Jan 13, 2020 11:32 PM | Kyle Torpey

When people are learning about Bitcoin for the first time, they often feel they’ve missed the boat on the crypto asset’s price appreciation over the past decade. This is, at least in part, why many are intrigued by the prospect of an altcoin that will eventually overtake Bitcoin as the top digital asset in the world.

Altcoins can give newcomers the feeling of getting in on the ground floor rather than joining a movement that, in their view, may have already experienced the majority of its early growth. However, no altcoin has yet been able to topple the king.

Why not? Putting aside the obvious fact that Bitcoin has first mover advantage, key challenges altcoins face include Bitcoin’s network effects as a money, a lack of decentralization, and the fact that Bitcoin is able to evolve. Let’s take a closer look at these three reasons altcoins have been unable to take Bitcoin’s top spot.

1. Bitcoin’s Network Effects as a Money

Altcoins face a serious issue right from the start in that the vast majority of people would prefer to use the more well-known, liquid, stable (relatively speaking), and trusted Bitcoin over any other cryptocurrency.

Network effects are extremely important for money, perhaps even more important than in social media. It’s not just that Bitcoin users can more easily transact with each other when they’re both using the same currency network. The underlying product also becomes a more reliable store of value due to the drop in volatility that is associated with greater adoption.As we reported last year, Bitcoin’s price volatility has continued to decline as it has gained more users over time.

According to a recent Bloomberg report (PDF), Bitcoin is clearly winning the adoption race among cryptocurrencies as a store of value. Altcoins must have a level of innovation that is enough to convince users to hold and use a form of money that is less compelling that Bitcoin.

The chart below illustrates the altcoin market’s troubling past couple of years. The Bletchley Indexes track the value of specific groups of crypto assets. The Bletchley 10 Index tracks the top ten crypto assets by market cap (including Bitcoin), the Bletchley 20 tracks twenty medium-sized crypto assets, and the Bletchley 40 tracks 40 small cap crypto assets. In the chart below, the Bletchley 10, Bletchley 20, and Bletchley 40 Indexes are charted against Bitcoin. 


2. Credible Decentralization and Censorship Resistance

Bitcoin’s network effects are helped by the credibility of the cryptocurrency’s value proposition as a decentralized, apolitical, and uncontrollable digital asset. Bitcoin’s resistance to changes that don’t have widespread consensus, as illustrated by the failure of the SegWit2x plan, is what protects the unique and valuable characteristics of the system – including Bitcoin’s monetary policy.

SegWit was basically a bug fix for the transaction malleability issue that would be extremely helpful for creating a better environment for the development of secondary protocol layers like the Lightning Network. While Segregated Witness (SegWit) was largely supported by Bitcoin users, some influential members of the network resisted adopting the change in an effort to combine the upgrade with a hard-forking increase to the block size limit. 

Cryptocurrency innovations must be made on a credibly decentralized network in order for them to have any value, and no altcoin has proven itself in this regard like Bitcoin did with the SegWit2x situation. If a cryptocurrency network can be easily co-opted or controlled, then there is no way to ensure that the asset’s issuance policy won’t be changed. This is critically important to the success of an asset where the main sales pitch is as a “digital gold” whose monetary policy won’t be influenced by politics.

Some projects in the cryptocurrency space, such as Ripple’s XRP, have such a low level of focus on censorship resistance that it’s questionable if these types of assets should even be grouped into the same category.

3. There is Innovation Happening in Bitcoin

Even as Bitcoin remains resistant to tampering, it is nonetheless open to innovation. While some may think the relatively slow pace at which changes are made in Bitcoin make itthe Model T of cryptocurrency technology, the reality is that new features are added to the world’s most popular cryptocurrency in a way that protects those first two key ingredients of network effects and decentralization. Additionally, Bitcoin is starting to evolve faster now that developments can be made on secondary layers, such as the Lightning Network, where changes do not need to gain consensus among the Bitcoin full nodes.

There is already a Bitcoin version of the most popular features found in altcoins such as smart contracts, privacy, and micropayments.

In the realm of smart contracts, Bitcoin is expected to gain greater functionality through the integration of Tapscript. Further down the line, the integration of Simplicity could enable even greater flexibility for smart contract developers. There’s also the RSK sidechain, which is a project similar to Ethereum that uses Bitcoin instead of Ether as its underlying token.

In the privacy department, CoinJoin implementations like JoinMarket and the ZeroLink protocol have emerged as the standard for using Bitcoin as privately as possible. Over the longer term, moves to take more transactions off of the base blockchain and onto secondary layers like the Lightning Network and sidechains should help users avoid many of the privacy issues associated with using a currency system based on a public blockchain.

A key goal in Bitcoin’s development process is to consider long-term implications of any potential changes to the network. Payments are a good illustration of this. Instead of taking the easy route of simply increasing the block size limit to enable greater transaction capacity on the network, the SegWit bug fix was used to enable secondary protocol layers that could be used for fast, cheap payments without disrupting the permissionless nature of the base Bitcoin protocol.

One key issue with altcoin innovations is the fact that the downsides of new features are often overlooked or completely ignored. Smart contract platforms have had issues related to scaling and a lack of formal verification. Many privacy-focused altcoins have implemented solutions that may not be scalable or involve experimental cryptography. And public blockchains focusing on increasing the transactions per second metric do so at the cost of higher node operation costs, which harms decentralization at a certain point. Those involved in the Bitcoin development process tend to be focused on avoiding these same pitfalls when bringing these kinds of features to the platform.

While altcoins are able to grab headlines and enjoy short term price pumps by implementing new features as quickly as possible, most of these solutions are not practical for use in decentralized systems due to the increased costs they add to operating a full node (among other issues), making them unsustainable over the long term. It’s interesting to see altcoin experiments with real money at stake, but many of these systems may end up being testnets for features that eventually find their way into Bitcoin.

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