Blockchains are a technical wonder, but in this very competitive landscape I have come to see the social consensus and ecosystem around blockchains as far as their most important strategic asset. The social layer means, but for various reasons depending on the chain.
Specifically, I have the hypothesis that “layer 0” for any blockchain ecosystem can only excel by a primary mission. When I say “layer 0”, what I’m really talking about is the communities of people who maintain these networks. They are all from enthusiasts to engineers, developers, investors, venture capitalists and volunteers. As public networks built with open source code, the strength of each ecosystem is primarily society around it.
Despite their superficial similarities, societies and ecosystems that support Bitcoin and Ethereum are radically different. I have long said that “Bitcoin is the asset. Ethereum is the platform.” In both cases, the social consensus around these blockchains is what holds them together and makes each one suitable for its mission.
Bitcoin first. Bitcoin is a scarcity -based value of value. Better than Fiat currency. More reliably barely than gold. Immune to politics and protected by great evidence of work infrastructure. Bitcoin is in a constant battle for Mindshare with other crypto assets and, even more, against traditional Fiat currencies and central bank issued assets.
This is not the same as other stores. There can be many forms of government and business debt, and their values are all linked to the likelihood of repayment. The closest analogy for Bitcoin is with gold which does not pay interest or generate any cash flow. There is also no meaningful industrial demand for gold. The value of gold is simply that it is scarce and it is not easy to get more of it.
A particularly important feature of this crypto ecosystem is that it is a zero-sum game. If you admit that there may be more than a cryptocurrency used as a value of value, you are on a smooth slope because there may technically be an endless supply of identical copies of Bitcoin. If there may be two, there may be a thousand. If that happens, the value of Bitcoin is uncertain and probably low.
Right now, no other cryptocurrencies have a value that is even distant close to that of Bitcoin. Assets such as Litecoin, Bitcoin Cash, Dogecoin and others represent a small fraction of Bitcoin’s market value. The only asset in the same general league is ether and I would argue that it should be seen less as a cryptocurrency and more as an effort in a computer ecosystem.
The result of this logic is a unique aggressive approach to Mindshare. The value of Bitcoin must be maintained by constant memory warfare against other cryptocurrencies. Scroll through R/Bitcoin and you will find a stream of memes aimed at strengthening the value of Bitcoin. Typical content includes severe warnings about the US dollar wear and quantitative relief, the serious US federal debt, the horrors of inflation and frightening predictions at future prices. This quantitative relief did not cause inflation, and to do to moderate inflation does not inflict any measurable financial damage does not matter in this context: political injury, yes, financial damage no (see here and here)
A typical Bitcoin meme includes a reminder that a long, long ago a dollar would buy a full bag of groceries. The implication is that you are being deprived of through gradual printing of money. This meme has never stood up for the most basic study. Moderate inflation is fine, necessary and infinitely better than deflation. We are much better off than we were when a dollar could buy a bag or groceries, but acknowledge that it would undermine the narrative. However, it doesn’t matter. Never let the facts get in the way of a good story.
To maintain its value, Bitcoin needs a very confident social consensus. And it has to continue for a very long time. Gold’s use as a shared global store with value stems from 650 BCE in the old Türkiye, so they have a significant lead. And although there are other precious metals, none of them have ever approached gold in terms of total market value. The Gold Market Cap is 10 times larger than the Silver Market Captain.
The social ecosystem that supports Ethereum is different. First of all, Ethereum is the world computer. Ethereum is a positive sum ecosystem where people are encouraged to build and expand. The discussion and tone in R/Ethereum is again a good proxy for the entire ecosystem: It is focused on technique, development and new applications.
Like Bitcoin, Ethereum has an equally passionate layer of zero ecosystem and is equally dominant compared to other “smart contract” block kains as Bitcoin is for other pure crypto assets. Ethereum’s dominance is visible in the asset’s market sheath, but also in its share of tokenized assets. Ethereum is the dominant ecosystem of most “real world” assets and most of the stablecoins as well. With over 100 layers of 2 networks in operation, Ethereum has 20 times more “network extensions” than any other ecosystem, including Bitcoin and Solana.
Both the Bitcoin and Ethereum ecosystems have eager believers who see things different from the dominant tale. There is a small but elastic application layer built on Bitcoin. Bitcoin soon has its own layers of two networks, including some that are EVM compatible.
Similarly, there is a passionate group of Ethereum believers who believe that Ethereum should be both the network computer and a scarcity-based asset. EIP-1559 (Improvement of Ethereum improvements), adopted in August 2021, reduced the speed at which new ETH was issued and moved the gas fee model so that some ETH is burned with each transaction. The result is that the amount of ETH in circulation increases at a slower pace than Bitcoin and in some cases even falling.
None of these are necessarily a bad idea, and at least in theory, neither ecosystem can be a host for both types of activities. In practice, the cultural requirements of each ecosystem are so different that they cannot really excel with more than one function at a time.
In the real world, currencies like the US dollar are most effective as an exchange of exchange, but not necessarily as a value of value. You can spend dollars to buy things, but a deflation system that increased the value of the dollar over time would be disastrous for the economy as it forced real interest rates. As Ben Bernanke discovered, it is very difficult to try to stimulate an economy when inflation is low. The same problem makes Bitcoin unfit as a currency, although it may excel as a value of value.
With Ethereum, we see how well the current blockchain boom is playing in the next few years. If the ecosystem retains its dominant proportion of new active docking and smart contracts, I think we can declare it as a winner on the primary mission. Bitcoin has a longer game to play, but if we see increasing connection with gold, it may be an indicator of investors in the real world buying into the argument for digital scarcity.
Either way, it can be years of experience with the real world before I can prove (or disprove) my theory. This also means that memetic warlings on Twitter between ecosystems do not disappear soon.
The views reflected in this article are the author’s views and do not necessarily reflect the views of the global EY organization or its member companies.
