With a simple Google search, anyone can find an overwhelming amount of information about bitcoin. Unfortunately, a sizeable portion of that information comes from critics who haven’t taken the time to deeply understand the technology and its implications on society. In the crypto community, we call this FUD (fear, uncertainty, and doubt). And, while valid criticisms of bitcoin and crypto industry very much exist, Onramp Academy wants to dispel those misconceptions that simply are not true. Is bitcoin actually bad for the environment? Does it have intrinsic value beyond a speculative asset? Is it true that it’s used by criminals? In our Bitcoin Mythbusting Series, we tackle all of these and more to give you the facts about what bitcoin is and isn’t.
Estimated Time: 5 Minutes
It’s Easy to Create Another Coin
Myth: Because it’s trivial to create new cryptoassets, there is nothing that prevents someone from creating a token that could displace bitcoin.
Truth: Because all blockchain based assets run on a consensus mechanism, any new token created will either be less secure or less decentralized than bitcoin. Either way, this tradeoff ensures that any new token will be less trustworthy than bitcoin and thus no one will adopt it as a store of value.
It is not difficult to create a new coin or token. In fact, as of writing this, there are over 13,000 various cryptoassets in existence (according to CoinMarketCap). This well-known fact has also led to a common myth that because it’s easy to create a token, someone will eventually create a new, better version of bitcoin and displace it as a store of value. However, this couldn’t be further from the truth. While it’s easy to create a new coin, it’s impossible to replicate the conditions that allowed bitcoin to simultaneously grow and remain fully decentralized.
To understand why bitcoin can never be recreated, we have to dive into how blockchain networks secure themselves and the importance of decentralization.
All blockchain based assets govern themselves through a consensus mechanism. While there are various types of consensus mechanisms, they all revolve around ensuring that there is one single record of historical transactions that the entire network agrees upon. In other words, the network must come to a consensus on what actually happened on the blockchain (hence the name). Without a single ledger that all participants agreed to, the whole system would fall apart.
The corollary to this is that should any single entity gain more than 50% of the network’s computing power, it would have the capability of controlling the network. This is known as a 51% Attack. By controlling the majority of the network, the attackers would be able to prevent new transactions from gaining confirmations, allowing them to halt payments between some or all users. They would also be able to reverse transactions that were completed while they were in control of the network, meaning they could double-spend coins. This would undermine the validity, usefulness and value of the network and coin.
All blockchain based assets face the risk of a 51% attack, especially early on when the network is nascent. The smaller the network is, the easier it is to gain 51% of the total computing power and thus newer coins are very susceptible to this vulnerability. Bitcoin is no different, it too was once susceptible to a 51% attack. However, when bitcoin was first launched back in 2009, only a very small number of people in a remote corner of the internet even knew of its existence and the ones that did, wanted to see it grow and succeed. Even if there was someone who knew about bitcoin in 2009 and wanted it to fail, bitcoin wasn’t worth anything back then so there was no incentive to attack it. Thus, bitcoin was allowed to grow in obscurity for a number of years. Fast forward to today and bitcoin is now the largest computing network on the planet. It’s larger than Facebook, Google and Amazon combined. In fact, bitcoin’s network is so large that it’s essentially impossible for anyone to afford to buy enough computing power to even try a 51% attack. Thus bitcoin is by far the most secure network on the planet.
Contrast that with a new coin that launches today. If it truly wants to be decentralized (more on why this is important later on), it would be very susceptible to the 51% attack when it initially launches. But here is the difference between launching a coin now versus back in 2009, everyone knows about cryptoassets and the potential value they might accrue. Thus any new coin that is launched today that starts to gain any amount of traction immediately attracts a lot of attention from a number of market participants. Undoubtedly, someone will attempt to hack the system for financial gain (hence all the exploits we have seen in recent years with newer coins). Knowing this is not only possible but likely, no one in their right mind would view a new cryptoasset as a reliable store of value.
The only way to combat this vulnerability is to not be fully decentralized. By creating some amount of centralization within a newly launched token, new projects can ensure that at least 51% of the network is friendly. This eliminates one attack vector for malicious actors. This is why every other token on the market today is less decentralized than bitcoin.
Which brings us to the importance of decentralization for a store of value. In addition to eliminating a single point of failure that is inherent in centralized systems, decentralization ensures that no single entity can change the asset’s monetary policy. Part of what makes bitcoin so reliable as a store of value is that its monetary policy is transparent, predictable, and can never be altered. We know for a certainty that there will only ever be 21 million bitcoin. We also know for certainty bitcoin’s supply issuance schedule. On average, every ten minutes a new block is mined, a constant amount of new bitcoin are released into the network, and for every 210,000 blocks that reward is cut in half. Bitcoin’s monetary policy is perfectly knowable, unchangeable, and therefore trustworthy.
Compare that to a more centralized token where either a single entity, or a small group has the capability to alter the monetary policy of the asset at any time. It doesn’t even matter if they intend to exercise that power or not, just the fact that there is the possibility that the monetary policy could change in the future means there is more uncertainty than bitcoin. Even Ethereum, arguably the second most decentralized token in existence, has seen its monetary policy altered more than once in its history (after the DAO hack and with the recent EIP-1559 upgrade). Only through decentralization can a coin be fully trusted to maintain its monetary policy forever.
Thus any new token that comes into existence has to make a tradeoff. It either maintains its decentralization and is vulnerable to being hacked or opts to circumvent that vulnerability at the expense of centralizing the governance of the token. Either way, it’s less trustworthy than bitcoin as a store of value.
Now let us be clear, that doesn’t mean new coins should not be launched. It also does not mean that every other token besides bitcoin is bad. In fact, there are many cryptoassets that are solving very worthwhile challenges other than being a store of value. We are big believers in many other cryptoassets other than bitcoin but we do not consider any of them money or digital gold. When it comes to the particular use case of a store of value, there is bitcoin and nothing else.
Though thousands of rival cryptocurrencies have been created over the past decade, none have succeeded in replacing bitcoin as a store of value. Despite the fact that over 13,000 cryptoassets exist, bitcoin is the only asset widely accepted as money, a store of value, and considered legal tender in some countries.
Because bitcoin was able to develop in obscurity until the network was large enough to overcome the inherent vulnerabilities of a new network, bitcoin has a unique origin that will never be replicated. It is, for this reason, there is likely never going to be a new coin that will be able to displace bitcoin.