Ten years have passed since Bitcoin was introduced, and it still isn't used much in online commerce. Will the Lightning Network, a new upgrade to Bitcoin, get it back on track?
When Satoshi Nakamoto introduced Bitcoin, they intended it for online shopping. Without an electronic form of cash, wrote Nakamoto, merchants must be "wary of their customer," hassling them for extra information.
Like the banknote, Bitcoin provides irreversible online payments. Merchants accepting irreversible forms of payment needn't worry about customers targeting them with fraudulent chargebacks. Chargeback fraud occurs when a customer buys something with a credit or debit card and then disputes the transaction with the card issuer. This allows them to regain the money spent while still keeping the product, leaving the unfortunate merchant out of luck.
Accepting irreversible forms of payment like cash or Bitcoin means no chargebacks and thus reduces the costs of running a business. Nakamoto wrote that this could even open the door to online micropayments, one of the holy grails in the payments space.
While irreversible online payments sound great, statistics show that few people actually use bitcoins for retail transactions. In a 2017 Bank of Canada survey, 46 percent of bitcoin holders reported never buying goods or services with bitcoins. Only 9 percent claimed to use it at least once a week.
Source: “Bitcoin Awareness and Usage in Canada: An Update,” Bank of Canada
Which isn't to say that Bitcoin hasn't gone mainstream. It has, just not for the purposes that Nakamoto originally intended. Forget online payments; Bitcoin has become the most successful gambling technology to be invented since Henry Orenstein introduced the poker pocket cam in 1999. The pocket cam allowed viewers to see players' cards, revolutionizing the way people watched the game of poker and launching the 2000s poker frenzy.
In what sense did Bitcoin succeed as a gambling technology? At its core, Bitcoin is a pure Keynesian beauty contest. People try to guess what other people guess other people guess Bitcoin's value will be. The price that results from this contest is incredibly unsteady. But these explosive rises and stunning falls provide a fun, challenging, and addictive bet for casual gamblers and deep-pocketed professional speculators alike.
The fact that Bitcoin has been adopted by consumers for reasons other than its creator's original intention isn't unique. Kleenex, for instance, was introduced by Kimberly-Clark as a makeup remover in 1924. In their book Kotex, Kleenex, Huggies: Kimberly-Clark and the Consumer Revolution in American Business, Batchelder and Heinrich recount how anecdotal evidence soon began to show that tissues were often used by both men and women for reasons other than the company intended: for blowing noses.
In 1930, Kleenex marketers ran a study in Peoria, Illinois, that revealed that 61 percent of consumers thought of Kleenex as a handkerchief while only 39 percent thought of it as a makeup remover. The company quickly repositioned the product to focus on its true user base.
Unlike Kleenex, Bitcoin isn't a profit-driven enterprise. Those responsible for designing Bitcoin, the "core developers," don't directly benefit from its success. Often working on a volunteer basis, core developers are motivated by a strong belief in ideas such as censorship resistance, financial privacy, and monetary inclusion.
So even though Bitcoin has gone mainstream as a gambling technology, the team responsible for building Bitcoin continues to focus on developing its tertiary function, electronic cash. Who can blame them? If you're an idealistic developer, maintaining a gambling machine for rich Westerners just isn't as alluring as launching a payments revolution or helping poor Venezuelans.
A new narrative was soon fabricated to try to provide an after-the-fact justification for why Bitcoin had become so popular as an object of gambling rather than a medium of exchange. Dipping into the lingo used by monetary economists, the Bitcoin cognoscenti began to describe Bitcoin as a store of value. But referring to Bitcoin as a store of value makes about as much sense as calling a lottery ticket a store of value. To qualify as such, an instrument needs to provide price consistency. Bitcoin’s price is the opposite of stable.
So why is Bitcoin not used as Satoshi Nakamoto originally intended? Many people blame this on its inability to scale. By 2016, Bitcoin started experiencing inconvenient lags as the number of transactions exceeded the network's capacity to process them.
Two fixes were devised. Bitcoin Cash, an alternative version of Bitcoin, adopted larger blocks. The competing solution, the Lightning Network, keeps Bitcoin's existing block size but builds a second layer on top of the base layer. Smaller transactions can be diverted into the new layer, thus freeing up the base layer to deal with large ones.
I tend to disagree with both solutions. The reason that Bitcoin never attracted usage as electronic cash wasn't because of scaling limitations. The problem is more fundamental: a Keynesian beauty contest cannot form the basis for money. Regular people don't want to accept Bitcoin payments. The price is too volatile, and converting back into fiat money is costly. And most people who already own bitcoins don't want to spend them: getting rid of their coins means not participating in an addictive guessing contest that could potentially make them atrociously rich.
That's why Bitcoin Cash, despite no longer having a scaling problem, hasn't become a popular way to transact online. Most people are still using it for the same reason they use the original Bitcoin: gambling. Lightning is currently in the early stages of being deployed. But it is unlikely to attract merchant adoption for the same reasons that Bitcoin Cash hasn't become a popular payments method.
Techno-utopians often think that all problems can be solved by tweaking the code. But the fact that Bitcoin is a Keynesian beauty contest is inherent to its nature. It cannot be changed with a few lines of code.
Where does that leave us? Unfortunately, Bitcoin's core developers and those supporting their idealistic attempt to revolutionize payments will have to reduce their expectations. Bitcoin's nature as a beauty contest interferes with its ability to perform as a payments network. The core development team's efforts to build up payments capabilities are destined to go unnoticed by 95 percent of Bitcoin users, for whom Bitcoin will always be about the price oscillations, thrills, and Lamborghinis. Only a small cadre of Bitcoiners who actually use Bitcoin for payments will ever appreciate their efforts.
But the goals of irreversibility, censorship resistance, and an open electronic-payments system are important. For now, Bitcoin is the only option out there that provides these qualities, and thus the best we've got.