It’s now Cryptocurrencies vs. Government currencies vs. Tech currencies; we should team up.
Bitcoin was established in 2009, as a declaration of independence from centralized control of money. Ethereum was established in 2015 as a declaration of independence from the institutions that manage our lives. These two blockchains have defined the cryptocurrency community, and the values that we hold; censorship resistance, decentralization, and no-rent seeking.
In 2019, Facebook established Libra, a declaration of independence from government money, but while retaining centralized management, in order to create a rent-seeking mechanism that adds to the wealth of the network stakeholders. Libra, backed by Facebook, it’s army of subordinate tech companies and 2.4 billion users, hopes to generate its own monetary system, while capturing the network value for itself.
While the crypto-community is a fan of reducing government’s power over money, giving this power to Big Tech is not what we had in mind. However, the idealism of crypto-enthusiasts does not scale well. Go preach decentralization and not-rent seeking to the average person, and be met with confusion and impatience. If the cryptocurrency world is going to take on a two-headed hydra (government money; corporate money), it needs to cooperate and combine resources. Not just to defeat the systems of money we do not agree with, but also to generate a better product and larger ecosystem.
The Trustless Bridge
A ‘bridge’ describes a mechanism to which the currency of one blockchain can ‘migrate’ to another blockchain, through a system of cryptographic guarantees. The ‘bridge’ manages the funds on both blockchains, and ensures that for every currency unit it its controls on blockchain A, it generates an equal amount on blockchain B, and allows anyone to migrate or redeem their funds on either blockchain.
The effectiveness of the ‘Trustless Bridge’ is how pass the ‘are you a real cryptocurrency?’ test.
Some cryptocurrencies should not be considered cryptocurrencies, because they fail the “Trustless Bridge” test. EOS, XRP, TRX have not maximized for censorship resistance or decentralization, and therefore make them closer to ‘corporate money’ than pure cryptocurrencies. To illustrate; if a trustless bridge between XRP and Ethereum could be established, it wouldn’t change the fact that XRP’s blockchain is controlled by Ripple, and the funds to/from the bridge could be censored by Ripple. Likewise, a bridge between Ethereum and EOS wouldn’t change how EOS Block Producers can block transactions, and can censor the EOS into/out of the bridge.
A short list of Cryptocurrencies that pass the trustless bridge test:
All of these blockchains are speaking the same language. They all operate with common tenets, which means they all receive the benefits of trustless value transfer and communication between blockchains.
Bang for the Buck
Bridging Bitcoin to Ethereum might be a relatively simple thing to do (in the grand scheme of things) that produces massive reward for the crypto world.
For the reasons discussed below, Bitcoin on Ethereum will kickstart a renaissance of open finance products and services. The weaknesses of each blockchain are complimented by the other, and together can accelerate each-others relevance to the outside world.
The Mutual Benefits of Bitcoin on Ethereum
Giving Bitcoin Programmability
Bitcoin’s biggest weakness is its lack of expressiveness. The reduction of its blockchain to its most simple form has been in an attempt to reduce complexity and attack surface area, while seeking to maximize for scarcity. The Bitcoin social contract states that complexity and programmability should be ‘pushed to the edges’, and any ‘smart-contracting’ functionality should be on Layer 2 or higher.
So far, Bitcoin has not been able to generate any sort of programmable Layer-2. After attending Bitcoin 2019 and listening to the panels relating to programmability and Bitcoin, the solutions being discussed here all sacrificed decentralization and censorship resistance to achieve Bitcoin expressability, and therefore fail the trustless bridge test. Platforms like Rootstock or Taproot represent a Bitcoin bridge to platforms more similar to EOS or TRX, rather than Ethereum. A few Bitcoiner’s that I’ve talked to (my podcast cohost, @ck_snarks and @taiberg) about this concern agreed; they’re not ideal solutions.
Bitcoin’s best bet for achieving programmability and utility as an asset, without sacrificing decentralization and censorship resistance, is for a trustless bridge to Ethereum. There is no reason why Bitcoin could not find itself alongside Ether or Dai on Ethereum’s most popular applications; Maker, Compound, Uniswap, DYDX, Kyber, SET. The trustless bridge mechanism will provide Bitcoin holders with levels of control and security that they need, with incentive of earning % interest on their BTC.
Trustless BTC Collateral in MakerDAO
One of MakerDAO’s most significant collateral problems is 3rd party risk. Security tokens, real world assets, centralized fiat coins all carry with them the risk that the centralized party ‘pulls the plug’, and decides that the ERC20 tokens that represent the asset, doesn’t. Or the money gets seized, house burns down, etc.
Bitcoin, cryptographically secured on the Bitcoin blockchain, and wrapped inside an ERC20 token on Ethereum, is a $200B collateral that exists without 3rd party risk. The only other asset of that quality is Ether itself. Bitcoin on Ethereum has the capacity to scale Dai growth to a $1 Billion market cap.
Ethereum has an internal and external side. Internally are the P2P transactions on Bitcoin, as well as Ethereum’s open finance network. All of Ethereum’s dapps are ‘internal’, while onramps like Coinbase, Gemini, Wyre, LocalBitcoins, are centralized companies with a foot on both side: accepting external fiat, and transferring the value to internal crypto.
As the fiat on ramps pour to the inside of the circle, the size (market cap) of the circle increases. Additionally, Ethereum’s open finance network also grows, which both pushes the circle from the inside-out, while also reducing the need to ‘outflow’ your value back to the external side of crypto. Anyone like me who makes more transaction in their CDP than their bank account has experienced this.
Bitcoin on Ethereum conjoins Bitcoin and Ethereum’s ‘internal’ side. They effective stitch eachothers blockchains together. Like two waterdrops runing into each-other, they combine their size.
Bitcoin is by far the most liquid cryptocurrency. Liquidity is perhaps the characteristic that Ethereum’s open finance could use the most of. When the technology exists for the Ethereum network to capture it’s share over Bitcoin’s liquidity, rather than Binance or Coinbase, we should definitely want to implement it.
Open Finance Provides Utility to Bitcoin
Bitcoiners, hyper-allergic to centralization and 3rd party risk, still end up trusting companies like Salt and Blockfi to hold their Bitcoin in order to receive a loan or interest payments. Bitcoin on Ethereum will enable BTC holders to experience the magic of open finance. Lending, borrowing, leveraging; all things Bitcoiners do on centralized platforms like Bitmex, Blockfi, Salt, but instead keeping control over one’s Bitcoin. The ability to access financial tools without giving up control of the asset will incentive the migration of a large amount of BTC to the Ethereum blockchain, perhaps never to return to the base Bitcoin blockchain ↓ ↓
Open Finance will create a one-way flow of BTC to Ethereum. Open finance will produce a very strong gravitational pull on Bitcoin. When someone can trustlessly receive a loan with BTC as collateral, or interest payments based on your supplied BTC, Ethereum-BTC (EBTC) will become more valuable than BBTC. BBTC will be a static asset, where as EBTC can earn interest or be leveraged in other ways. Dormant BBTC might as well migrate to Ethereum and be lent in Compound, DYDX, or Dharma in order to get interest payments on the loan.
Ethereum Will Scale Bitcoin
The research and development of Ethereum 2.0 is the natural continuation of the cypher-punk research that created Bitcoin. Ethereum’s scaling research, such as generalized state channels, plasma, and sharding, can be made accessible to Bitcoin via the trustless bridge.
Bitcoin’s lightning network have proven difficult to gain adoption, and it makes strict requirements of any participant, such as the need to run your own node.
Ethereum is far more likely to scale Bitcoin than the lightning network. Through a trustless bridge, Bitcoin leverage all of the man-hours that Ethereum researchers and developers have put into scaling research, and use that, rather than the horrendous UX of the lightning network.
Ethereum Will Make Bitcoin Private
EY’s Nightfall, the ZK-Snark protocol for private transactions on Ethereum, is one of the most institution-ready products on Ethereum. AZTEC Protocol, an alternative private transaction protocol for ERC20’s, also has capability of private Ethereum token transactions. These functions can make Bitcoin totally obscured and fungible.
The Three Monies
Here is a prediction I am becoming more confident in.
Cryptocurrency will produce three monies.
- Fixed Supply, PoW
- Fixed Supply Issuance, PoS
- Variable Supply, Stable Value, Collateralized
Bitcoin — The Austrian, highly speculative, commodity money
Ether — The algorithmic, fundamentals-based, asset/equity money
Dai — The governed, non-speculative, collateralized sound money
Each of these three monies will have their own use cases, and their own array of holders.
Bitcoin, primarily valuated by its scarcity, will always be the global speculative asset. The hard cap of Bitcoin will continue its status as an uncorrelated asset that is a hedge against everything else.
Ether will be bought and held as an asset with measurable and concrete fundamentals behind it. The ether staking rate and its value as collateral will provide money managers to make educated predictions about the growth of their money into the future. The fees that are able to be collected through the exclusive ownership of Ether, along with the finite possible number of Ether-stakers, will generate generally predictable returns, while maintaining its status as an equity token of the Ethereum network
Dai will be the currency of choice for the largest population. Its stability and predictability will make Dai the predominate Store-of-Value cryptocurrency, due to its ability to allow people to accurately predict the value of their Dai into the distant future, unlike Ether or Bitcoin. It will also have access to whats referred to the Dai Savings Rate, a savings account for Dai holders that returns them yearly interest, as well as access to other Dai lending platforms.
The need for money to operate as a Medium-of-Exchange, Store-of-Value, and Unit-of-Account, will be largely captured by these three currency types. Dai, Bitcoin, and Ether, will be in a constant tug-of-war, as the financial system built on top of Ethereum will generate variable market demands for each across time.
Ether: The Triple-Point Asset
Ether is a currency with unique properties. Unlike Dai or Bitcoin, which are ‘just monies’, Ether has a privileged position as the native currency of the Ethereum blockchain.
There are three categories of ‘Asset Superclasses’, defined in 1997 by Robert Greer, and then recently popularized (in cryptocurrency) by Chris Burniske.
These three ‘superclasses’ illustrate the various categories that something of value must fall into, and Ether falls into all of them, representing Ether’s ‘superposition’ as a currency.
● Capital Assets (CA): “Ongoing source of something of value… valued on the basis of net present value of its expected returns.” Obvious examples are equities, bonds, income producing real estate, and so on
● Consumable/Transformable Assets (C/T): “You can consume it. You can transform it into another asset. It has economic value. But it does not yield an ongoing stream of value.” Oil, wheat, natural gas would singularly fall into this bucket, while some precious metals and scarce commodities are C/T assets but also socially accepted stores of value (overlapping with the 3rd superclass)
● Store of Value Assets (SoV): “Cannot be consumed; nor can it generate income. Nevertheless, it has value; it is a store of value asset.” Assets like art, collectibles, and fiat currencies are purely stores of value of varying quality, while the SoV superclass also has overlap with the rarer consumables/transformables.
— Chris Burniske, Placeholder VC, found on their blog
Ether, in its Ethereum 2.0 form, will be the only asset in existence to be able to meet the criteria for being all three asset types at the same time.
Ether is a Store of Value Asset; as the Ethereum Network demands Ether to fun, Ether can be counted on to be valuable so long as Ethereum exists.
Ether is an Equity Asset; Ether is a claim on the fees generated by the Ethereum network. Ether produces dividends based on the health and growth of the network.
Ether is a Consumable/Transformable Asset; Ether can be manipulated by various protocols (like MakerDAO) to be turned into something else. Through EIP 1559, Ether is also consumed as gas, to be permanently burned and removed from supply.
Humanity has never seen an asset like this before. Ether operates in a ‘Triple Position’, where each function of Ether will pull on the demand of Ether, and ultimately generate its scarcity on the secondary market.
Ether, the Triple-Point Asset, illustrated in science:
Ethereum: The Global Settlement Layer
Trustless bridges enables Ethereum to become what it set out to be; the internet-native global settlement layer. Capable of settling any currency, with any logic, at low-latecy and high capacity, Ethereum is the financial platform that returns choice to the user. No longer restricted by having only one choice of currency, each user can leverage the currency that fits their particular needs.
Not just Money, Global Settlement of Assets
Ethereum’s strength as a tokenized asset platform has been proven. The censorship resistance decentralization first principles behind Ethereum’s design choices have given asset issuers and investors the security and peace-of-mind required for the safe investment and ownership of tokenized assets. The promise that the asset will always be available to the controller of the associated private keys, as well as the removal of all unnecessary rent-seeking mechanics, has enabled both new types of assets, as well as new mechanisms for issuing traditional assets. Additionally, the network effects of Ethereum as an asset issuance platform have entered a positive feedback loop. The incentive to issue assets on the same platform as all other assets is increasing, as interoperability and exchange between assets requires a common platform.
Being the schelling point for assets to be issued and exchanged makes Bitcoins presence on Ethereum all the more important. If you believe more and more types of assets will be tokenized and issued, Bitcoin will want to be able to be bought and sold for it. It’s supposed to be money, after all.
Implications to the Bitcoin Blockchain
Eventually, the Bitcoin blockchain will be managed by a fee market. While this date doesn’t official come until 2140, Bitcoin will need to be sufficiently secured by fees much sooner than that. In like 4–5 halvenings, so 16–20 years, fees will be a predominate part of Bitcoins security.
Bitcoin on Ethereum may seriously reduce the need to transact on Bitcoin. If sharding truly generates the scaling needed by base blockchains, it will be far cheaper to transaction Ethereum-BTC than BTC directly on the Bitcoin blockchain. Fees have been guesstimated to need to above $50 in order to secure the Bitcoin blockchain, but that’s before EBTC captures Bitcoin’s transaction demand with cheaper, faster fees.
If BTC supply does primarily migrate to Ethereum, and if transaction demand on the base blockchain reduces while block rewards also reduce, what is left for Bitcoin security? Will it matter? If the majority of BTC is locked and available on Ethereum, that BTC will likely never be transacted again on the Bitcoin blockchain. It won’t be rolled-back or double-spent, because it won’t ever move from it’s address. Will the weakened Bitcoin blockchain not actually threaten the BTC inside Ethereum?
If all the BTC is in a hash time locked contract on Bitcoin, but moving around/exchanged/traded in the economy on Ethereum, does it matter if the Bitcoin blockchain is secure, or not? All BTC needs to do is be transferred to the Bridge, and be collected on the other side.
This lines of questioning are thanking the above thesis to its logical conclusion. Likely, things will happen that I did not expect.
Did you like this article?
Then you will love this podcast episode I did on it.
Me and Christian Keroles (@ck_snarks) discuss and debate this topic on our podcast, POV Crypto. Our podcast is where Bitcoins and Ethereans come to converse and debate, and it’s a ton of fun.
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Dai is not 1 Dollar — Dai is a currency designed to respond to market forces. It’s ability to not be 1 dollar is its strength.
MakerDAO: Bitcoin, in Two Coins — Through the Power of Smart Contracts!! The architects of MakerDAO have discovered to take Bitcoin’s various characteristics, seperate and distill them into two separate coins: DAI and MKR.
Evaluating MKR — The MKR token has a novel value-capture mechanism that leverages game theory to generate price growth.