First mover advantages are often erased relatively quickly when it comes to high tech projects. There are just a few that have managed to retain their position at the top once competitors start pouring into the market. Google’s search engine, Microsoft’s Office suite and Bitcoin are among the most prominent first movers that are still at the top of their game. They are the exception, not the rule. Nevertheless, when it comes to Bitcoin, that first mover advantage should have vanished a long time ago. So, why is Bitcoin still at the top and seems irreplaceable?
Slow to update
Unlike Microsoft and Google, which can update their products and services quickly, at the whim of their management teams, Bitcoin is notoriously slow at updating. As a decentralized, open source project that requires consensus to deploy software updates, Bitcoin should be prone to being replaced. None of the alternatives that came into the market over the last 10 years have managed to replace Bitcoin, however.
Hal Finney suggested why Bitcoin is irreplaceable
Despite these built-in drawbacks, Bitcoin is a project that is geared towards a fundamental change in finance. It is the first project to create digital scarcity and somehow that is irreplaceable. Hal Finney explained why this is the case. It all boils down to credibility, as is the case with any other currency.
On 30 May 2011, Hal Finney posted the following on Bitcointalk:
“Any successful replacement of the Bitcoin blockchain will forever undermine the credibility of any successor. How is an investor to know that it won’t happen again?
Rebooting now may benefit a few thousand early adopters. What happens when hundreds of millions use Bitcoin 2? They’ll be just as jealous and envious of you as you are of others. Given the precedent you want to set, how will you argue against yet another reboot?”
Is Bitcoin really irreplaceable?
There is no doubt that people gravitate towards a known asset that they can trust when it comes to currencies. Despite the fact that there are many other cryptocurrencies out there that might be better at scaling than Bitcoin or might bring more sophisticated use cases to the fore, like smart contracts for example, we are fundamentally talking about a medium of exchange. Undermining it credibility will open Pandora’s Box, but the fact that it hasn’t happened yet doesn’t mean it can’t happen.
Maybe looking at it from the perspective of the tech is misleading. All the cryptocurrencies that took a shot at Bitcoin’s position at the top of the market, did so based on a superior tech argument. That might work for other products and services in a wide range of industries, but it is a weak argument when it comes to currencies.
World reserve currencies as an example
Finney has a point when he talks about trust and the perils of undermining that trust constantly to replace whatever is at the top. Nevertheless, history shows us that currencies are indeed replaced at the top periodically. It just takes hundreds of years to get to that point. The US dollar for instance, did not become international reserve currency because it was incredibly innovative. It replaced the British pound because the US economy rose to the top after World War II.
The British pound also replaced another currency at the top before it was replaced by the US dollar. The Dutch guilder was the de facto reserve currency in Europe before the pound. When the pound replaced the guilder, it wasn’t more technologically advanced and that is what those who make the tech argument are missing out on.
Bitcoin can update itself
Since the market trusts Bitcoin way more than any other coin coming in behind it, the next question is can it update itself quickly enough to keep competitors at bay? The answer is mostly yes. Bitcoin has been criticized for having scalability issues. But since there is so much more capital invested in it than in any other coin, many of the brightest minds in the space are looking to solve existing issues in Bitcoin. That is how SegWit and subsequently the Lightning Network came into being.
Smart contracts might be next. There are companies like RSK that are working on smart contracts for Bitcoin. The best part of solutions like these, is that they are layer-2 solutions; they do not take place on Bitcoin itself, but rather on a separate network. If something goes wrong, Bitcoin can keep on working as it has so far.
Bitcoin problems turned into advantages
Therefore, the fact that it is difficult to upgrade a decentralized, open source project that requires consensus like Bitcoin, might become an advantage. Instead of trying to launch a do-it-all coin, it might be better to work with a trustworthy currency on solutions that can be layered onto it.
This is part of what might be keeping other projects from taking Bitcoin’s place. Ethereum is a great example. Although it came with a built-in system for smart contracts, its upgrades have been slow as well, and its scalability issues have become glaringly perilous. People also tend to forget the DAO debacle, in which Ethereum actually sacrificed immutability to bail out DAO investors who had poured money into a faulty smart contract. That could never happen to Bitcoin, because a smart contract feature on it will almost certainly not involve changes to its software.
The devil you know
People are likely to hold onto the devil they know. That is also why Bitcoin hasn’t replaced the USD as an international reserve currency despite being technologically superior itself. Change is scary, especially when it comes to the medium of exchange that you value. That, more than Finney’s point to the inherent perils that undermining the incumbent coin at the top would unleash on the challenger trying to become the next incumbent, is the reason why Bitcoin will remain at the top for the foreseeable future. Nevertheless, just like the British pound and the Dutch guilder before it, the market is bound to replace Bitcoin at the top in the future. If history can be an indicator, that point in time might be more than 100 years away.
Hitesh Malviya is the Founder of ItsBlockchain. He is one of the most early adopters of blockchain & cryptocurrency enthusiast in India. After being into space for a few years, he started IBC in 2016 to help other early adopters learn about the technology.
Before IBC, Hitesh has founded 4 companies in the cyber security & IT space.
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