What can you do with Bitcoin? - WFM #195
Bitcoin’s original use-cases remain some of its strongest.
Last week, we discussed how the history of Bitcoin shaped the development of the crypto industry. Today, we are going after the core question: What can you do with Bitcoin?
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What can you ACTUALLY do with Bitcoin?
By Harrison Smith, Head of Research @ Future Mints
Bitcoin has long been referred to as digital gold. But as Circle CEO Jeremy Allaire said last year, the similarity between Bitcoin and digital gold is “limited.” Comparing the two neglects the usability and utility that Bitcoin actually has, and the potential it carries to revolutionize aspects of the modern financial system.
Sure, Bitcoin is a “hedge against inflation,” or a “store of value,” as people often call it. That’s the digital gold part. Bitcoin is bound by an eventual hard cap of 21M tokens in circulation, which by recent estimates, will happen somewhere around 2140. But even then, Bitcoin is an incredibly speculative asset. How can you confidently describe an asset that shifts so rapidly in price as either of those things?
Bitcoin’s history, development, and role in the greater crypto environment have forged a far more viable use-case: payments.
Although Bitcoin has a handful of utilities beyond speculation, the primary utility Bitcoin offers is its incomparable advantages throughout the worldwide payments ecosystem.
Bitcoin is far from being a flawless payment system, but the combination of historical benefits and developments on the chain have shown the potential Bitcoin could provide.
Bitcoin of course possesses the basic properties that define a blockchain, such as privacy, anonymity, and immutability.
But Bitcoin also has properties that uniquely position it for success, in comparison to other cryptocurrencies:
Provenance: Massive companies such as Square and PayPal have begun to offer Bitcoin as a common payment option, and a rapidly increasing number of physical and digital storefronts have begun to accept Bitcoin.
Trust: Bitcoin’s name value and notoriety have led to it become the most widely accepted token, and it has a network effect that is hard to replicate.
Liquidity: Bitcoin has the highest trading volumes on cryptocurrency exchanges. The liquidity of Bitcoin even extends into the real world, with an increasing number of physical ATMs offering bidirectional cash-to-Bitcoin exchanges.
Community: The Bitcoin community is incredibly strong, vocal and committed to driving both expansion and adoption of the token.
Despite these advantages, Bitcoin’s baseline technology is simply inadequate to serve as a worldwide payment system.
Problem: Bitcoin’s mainnet has always struggled with scalability and transaction fees. Bitcoin can only process 7 transactions per second - far less than major payment processors like Visa.
Solution: The Lightning Network.
Bitcoin’s Lightning network is one of the most widely discussed advancements on the chain. Rather than each individual transaction be recorded, payment channels can be left open between two parties. Transactions can be recorded over and over within this payment channel, and whenever either party desires, the channel can be closed and the information sent back to mainnet.
Let’s look at an analogy.
The Starbucks mobile app is based on a system where you reload an account balance, then use your balance to make purchases at their stores or online. A customer can make a one-time-payment from their card to load their balance, and then the balance can be used over and over without requiring another banking transaction.
This is kinda the idea of what Bitcoin’s Lightning Network enables. The initial transaction opens this payment channel, which can be used over and over until either party decides they want to move the payment ledger back to Bitcoin mainnet.
The Lightning Network uplifts Bitcoin smart contracts into real, widespread usability.
Wait, Bitcoin smart contracts? There are smart contracts on Bitcoin?
Under Nick Szabo’s original definition, there are four principals that determine if something is a smart contract.
Observability. Verifiability. Privity. Enforceability.
Every transaction on Bitcoin contains every single one of those qualifiers. There is two parties on either end of every transaction, and the arbiter is simply the blockchain.
So every transaction on Bitcoin is merely a smart contract interaction.
One key function Bitcoin smart contracts pioneered is the ability to time-lock transactions. Back in 2015, the CheckLockTimeVerify (CLTV) function was implemented into Bitcoin Core. The CLTV function allows Bitcoin users to create a transaction with an output that only becomes spendable at a future date in time, determined by the number of blocks mined.
This function has tons of practical utility, such as a rent payment you want to make on a certain date, or a gift you want someone to have on a certain birthday.
The CLTV function also inherently created the concept of multi-sig transactions, and laid the groundwork for the Lightning Network.
In 2016, one year after releasing the initial Lightning Network whitepaper, Joseph Poon and Thaddeus Dryja founded Lightning Labs. Over the next few years, developers could build apps on the Lightning Network, and many proof-of-concepts such as wallets and gambling platforms came to life. In 2018, a beta version of the Lightning Network was implemented into the Bitcoin mainnet.
The Lightning Network unlocked two key things that Bitcoin had been missing.
Speed. Granularity.
The ability to have scalable, off-chain instant payments revolutionized the potential Bitcoin had, while maintaining the high degree of privacy, integrity, and security expected from blockchain technology.
An additional benefit the Lightning Network provides is the capability for routing.
As one interacts on the Lightning Network, more and more possible payment channels are opened. When there is a route from both ends of a potential transaction to connect through existing channels, the payment can be sent across channels similarly to the Tor network.
If payments are able to be routed, channels don’t need to be individually opened and closed, and fees can be largely negated.
As we know, widespread technology adoption is generally slow. Massive changes often take decades before they reach materiality. The Lightning Network has been used increasingly in online marketplaces, but has yet to really permeate the physical retail space.
Nonetheless, the combination of these historical advantages and and technical upgrades directly led to the widespread adoption of Bitcoin as a payment system that we see today. Bitcoin has established a reign on crypto-payments, and I don’t expect that to change anytime soon.
Well, besides payments, what else can Bitcoin do?
Additional layers built on top of Bitcoin allow other smart contract functions, such as the creation of NFTs and defi systems. As opposed to Ethereum, these NFT and defi environments are not directly on the Bitcoin blockchain.
Wait, did you say Bitcoin NFTs?
Yep, Bitcoin NFTs. Layers like Stacks or Rootstock enable smart contracts to create metadata and NFTs. As Stacks founder Muneeb Al describes it, these alternate layers operate on layer 1.5. They’re closely tied to Bitcoin, and allow detailed off-chain transactions that are settled on-chain. Bitcoin NFTs can be traded on a Bitcoin NFT marketplace, similar to any other chain.
There is even an identity protocol on Bitcoin. Bitcoin Naming System (BNS) is a decentralized system for resolving human-readable names to corresponding digital addresses. Anyone can create a namespace on a first-come first-serve basis, and once created, unlike ENS, they last forever.
But let’s be real.
The overwhelming majority of people are not using Bitcoin as their destination to trade NFTs, nor their home for defi activity. These use cases are mostly just novelty, and other blockchains have demonstrated the ability to have more relevant and widespread use cases on-chain.
Still, Bitcoin is far more than digital gold. Bitcoin unlocks a payment ecosystem that was previously unimaginable, and has a uniquely suited path to success. As adoption expands, Bitcoin’s value as a worldwide payment system follows.
Bitcoin just can’t simply or efficiently do many of the things we’ve come to know and love about other chains.
Bitcoin’s history led to its proliferation as the go-to crypto payment system, and it thrives as exactly that.
News of the Week
A wallet belonging to Proof founder Kevin Rose was hacked, and countless high-valued NFTs were stolen. Roughly 40 NFTs were taken, including Chromie Squiggles and Autoglyphs.
Yuga Labs’s Sewer Pass provides an immersive game experience that challenged players to compete for high scores. But for some, the challenge came elsewhere. Cygaar, a well-known web3 software engineer, instead took the challenge of trying to exploit the Dookey Dash game.
Mango Markets, the Solana-based crypto exchange, is planning to relaunch, despite the U.S. Securities and Exchange Commission labelling the project’s native token as a security. Mango Markets also opened a suit against Avraham Eisenberg, a trader who infamously drained Mango last October, for $47 million in damages.