We hear a lot being made about bitcoin and how it is going to change the world. We know the maxis believe there is bitcoin and everything else is shit. Unfortunately, they make the fatal mistake that most do when discussing a topic like this.
How often have you heard someone talking about the monetary system and how it evolves? Do you hear the maxis discussing what takes place at that level? Do they compare bitcoin to the existing monetary systems while expressing how it improves things?
Of course not. This never crosses their mind. Instead, they focus upon money. This is what is common. However, it misses the major portion of the situation.
Focusing upon money is like debating electric versus ICE vehicles while ignoring the fact the roads are made of dirt, filled with potholes. Does it really matter what rides on top when the foundation is complete trash?
This is what we are dealing with here.
So what is a monetary system?
This is the combination of accounting and communications that provide some form of settlement. These factors are always in play whether we are dealing with paper, coins, cryptocurrency, cows, or slaves. All have these components.
Here is a quick example:
You go into a store and see an item that costs $10. The first stage is accounting, i.e. knowing what you have. In your pocket is $20. Grabbing the item, you take it to the counter. The clerk tells you that will be $10. Here is the communication. You hand over the $10 bill, get a receipt, which is the settlement of the transaction.
This is a simple example of how it works. We can then extrapolate that to our currency system of commercial, central bank, and Eurodollar money.
To go a bit further, accounting can be encompassed by the term ledger. We are dealing with ledgers that keep track of all balances. As for communications, today that is handled by digital networks.
Thus a monetary system is really a ledger(s) that is tied to a digital network(s) which offers settlement.
Many feel that blockchain is the future of monetary systems. As we can see, by definition, they serve this purpose.
Using distributed ledger technology (DLT) all transactions are accounted for. As money moves throughout the different wallets, the system maintains all balances.
Bitcoin was revolutionary in that Satoshi Nakamoto was able to solve the double spend problem without a centralized entity. This was the major innovation that is going to change the world. The present monetary system has centralized entities controlling the digital forms of money. In this instance, it is the banks.
Anyone who looked at cryptocurrency understands there are some issues with blockchain. The biggest is scaling and here is where bitcoin runs into issues. It is also why the established system ignores this as a threat. There is no way it holds up under the strain that an expanding system of trade provides.
One of the drawbacks to bitcoin is that it is basically 12 year old technology. Think about how you would feel about a business that ran on 12 year old computers. Certainly, the hardware was upgraded but the capabilities of the network are basically the same. Taproot, so we were told, was suppose to fix this. It turns out that it only created more problems.
We recently saw the fees on bitcoin jump as ordinals started to take over. This is getting people upset, starting the debate between high and low quality transactions. Obviously, the miners do not care what transactions are going through since their job, and return, is based upon processing them.
None of this is novel. The shortcomings of that network were well known. In fact, this is why the Lightning Network was created. This was framed as the solution to the problem. Many pointing out the shortcomings of this idea, only to be rebuked. Here is what would make bitcoin the true medium of exchange, taking out the US dollar.
Before we get into the recent issue with Lightning, here is a good summary of what is taking place.
One of the key concepts with Lightning was that a bunch of individuals would be operating nodes all over the world. The average person would take a piece of hardware and set up a node. This would happen because either:
As noble as the first is, we know few do that. Hence, we are back to incentive. One of the issues bitcoin has is that all rewards go to the miners. There is nothing left from bitcoin inflation to offer incentives for any other infrastructure. Also, with their governance model, which seems to be screaming on Twitter, change is not in the air.
Now bear in mind, bitcoin does provide a very valuable service. When it comes to security, we might be dealing with something that is unrivaled. Thus, we have to highlight the advantage it does provide. The problem is scaling. Fort Knox might have the best security in the world buy safety deposit boxes exist because most do not need that level for the titles to their cars or family heirlooms.
Lightning is the safety deposit box. The challenge is that it is dependent upon the node operators opening and closing channels. As explained in the linked article, this is possible at 30 cents. When a transaction costs $10, it eats up all the profits.
This means that the only ones who can run the nodes are those with:
The last part, in the digital world, usually means mining of data. In other words, we are looking at centralized.
In other words, Bitcoin needs a centralized network to potentially operate as a viable medium of exchange.
One can talk about money all they want. The problem is that if it is a poor monetary system, all else is immaterial.
We covered how bitcoin is a ledger like all blockchains. The security on this end is unsurpassed. So it checks the box here. Where the challenge arises is as a digital network. It is simply not efficient.
This means that additional networks have to be built to handle it. As we can see, Lightning was meant to do this yet it has it drawbacks. What happens if the Lightning nodes are run by Chase and Barclay's?
At this point, even if bitcoin is the Ferrari of money, it is running on a dirt road full of potholes. The established system is the interstate superhighway where vehicles can run at 120 or 130 mph. Yet bitcoin tops out at about 35 or 40 if the road is not muddy.
In the future, we could see a network built that solves the problem. However, the drawback to bitcoin, at this point, is that it basically fails as a real world monetary system.
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