How poetically perfect that 2021 was the year the world discovered just how key 21 million bitcoins are to the future global economic system. This is the year the public finally woke up.
Last year Bitcoin entered the global cultural zeitgeist in a way like never before. This year has been a game changer and has taught us many lessons. Specifically, there are four Bitcoin and cryptocurrency lessons of 2021 that haven’t received enough attention:
First lesson: Fiat inflation is inevitable
Last year, we all heard the sound of the “brr” banknote printer. This sound was also the sound of confidence in our monetary system being fed into a chipper.
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 the use case for Bitcoin as a reliable store of value went from speculative to urgent.
Last year, people around the world woke up and started embracing bitcoin as a hedge against runaway inflation. Everyone from Gen Zers to world-famous athletes to big-city mayors viewed Bitcoin as an inflation hedge. Companies have invested heavily in bitcoin, they are betting big. A great example is MicroStrategy, which has purchased $5.7 billion worth of bitcoins so far.
Bitcoin may 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 it became apparent just how unique Bitcoin is compared to the rest of the token economy. Since the dawn of tokens, almost all of them have been “altcoins” – tokens that supposedly seek to compete with Bitcoin by tweaking or adding functionality.
This focus on functionality is typical of technology products. Last year, it became apparent that Ethereum, smart contract platforms and DApps are tech products, while Bitcoin is something else entirely.
Technology products – software – must constantly change, update and upgrade to keep up with the competition. Bitcoin is not typical software. Rather, it’s something new: permaware. Permaware is a set of immutable rules, written in code. It’s designed for reliability and consistency, not functionality.
It’s strange to realize that an entire crypto industry was built around copying and competing with Bitcoin and yet nothing ended up copying Bitcoin’s core functionality: 13 years later, Bitcoin remains as unique as the day of its launch.
Lesson Three: Smart Contract Platforms Have Weak Moats
The mental model that many investors use when thinking about blockchains is that of social media. Facebook and Twitter have become extremely valuable, even if easy to copy, because their network effects keep users captive.
Towards the end of 2020, the crypto world assumed that Ethereum had reached an unsurpassable ecosystem network effect, due to developer attention, DApp interoperability, and “silver legos”. But, in just one year, that narrative has been turned upside down. Chains such as Solana, BSC, and Polygon have overtaken the Ethereum network in terms of 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? Unlike Web 2.0, Web 3.0 users control their value through their private keys, making users and value extremely portable.
At the same time, since everything is open source, it is almost trivial to copy the technology. It turns out that the network effect of Ethereum was not in the chain but rather in the Ethereum Virtual Machine (EVM) – the development language, frameworks and wallets. This has been copied on many blockchains.
If smart contract chains do not have strong network effects and are in constant competition with each other to reduce transaction fees, it is difficult to see how they (via their tokens) capture value at long term.
Lesson 4: We can build anything on Bitcoin
This year we learned that inflation is not just a boogieman story and that we really need Bitcoin. We have learned that despite over a decade of attempts, nothing has succeeded in replicating Bitcoin’s core functionality: its ingrained set of rules. And, we’ve learned that there is a real desire for DeFi, but that doesn’t necessarily mean smart contract platform tokens can have lasting value.
This poses a problem – smart contract platforms are almost all proof-of-stake systems. If their tokens can’t capture a value, those strings won’t be secure. What does this mean for DeFi and Web 3.0?
Fortunately, all is not lost, thanks to one final lesson of 2021: anything can be built and secured by Bitcoin.
I’m proud to say that I was one of the main contributors to Sovryn, the open-source project that uses bitcoin-based technologies like Rootstock, the Lightning Network, and Taproot, and attempts to exemplify this final lesson.
Over the past year, we’ve successfully brought EVM compatibility to Bitcoin, replicated DeFi products such as trading, lending, and yield generation, and done so on a Bitcoin sidechain that leverages mining merged. Over the past few months, Sovryn has started to gain widespread adoption and has already processed nearly $2 billion in transactions.
In other words, we now know that Bitcoin’s ability to embrace any useful technology isn’t just a meme, it’s a reality.
2021 has been a pivotal year. Bitcoin was ready for us when it finally became clear that we all needed it. And it has become clear that there is no substitute for Bitcoin.
We can build an economic system that relies on the reliability of 21 million bitcoins. Poetically or not, all of this is happening as we reach a global turning point after 2021. We are at a point where the world is waking up to the flaws in the fiat system.
This is a guest post by Edan Yago. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or bitcoin magazine.