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Bitcoin and software's plasticity

I’ve mostly remained oblivious to the crypto movement to date. I didn’t have a strong opinion on the tech in either bear or bull direction; I was busy with other things. The recent thrill around the latest wave of crypto innovations in the form of DeFi and DAOs made me look into the movement more closely. I also wondered whether in December 2021 they let people in San Francisco without handing in an opinion on decentralization du jour. So on recent my plane ride from Miami to San Francisco, I picked up the original Bitcoin publication “Bitcoin: A Peer-to-Peer Electronic Cash System”.

It’s a nine pages long, a beautifully written paper. My computer science brain regions lit up when I saw an ingenious marriage between cryptography and an incentive design. The Bitcoin paper didn’t invent the concept of proof of work, but it applied it to online payments. Wait, online payments?

If I leave aside the technical creativity of the Bitcoin paper and focus on the stated intent, I come thoroughly surprised. The PDF clearly pitched one specific idea: peer-to-peer payments or an internet-native payments system.

It pitched p2p, non-reversible payments as a potentially lower-cost alternative to the existing system. The savings would come from merchants not having to set aside funds that cover disputed transactions. Bitcoin failed as a payment system in hindsight, but its users focused on its other use case: store of value.

What happened? Bitcoin’s pitch as a digital currency for payments had three properties hiding: scarcity, fungibility, and low cost of an exchange. Scarcity means you can’t make money out of thin air, which would decrease its value over time if possible. Fungibility means that each dollar or euro is the same. Contrast it to the time of barter when people had to haggle over conversion each time an exchange happened. E.g., a small pig is worth fewer bags of grain than a large one. Pigs are not equal and hence not fungible. The low cost of exchange is pretty self-explanatory.

Over time it became clear that Bitcoin is not cheap to exchange hands due to tech’s fundamental limitation of relying on proof of work. The narrative around Bitcoin shifted towards the store-of-value use case that requires scarcity and fungibility but gets away with high transaction fees. A digital gold was born, and it has seen an incredible run for the decade. Bitcoin’s total value is at 20% of all world’s gold (excluding gold in the jewelry).

What does it teach us? It’s a great reminder of software’s plasticity. The software has a rich design space, and software adoption is an interplay between its power and the user’s desires. Like any powerful technology, Bitcoin captured people’s imagination, and its adopters eventually found its use.

There’s a flip side of that coin (pun intended): a technology can succeed, but your specific bet (e.g., a product you want to build) will not. The best software entrepreneurs seem to know how to fire enough lead bullets to make it to the other side, though.