The first eleven years of Bitcoin and blockchain have been dominated by crypto consensus goals and development. The state of the industry is a reflection of what is thought to be valuable by this consensus view. The crypto consensus believes that the industry is on the right track, but that it is still early. The lack of adoption is a temporary state, one which provides a huge opportunity to investors. This view is made clear in the investments that funds continue to make in technologies promoting decentralization, trustlessness, and censorship resistance.
In our view, the current state of the industry demonstrates the failure of this thesis. Inefficient technologies offering trustlessness and censorship resistance have been widely rejected by the public. Bitcoin in the form of BTC has become crippled. We see the digital gold use case as a last resort, a fallback from grander visions that still seems plausible given the consensus views on Bitcoin’s technical limitations. Ultimately, we think this vision will run its course and be eclipsed by a version of Bitcoin in BSV which no longer limits itself by seeking decentralization and focuses instead on expanding the efficiencies of Bitcoin through scale to create a better, more efficient internet.
THE REGRESSION OF BITCOIN
The widespread belief that Bitcoin is unscalable becomes more understandable when you realize that BTC, the most popular version of Bitcoin with a market valuation of $16O billion, is unscalable by design. Despite originating with the potential described in the previous chapter, ten years of developer tinkering has yielded a broken Bitcoin in BTC. The developers who have assumed control of the main Bitcoin code value decentralization so highly that they intentionally prevented Bitcoin from achieving scale. By imposing technical constraints on the amount of data that could be written to the Bitcoin database and removing the native programming language which enabled much of Bitcoin’s functionality, the initial developers of Bitcoin transformed BTC into what they consider to be state-free money or “digital gold”. One of Multicoin Capital’s three “crypto mega theses” is that global state-free money, like BTC, will be able to capture a market they value at $1OO trillion.
Destroying Bitcoin’s scalability resulted in a network that is slow and expensive, even at a level of usage that is miniscule relative to the valuation of the currency. Today (5/1/2020[, BTC’s transaction fees hover around $1.8O but have reached as high as $5O in times of peak traffic. BTC’s lack of scale has eliminated the possibility for most of Bitcoin’s revolutionary features and use cases. Since BTC’s only remaining value proposition is trustless, censorship-resistant “digital gold,” which necessitates that the network doesn’t scale, BTC indeed does not scale. With scale topping out at around seven transactions per second, we don’t see how mainstream adoption is feasible.
Some may respond to this critique by suggesting that Bitcoin will scale via layer-two solutions like lightning network. Thoroughly explaining Unbounded Capital’s critique of the lightning network here is not the best use of this ebook. Suffice it to say that even if the lightning network is able to alleviate BTC’s transaction fees, its success would not enable Unbounded Capital’s vision of Bitcoin. The lightning network creates an entirely separate network that does not share the features of Bitcoin as a scalable, public, and immutable database. From the perspective of the cryptocurrency consensus, a functional lightning network would be valuable because it scales the digital gold use case, but even the most optimistic lighting network proponent would not suggest that it could enable the Bitcoin described in the previous chapter. Today, the only version of Bitcoin that is trying to achieve Unbounded Capital’s vision of Bitcoin is Bitcoin Satoshi Vision, which trades as BSV.
Ultimately, the success of the digital gold use case for BTC depends on what alternatives can emerge. We think that many investors who are interested in digital gold are interested in it primarily for its ability to serve as an inflation hedge that can be transferred over a communication channel. If given a choice between a version of Bitcoin with massive scale and utility that is seizable and recoverable or a version that is non-seizable and censorship-resistant but is unable to scale, we think they will opt for scale and utility.
BITCOIN COMPETITORS
Although aspects of Unbounded Capital’s vision for Bitcoin (like user-centric data ownership, improved interoperability, and improved privacy[ have excited some operating within the cryptocurrency consensus, they assume that achieving it on Bitcoin is not possible. This assumption is rooted both in Bitcoin’s perceived lack of scale and also the view that Bitcoin lacks key functionality that networks like Ethereum have. This has prompted the development of new, supposedly more scalable, functional protocols to accomplish what is ostensibly beyond Bitcoin’s capabilities.
Blockchains like Ethereum were marketed in part as “turing-complete” Bitcoin. This insinuates that Bitcoin is not capable of the same types of computations that platforms like Ethereum are. This assumption is widely held but is false. Multicoin Capital acknowledges that Bitcoin is “technically programmable,” but Bitcoin is widely thought not to be turing-complete. To be turing-complete is to be able to compute anything that a turing machine can compute, or as it is commonly understood, to have the computing ability of a modern computer. Bitcoin script, a function largely disabled by BTC, but re-enabled on BSV, is computed through a 2-PDA, a structure well known for being turing-complete. While the view that Bitcoin is incapable of what other smart-contracting platforms can do is erroneous, BTC’s lack of scale at the time these competing platforms were developed made the interrogation of this false assumption pointless. In practice, BTC lacks turing-completeness, and the BTC developers’ stubbornness about maintaining this limitation incentivized the creation of alternative platforms. Had BSV been around then, it is unclear whether or not these platforms would have proliferated.
Turing-complete, programmable Bitcoin alternatives like Ethereum have promised a vision of a decentralized web3. Today, the cryptocurrency consensus contends that their vision of web3, perhaps best articulated by Multicoin Capital, is still in the early days. At Unbounded Capital, we disagree. We believe the assumptions guiding the development of these protocols are in their late days. The theses built on these assumptions are being disproven in real-time by a stunning lack of adoption and scalability.
What has a decade of non-Bitcoin cryptocurrency development yielded? Today we have a landscape of thousands of non-Bitcoin cryptocurrency and blockchain projects which cumulatively are valued at over $9O billion. What do these projects do? Unfortunately, outside of enabling speculation on their future value, the networks do very little. The most highly valued layer-one Bitcoin alternatives like Ethereum and EOS have enabled few if any popular decentralized applications (DApps) and appear to have already hit scaling limitations.
With its launch in 2O15, Ethereum was the first Bitcoin alternative to enable the development of DApps. Five years in, what is the current state of DApps? The website State of The DApps monitors DApps’ and their platforms’ publicly available metrics over time. The metrics reveal DApps to be a virtually unused technology.
THE FAILURE OF DApps
Compare these cumulative ~ 3,5OO DApps across 14 platforms five years after Ethereum’s launch to the Apple App Store’s 900,000+ iOS apps and Android Google Play’s 1,000,000+ apps available in 2O13, five and four years after their respective launches. Five years in, these DApps cumulatively generate less than 1OO, OOO daily active users (DAU[. Contrast this to the big winner of Apple’s five year anniversary, Candy Crush Saga, which by itself in Q4 of 2013 generated over 128 million DAU playing 1.2 billion unique games per day. Worse still, State of the DApps lists about 35% of these DApps as abandoned projects, suggesting diminished possibility for future growth for over a third of existing DApp projects.
Beyond the woeful metrics, what are the apps that do exist currently used for? As we’ve seen with Apple and Google’s app platforms, a popular use case is gaming, which makes up the plurality of DApp’s DAUs with roughly 3O%. Online card games like Splinterlands (built on Steem[ or retro-aesthetic role-playing games like My Crypto Heroes (built on Ethereum[ have 4,2OO and 2,5OO DAU’s respectively, topping the State of the DApp charts. However, these decentralized games pay a heavy price on user experience due to exceptionally high barriers to entry for user onboarding. To simply play DApp games like Splinterlands and My Crypto Heroes, users need to link crypto wallets which requires making accounts on third-party services like Metamask or Steemconnect. Once made, these accounts need to be funded with the relevant cryptocurrencies, which often require users to make yet another account on one or multiple third-party exchanges. Contrast this to typical iOS or Google Play games that either don’t require sign-in or, if they do, leverage authentication services like Facebook or Google where users already have accounts. iOS and Google Play games that come with a cost or include in-game purchases typically incorporate one-touch payments with everything denominated in, or automatically converted to, currencies the users already own.
Even if one is able to make a successful DApp given these user experience challenges, limitations on scale can kill momentum. The most famous example was Crypto0itties, a digital pet breeding game which caused a massive amount of congestion on Ethereum leading protocol developers to criticize the game for taking up space for frivolous reasons. Ethereum has made plans to address this lack of scalability, but doing so has added complexity to the developer experience. In fact, the Crypto0itties team found Ethereum proposed scalability solutions such as sharding to be so damaging that they launched their own blockchain instead of continuing to use Ethereum.
DApp OPTIMISM
Considering these shortcomings in user experience relative to the competition, it’s no wonder DApp games have such abysmal traction. Despite attempting to buy additional scalability relative to BTC by sacrificing some decentralization, these platforms are still unable to offer a gaming experience that can compete with existing apps. So what else can DApps offer? The State of the DApps’ data indicates that the majority (roughly 55%[ of DApps’ DAUs fall under the categories of Exchanges, Finance, Gambling, and Wallets, which together facilitate the buying, selling, trading, and saving of cryptocurrencies.
It’s somewhat ironic that despite the DApp platforms’ raisons d’etre of expanding blockchain’s utility beyond BTC’s digital gold use case, the same inability to scale while maintaining decentralization encouraged platforms like Ethereum to gravitate towards a vision similar to digital gold dubbed decentralized finance (DeFi[. Despite the irony, the shift to this focus makes logical sense for a few reasons. First, from a developer’s perspective, all of these are computationally cheap and thus technically feasible despite the platforms’ lack of scale. Second, the DeFi vision falls in line with the BTC inspired consensus understanding of cryptocurrency that suggests the technology’s value is primarily financial in nature.
Operating in this DeFi context, these products are offering ostensibly novel services like taking out a USD-backed loan without interacting with any established financial institutions and thus have no direct competition so long as “[not] interacting with any established financial institution” is the primary selling point. The last reason is perhaps the most subconscious, and most important, factor in attracting resources and attention to DeFi. Because it is currently technically possible to build tools on an unscaled protocol to facilitate speculation, which is fundamentally about future utility, the cryptocurrency ecosystem’s lack of current utility due to unscalability can be forgiven. That is to say, by shifting the burden of scaling and utility creation to the theoretical-future, the failures of the practical-present can be ignored while still claiming cryptocurrency as a revolutionary technology.
WHY HAVEN’T DApps SUCCEEDED?
The consensus’ explanation for DApps abysmal traction and lack of user-friendliness is that we are still early. The infrastructure that DApps need to succeed is still being built and scaled. Once their scale is increased, they will be more user-friendly and able to compete with the likes of Candy Crush. Multicoin Capital says as much in a blog post titled “The Web3 Stack”,
“Considering how much of the Web3 stack is still under development, it’s no wonder that dapp usage is abysmal: it’s practically impossible to build usable dapps given the state of the Web3 stack today! Like many other technologies, the Web3 stack will progress slowly, and then quickly after surpassing some tipping point.
“The dapp revolution will happen shortly after the Web3 stack achieves some level of usability, stability, and feature-completeness. I suspect this is 2-3 years out.”
Today, almost two years after this blog’s publication in July of 2O18, DApp, and decentralized protocol scale has shown no real improvement. The idea that it is still early would make more sense if it wasn’t for the array of new Bitcoin-alternative blockchains that have been developed since and claim to enable greater scale. A fund like Multicoin Capital which has invested in several allegedly scalable layer-one protocols needs to explain why these currently lack DApps. After investing in DApp platform Solana, Multicoin Capital published a blog post that claimed “Solana offers all the properties that developers of trust-minimized apps need,” noting its ability to enable throughput that “today supports 5O, OOO transactions per second on a global network of 2OO consensus nodes.” Platforms like Solana have failed to get significant traction with DApp creators and users because they are either unable to actually achieve the scale they claim, or perhaps their product – a DApp platform offering trustlessness and censorship resistance – is not wanted. Even with this lack of demonstrated product-market fit, funds like a16z are still investing in a DApp future, having recently led a $21M token sale for NEAR protocol, a platform for building DApps.
Unbounded Capital’s explanation for the failures of DApps and the allegedly-scalable platforms they are built on is that the people who are funding and building these technologies fundamentally misunderstand the value of Bitcoin, cryptocurrency, and decentralization. These DApps are built to provide a trust-minimized, censorship resistant user experience. This is not valued by the market for reasons we will explain in chapters 3 and 4.
FUNDRAISING AND UTILITY
In our view, the ICO (initial coin offering[ craze of 2O17-2O18 goes a long way in explaining the continued investment into DApp platforms and protocols without any demonstrated product-market fit. According to an article in CoinTelegraph, ICOs were used to raise $6.9B dollars in Q1 of 2O18. Most of this was for platforms or protocols that could be used to build DApps or were specific DApps themselves. This ICO craze launched the careers of many crypto investors and it made it appear that there was genuine interest in the goal of decentralizing the internet. The early success of DApp oriented theses and early retail investor enthusiasm has fueled years of continued development without continued interest from users or retail investors.
Just a year after Dentacoin, a blockchain concept for the global dental industry, individually set out to raise $28M, only $118 million in total was raised through ICOs in Q1 of 2O19. This was in part because the fundraising mechanism of an ICO had gone out of style, primarily for legal reasons. It still points to a declining interest from the broader public and signs of unsustainability in the current theses. It will take time for these projects to run out of money and VCs are still providing a lifeline to the DApp industry, but ultimately these platforms need to get some traction or interest will die out completely.
WORTH THE COST?
The decision to intentionally cripple Bitcoin’s inherent scalability in the name of decentralization has been an incredibly costly error for the cryptocurrency consensus. What was gained in a theoretical concept like decentralization came at the expense of providing a network that could generate enormous utility. This trade-off has rendered BTC and the cryptocurrency consensus’ favorite Bitcoin-alternative projects unable to deliver more than a casino of virtual assets and hobbyist level games and applications that fail to generate interest. At Unbounded Capital, we think it’s clear that the demand for inefficient DApps simply isn’t there. Attempting to convince people that they should want a decentralized network for ideological reasons appears to be a failed strategy.