Blockchains are a technical wonder, but in this largely competitive landscape, I came to see the social consensus and the ecosystem around blockchains as well as their most important strategic asset. The social layer is important, but for various reasons depending on the chain.
More specifically, I have the hypothesis that the “layer 0” for any blockchain ecosystem can only excel a main mission. When I say “layer 0”, what I really talk about are the communities of people who support these networks. They are everyone, enthusiasts to engineers, developers, investors, venture capital 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, the communities and the ecosystems that underlie Bitcoin and Ethereum are radically different. I have long said that “Bitcoin is the asset. Ethereum is the platform.” In both cases, social consensus around these blockchains is what keeps them together and each makes it perfect for their mission.
Bitcoin first. Bitcoin is a value -based value store. Better than fiduciary currency. More reliable than gold. Keeping from politics and protected by vast evidence of work infrastructure. Bitcoin is in a constant battle for Mindshare with other crypto assets and, even more, against traditional fiduciary currencies and the assets issued by the Central Bank.
It is not the same as other value reserves. There may be many types of government and business debts, and their values are all 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 rare and that it is not easier.
A particularly important characteristic 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 reserve of value, you are on a slippery slope because technically, there can be an infinite offer of identical copies of Bitcoin. If there can be two, there can be a thousand. If this happens, the value of Bitcoin is uncertain and probably weak.
Currently, there are no other cryptocurrencies that have a value even from a distance close to that of Bitcoin. Assets like Litecoin, Bitcoin Cash, Dogecoin and others represent a tiny fraction of the Bitcoin market capitalization. The only active in the same general league is ether, and I would say that it should be considered as a cryptocurrency and more as an interest in a computer ecosystem.
The result of this logic is a particularly aggressive approach to Mindshare. The value of the bitcoin must be supported by a constant memetical war against other cryptocurrencies. Scroll R / Bitcoin and you will find a flow of memes which aims to strengthen the value of Bitcoin. The typical content includes disastrous warnings about the discharge of the US dollar with quantitative relaxation, serious American federal debt, inflation horrors and delighted predictions for future prices. This quantitative relaxation has not caused inflation and that low to moderate inflations do not inflict any measurable economic damage does not matter in this context: political damage, yes, economic damage no. (See here and here)
A meme typical bitcoin includes a reminder that a long time ago, a dollar would buy you a full bag of grocery store. The involvement is that you are stolen by the gradual impression of money. This same has never resisted the most basic examination. Moderate inflation is good, necessary and infinitely better than deflation. We are much better off than we were when a dollar could buy a bag or a grocery store, but recognizing that it would undermine the story. However, this does not matter. Never let the facts hinder a good story.
To maintain its value, Bitcoin needs a very assertive social consensus. And this must continue for a long time. The use of Gold as a global store shared in value dates of 650 BCE in the old Türkiye, so they are a significant step ahead. And although there are other precious metals, none of them has ever approached gold in terms of total market capitalization. The market capitalization of gold is 10 times greater than the market capitalization of money.
The social ecosystem that underlies Ethereum is different. First and foremost, Ethereum is the global computer. Ethereum is an ecosystem with a positive sum where people are encouraged to build and extend. The discussion and tone of R / Ethereum are, once again, a good proxy for the whole ecosystem: it focuses on engineering, development and new applications.
Ethereum, like Bitcoin, has an equally passionate zero layer ecosystem and is as dominant compared to other “intelligent” blockchains as Bitcoin to other pure crypto assets. The domination of Ethereum is visible in the market capitalization of the assets but also in its share of tokenized assets. Ethereum is the dominant ecosystem for most “real” assets and the majority of stablecoins. With more than 100 layer 2 networks in operation, Ethereum has 20 times more “network extensions” than any other ecosystem, including Bitcoin and Solana.
Bitcoin and Ethereum ecosystems both have ardent believers who see things differently from the dominant story. There is a small but resilient layer of construction on Bitcoin. Bitcoin will soon have its own layer two networks, including some EVM compatible.
Likewise, there is a passionate group of Ethereum believers who think that Ethereum should be both the network computer and an asset based on rarity. The EIP-1559 (Ethereum Improvement proposal), which was adopted in August 2021, reduced the rate to which a new ethn was issued and shifted the model of gas costs so that some ETH is burned with each transaction. The result is that the quantity of ETH in circulation increases at a slower rate than bitcoin and, in some cases, even decreasing.
None of these elements is necessarily a bad idea and, at least in theory, one or the other ecosystem could be the host of the two types of activity. In practice, the cultural requirements of each ecosystem are so different that they cannot really excel in more than one function at a time.
In the real world, currencies like the US dollar are more effective as a means of exchange, but not necessarily as a reserve of value. You can use dollars to buy things, but a deflationary system that has increased the value of the dollar, over time, would be catastrophic for the economy because it has forced real interest rates. As Ben Bernanke has discovered it, trying to stimulate an economy when inflation is low is very difficult. The same problem makes bitcoin unsuitable as a currency even if it can excel as a reserve of value.
With Ethereum, we will see how the Boomchain Blockchain boom takes place in the coming years. If the ecosystem retains its dominant share of the new tokenization of intelligent assets and contracts, I think we can declare a winner of the main mission. Bitcoin has a longer game to play, but if we see an increasing correlation with gold, this can be an indicator that investors in the real world buy in the argument of digital rarity.
Anyway, it could be several years of real experience before being able to prove (or refute) my theory. It also means that the memetic war on Twitter between ecosystems will not disappear anytime soon.
The opinions reflected in this article are the views of the author and do not necessarily reflect the opinions of the World Organization EY or its member companies.
