept Bitcoin is the undisputed winner, then you might also agree that this winning blockchain is only the winner of the base layer protocol wars. Analogous to the early days of the internet, where TCP/IP became the internet protocol winner, and then came along HTML as a second layer protocol, web browsers, and so on. To carry the analogy a bit further, don’t become the next ‘Blockbuster Video,’ dismissing streaming video in the early days of the internet as too slow, too unreliable, too cumbersome, too expensive to be a genuine competitor. Instead, ask yourself how the Bitcoin ecosystem and the new economic drivers of bitcoin might disrupt your organization.

So, does this mean that there’s no need for other blockchains? Not at all, again, Bitcoin is only the base layer protocol winner. Now, this does mean that other blockchains will need to offer compelling Layer 2+ or Sidechain or Off-Chain solutions. Even the enterprise blockchain projects, and “private blockchains” built on top of Bitcoin, will be the only viable ones in the long run.

With a Layer 2+ approach, your blockchain project gets freed up from trying to design a distributed ledger strategy that is economically feasible. For the foreseeable future, distributed ledgers will be an order of magnitude more expensive to develop and several orders of magnitude more costly to operate than centralized database approaches. Also, consider that Layer 2+ solutions are “legitimate,” so long as users get the utility and service they seek. There’s no need to defend if your blockchain is open or private, if it is decentralized enough or not, etc., the only thing that matters is whether or not you have an excellent product-market fit.

If you look where the money is flowing to in the blockchain space, it is going to projects building Layer 2 solutions on open blockchains. Venture capital is going to start-ups being built on top of or leveraging open blockchains. Big money is no longer going to those trying to come up with a better blockchain protocol, and certainly not to anyone creating yet another cryptocurrency. There are large, well-established management consulting firms in this space that have shifted their focus to helping clients build solutions on top of open blockchains, instead of assisting them in creating “private blockchains.” Concerning public blockchains, how many will prevail? Perhaps a handful, so it begs the argument that over the long run, Layer 2 projects will be a much bigger deal as compared to base layer protocol projects. Let’s consider what we built on top of TCP/IP over the past 30 years! E.g., Bitcoin runs on top of TCP/IP. Not to add confusion, while Bitcoin, Ethereum, and IOTA, just to name three, run on top of TCP/IP, they are still considered base layer blockchain protocols.

The financial world is starting to look at bitcoin not just as the world’s hardest money, which is it, but also as the world’s hardest asset. It is mind-bending that the world’s ‘hardest’ asset is ironically 100% virtual. Bitcoin is now a worthy financial product in the discussion of portfolio diversification alongside commodities, equity, fixed income, and real estate. Moreover, a growing sentiment among portfolio managers and savvy individual investors is that bitcoin, not crypto, is an asset class onto itself.

Let me take you back to your local pop-up summer carnival. How did you pay for hot dogs, fries, coke, cotton candy, and amusement rides? The answer, with chits. Since chits expire worthless as soon as the festival shuts down, everyone knows that the trick is to buy only the right number of chits needed. Otherwise, you could end up leaving the carnival with excess cotton candy. Chits are not “bad money,” per se, as people are willing to exchange their money for chits, knowing it is the only valid medium of exchange within the confines of the carnival.

From a user’s (not a coin issuer) perspective, consider for a minute that all cryptocurrencies except bitcoin, whether they are privacy coins, stable coins, utility coins, security coins, central bank coins, etc., are in a single category called, “Crypto Chits.” Crypto Chits are analogous to our limited-use carnival chit. Like a carnival chit, a crypto chit can be very appealing, primarily if it provides exceptional user experience and value. Suppose the only way to pay for the cheapest and most reliable energy source for your home is to use the energy provider’s crypto chit. Or, what if the only way to pay for an artificial intelligence algorithm in a decentralized marketplace, is to use the marketplace’s crypto chit. Or, what if the most considerable discount for an airline ticket is available to those with the global currency Libra, (Also a Crypto Chit) would you partake on any of these transactions? I sure would. Just like no one typically questions the monetary soundness of carnival chits, there’s no need to examine the financial robustness of any of these crypto chits, provided you consume them quickly before they expire as worthless.

If you accept Bitcoin is the undisputed winner, then channel your resources towards building compelling layer 2+ solutions, applications, and businesses on top of Bitcoin. Also, if you accept that bitcoin is the hardest money ever created, then the rest of the cryptocurrencies are not, and therefore they are not worth owning but for a fleeting moment. I leave you to ponder this quote from Saifedean Ammous.

“History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.”

Quote from the book,
The Bitcoin Standard: The Decentralized Alternative to Central Banking
by Saifedean Ammous (April 2018)