What We Learned About Bitcoin In 2021

On Jan 18, 2022

How poetically perfect that 2021 was the year that the world discovered how 21 million bitcoin are the key to the world’s future economic system. This was the year when the public finally woke up.

Last year, Bitcoin entered the world’s cultural zeitgeist in a way like never before. This was a game changer of a year that taught us many lessons. Specifically, there are four lessons about Bitcoin and cryptocurrency from 2021 that haven’t received enough attention:

Lesson One: Fiat Inflation Is Inevitable

Last year, we all heard the sound of the money printer going “brr.” This sound was also the sound of trust in our monetary system being fed into a shredder.

Bitcoin was designed as an alternative to a trust-based monetary system. In 2021, it finally became obvious to everyone that inflation was here, and Bitcoin’s use case as a trusted store of value went from speculative to urgent.

Last year, people around the world woke up and began to embrace bitcoin as a hedge against rampant inflation. Everyone from members of Gen Z to world-famous athletes to big-city mayors were looking to Bitcoin as a hedge against inflation. Corporations placed massive investments into bitcoin, they’re betting big. One big example is MicroStrategy, which has bought $5.7 billion worth of bitcoin thus far.

Bitcoin might not be fully mainstream yet, but in 2021, its primary use case certainly was.

Lesson Two: Bitcoin Is Permaware, Crypto Is Software

2021 was also the year that it became apparent just how unique Bitcoin is in comparison to the rest of the tokenized economy. Since the dawn of tokens, almost all have been “altcoins” — tokens that supposedly seek to compete with Bitcoin by tweaking or adding features.

This focus on features is typical of tech products. Last year, it became apparent that Ethereum, smart contract platforms and DApps are tech products, while Bitcoin is something else entirely.

Tech products — software — must constantly change, update and upgrade to keep up with competition. Bitcoin is not typical software. Rather, it is something new: permaware. Permaware is a set of unchanging rules, written in code. It is designed for reliability and consistency, not features.

It is strange to realize that an entire crypto industry has been built around copying and competing with Bitcoin and yet nothing has actually ended up copying Bitcoin’s core feature: 13 years later and Bitcoin remains as unique as the day it was launched.

Lesson Three: Smart Contract Platforms Have Weak Moats

The mental model that many investors are using when they think about blockchains is that of social networks. Facebook and Twitter have become extremely valuable, even though they are easy to copy, because their network effects keep users captive.

Towards the end of 2020, the crypto world assumed that Ethereum had achieved an unsurpassable ecosystem network effect, due to developer attention, DApp interoperability and “money legos.” But, within just one year, this narrative was flipped on its head. Chains such as Solana, BSC and Polygon have surpassed the Ethereum network in total transaction activity and daily users.

In other words, last year we learned that unlike social networks, blockchains have weak network effects. Why the difference? In contrast to Web 2.0, Web 3.0 users control their value via their private keys, making users and value extremely portable.

At the same time, because everything is open source, it is almost trivial to copy technology. It turns out that Ethereum’s network effect wasn’t in the chain but rather in the Ethereum Virtual Machine (EVM) — the developer language, frameworks and wallets. This has been copied across many blockchains.

If smart contract chains don’t have strong network effects and are in constant competition with each other to reduce transaction fees, it’s hard to see how they (through their tokens) capture value long term.

Lesson Four: We Can Build Anything On Bitcoin

This year we learned that inflation is not just a boogieman story and we really do need Bitcoin. We learned that despite more than a decade of attempts, nothing has managed to replicate Bitcoin’s core feature: its ingrained ruleset. And, we learned that there is a real desire for DeFi but that does not necessarily mean that smart contract platform tokens can have sustainable value.

This presents a problem — smart contract platforms are almost all proof-of-stake systems. If their tokens can’t capture value, those chains won’t be secure. What does this mean for DeFi and Web 3.0?

Thankfully, all is not lost, due to one final lesson from 2021: Everything can be built on and secured by Bitcoin.

I’m proud to say that I have been a core contributor to Sovryn, the open-source project that utilizes Bitcoin-based technologies like Rootstock, the Lightning Network and Taproot, and attempts to exemplify this last lesson.

Over the last year, we have managed to bring EVM-compatibility to Bitcoin, replicate DeFi products such as trading, lending and yield generation and to do so on a Bitcoin sidechain that leverages merged mining. Over the last few months, Sovryn has started to see significant adoption, and has already processed nearly $2 billion in trades.

In other words, we now know that Bitcoin’s ability to adopt any useful technology is not just a meme — it’s a reality.

2021 was a watershed year. Bitcoin was ready for us when it finally became clear that we all needed it. And it became clear that there is no substitute for Bitcoin.

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