In This Vastly Competitive Landscape, I've Come to See the Social Consensus and Ecosystem Around Blockchains as By Far Their Most Important Strategic Asset

Blockchains are a technical marvel, but in this vastly competitive landscape, I've come to see the social consensus and ecosystem around blockchains as by far their most important strategic asset. The social layer matters, but for different reasons depending on the chain.

The social consensus and ecosystem around blockchain is by far its most important strategic asset in this vastly competitive landscape. We discuss how this 'Layer 0' factor is crucial and how it can only really excel at one primary mission.

What do you get when you combine a passion for crypto with a knack for economics? Ben Bernanke impressions and a deep dive into the Bitcoin and Ethereum ecosystems.

We’ve written before about how cryptocurrencies are best understood as a technical solution to a social problem. In the case of bitcoin, the founders recognized that the monetary system was fundamentally broken and decided to build a cryptocurrency focused on scarcity. The essence of bitcoin is that it's an excellent store of value, a property that is useful in a world with an excess of liquidity and risky assets.

Of course, if bitcoin is going to be the primary store of value, it needs an ecosystem that can sustain it for the very long term. And that social consensus is going to be crucial to bitcoin's success.

To put this in perspective, we'll start with some very broad numbers. The community around bitcoin is focused on the cryptocurrency's role as a scarcity-based asset. It's better than fiat currency and more reliably scarce than gold. It's also immune to politics and protected by a vast proof of work infrastructure. Bitcoin is in a constant battle for mindshare with other crypto-assets and, even more so, against traditional fiat currencies and central-bank-issued assets.

This is not the same as other stores-of-value. There can be many kinds of government and corporate debt, and their values are all tied to the likelihood of repayment. The closest analogy for bitcoin is with gold, which does not pay interest or generate any cash flow. Nor is there any meaningful industrial demand for gold. The value of gold is simply that it is scarce and getting more of it is not easy.

One particularly important feature of this crypto ecosystem is that it is a zero-sum game. If you admit that there can be more than one cryptocurrency used as a store of value, you are on a slippery slope because technically, there can be an infinite supply of identical copies of bitcoin. If there can be two, there can be a thousand. If that happens, the value of bitcoin is uncertain and likely low.

Right now, there are no other cryptocurrencies that have a value even remotely close to that of bitcoin. Assets like litecoin, bitcoin cash, dogecoin and others represent a tiny fraction of bitcoin's market capitalization. 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 a stake in a computing ecosystem.

The result of this logic is a uniquely aggressive approach to mindshare. The value of bitcoin must be sustained by constant memetic warfare against other cryptocurrencies. Scroll through r/bitcoin, and you will find a stream of memes that aim to reinforce the value of bitcoin. Typical content includes dire warnings about the U.S. dollar's debasement with quantitative easing, the serious U.S. federal debt, the horrors of inflation, and rapturous predictions for future prices. That quantitative easing did not cause inflation and that low to moderate inflations inflict no measurable economic harm does not matter in that context: Political harm, yes, economic harm no. (See here and here)

A typical bitcoin meme includes a reminder that a long, long time ago, a dollar would buy you a full bag of groceries. The implication is that you are being robbed through gradual printing of money. This meme has never stood up to the most basic examination. Moderate inflation is fine, necessary, and infinitely better than deflation. We are vastly better off than we were when a dollar could buy a bag or groceries, but acknowledging that would undermine the narrative. It does not matter, however. Never let the facts get in the way of a good story.

To sustain its value, bitcoin needs a very assertive social consensus. And that has to continue for an exceedingly long time. Gold's use as a shared global store of value dates to 650 BCE in ancient Türkiye, so they have a significant head start. And while there are other precious metals, none of them have ever approached gold in terms of total market capitalization. The market cap of gold is 10 times larger than the market cap for silver.

The social ecosystem that underpins Ethereum is different. First and foremost, Ethereum is the world computer. Ethereum is a positive-sum ecosystem where people are encouraged to build and extend. The discussion and tone of r/Ethereum is, again, a good proxy for the whole ecosystem: it is focused on engineering, development, and new applications.

Ethereum, like bitcoin, has an equally passionate Layer Zero ecosystem and is as dominant compared to other “smart contract” blockchains as bitcoin is to other pure crypto-assets. Ethereum's dominance is visible in the market cap of the asset but also in its share of