Although the roof seems to be the most important part of a house it is still smart to build the foundation and the walls first. Bitcoin is the only cryptocurrency that is building the blockchain up from the base to the top, many alt coins seem to do the opposite. A proper blockchain is focussed on security and decentralisation first, and speed and fancy features should come later. Bitcoin is the only house in town with a proper foundation!
It is important to have a roof above your head, so let’s build the roof first!
Most of the alt coins are building the roof first
Security is the main feature of every blockchain
Security is the main feature of a blockchain, an insecure blockchain is useless. Security is relative, 100% security will never be reached. It is important for a blockchain to reach an as high as possible security level. When two blockchains have exactly the same features the most secure one will always be more valuable.
This means that building on security must be the first priority, it will make all secondary features more valuable. Smart contracts, registration of assets, cloud storage or just payments, it all have to happen in a secure manner, the more security the better. Security of a blockchain can be divided in two categories:
Security of the funds
The entries on the blockchain (the funds) have to be as secure as possible. This means they are protected against theft and double spending. The level of this type of security comes from the hash power that miners deliver to the network. The more miners, the more security of funds on the blockchain.
Security of the network itself
Beside the desire to keep the funds safe, you also want to be sure about the network where the funds are issued on. Your own coins can be safe, but when the network fails, the supply of new coins changes or someone set the network rules to his own interest you could lose your value too. A high level of decentralisation is here required.
For security a blockchain need to become valuable
A PoW blockchain becomes more secure when the value goes up. Mining will become more profitable and more miners will be attracted to the network. This will lead to more hashing power on the network and will make it more expensive to double spend, censor transactions or change the network rules. This creates a positive feedback loop, higher security makes the network more valuable.
Store of Value is the most efficient way to attract value
Store of value users are the most efficient users to secure the main chain, because they demand big amounts of the currency (push the price up through supply/demand), don’t make many transactions (don’t put much load on the main chain) and don’t care about high fees (are able to pay the miners generously when block reward decreases). That’s why a blockchain focussed on store of value will be able to reach a optimal security level. Bitcoin is the ONLY blockchain that is doing this!
Easy accessibility and only voluntary changes preserves decentralisation
Beside the hash rate, decentralisation is also extremely important. To reach a maximal level of decentralisation it must be as easy as possible for everyone to be involved with as less as possible required resources and limitations. This means that some things have to be avoided on the main chain:
Big blocks
When blocks are bigger the total blockchain will contain more data and more powerful hardware will be required to take part in the network. More powerful and thus expensive devices are needed to run software and it will take longer to synchronise with the blockchain. This makes the network less accessible for poor people or people in areas with less infrastructure. When blocks become even bigger only centralised data centres will be able to run a full node. The Ethereum network is loosing nodes in a fast pace already, so this can happen fast!
Hard forks
A hard fork means that the network will be updated and everyone who doesn’t follow will be incompatible with the network. This means that users are forced to update otherwise they will not be able to use the network anymore. The occurrence of a hard fork means that big changes are easy to make and thus decreases future certainty (what more will change in the next ten years?). Furthermore, every hard fork the network centralises further because the ones that don’t want to follow the leader are punished and kicked off the network.
After the worse bugs that really threatened the Bitcoin network were hard forked out in the early years Bitcoin Core devs only wanted to update through soft forks as long as there is no emergency. Soft forks are backwards compatible, what means that users that deny to upgrade are still compatible with the network.
This means that soft forks are voluntary, you can still take part in the network even when you don’t want to use the new code. When only soft forks happen you can be sure that the Bitcoin you buy today is still the same Bitcoin in ten years and the network will remain decentralised because nobody is kicked off the network and upgrades can be used voluntarily, only if you want.
Additional features will be build on second layers
Increasing block space will always come with trade offs on security and decentralisation, so it is optimal to keep the main chain intact and use it only for the highest value use cases (store of value) to bring as much as possible value (= security for the blockchain) in the limited block space. This is the ultimate way to build a super secure and decentralised basis where the secondary features can be build on top of.
This will be done through second layers, where every possible use case of any cryptocurrency can be implemented in a separate network that drives on the Bitcoin network and benefits of the same security level and uses the same coins.
Failure of a second layer doesn’t matter
Most alt coins have extra features and thus more complicated code. The downside of this is that there are more attack vectors and there is a bigger chance for bugs. Also the blocks will need to be bigger what can result in the issues as described earlier. If implemented in a second layer it doesn’t crash the entire network when it goes wrong and the blockchain and security level can be maintained on the main chain.
Value of the main chain and 2nd layers will reinforce each other
When an extra 2nd layer is build on top of Bitcoin it will increase the value of the network overall and thus the security level. This in turn will increase the Value of every other 2nd layer and the main chain as well because they all become more secure. When multiple 2nd layers are rolled out it will be very hard for alt coins to compete against this network effect.
Second layers can be extremely cheap and scalable while super secure
Because the miners are already paid by the store of value users on the main chain, 2nd layers can theoretically benefit the enormous security level for free. The only time blockchain fees have to be paid will be when you bring funds in and out, inside the system fees will be tiny. Alt coins will need to pay for their security by network fees or inflation, both will be on the expense of the users. This means that 2nd layer solutions will be more secure AND cheaper than alt coins. Beside that the capacity is way bigger because not every node have to store a copy of the transactions.
Conclusion:
Bitcoin is the only cryptocurrency that is focussed on security and decentralisation and thus the only building that has a strong foundation. The capacity and usability of the main chain will gain slowly through complicated innovation like Schnor, MAST and Bulletproof by the best devs in the world while decentralisation is maintained and security grows.
Second layers will bring fast and cheap payments, smart contracts and all the other imaginable fancy blockchain features with a higher security level and scale than alt coins while the value of them will reinforce each other. When this monster grows it will be harder and harder for alt coins to compete against the huge network effect and they will be eaten one by one.
Simply said, the main chain have to be simple, secure and decentralised as a foundation to build more complicated systems on top of.
Disclaimer
This is no financial advice, just my view on the market.
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