Investors,

It is hard to keep up with this space. The tech changes so fast, companies add different features to their UX, and new information spreads like wildfire.

Even when I think I have bitcoin figured out I read another article or watch another video to disrupt my thesis. Writing this newsletter sometimes feel like a game of catch up. I wrote my first bitcoin research paper on May 19, 2020, and I already feel like some of the information is growing irrelevant.

What has remained consistent is the criticism of bitcoin. One criticism I want to point out today is scalability.

Lyn Alden Schwartzer published a report yesterday addressing a few of bitcoins’ constant misconceptions and the scalability argument. She wrote:

3) "Bitcoin Isn't Scalable"

A common criticism of Bitcoin is that the number of transactions that the network can handle per 10 minutes is very low compared to, say, Visa (V) datacenters. This limits Bitcoin's ability to be used for everyday transactions, such as to buy coffee.

In fact, this played a key role in the 2017 hard fork between Bitcoin and Bitcoin Cash. Proponents of Bitcoin Cash wanted to increase the block size, which would allow the network to process more transactions per unit of time.

However, with any payment protocol, there is a trade-off between security, decentralization, and speed. Which variables to maximize is a design choice; it's currently impossible to maximize all three.

Visa, for example, maximizes speed to handle countless transactions per minute, and has moderate security depending on how you measure it. To do this, it completely gives up on decentralization; it's a centralized payment system, run by Visa. And it of course relies on the underlying currency, which itself is centralized government fiat currency.

Bitcoin, on the other hand, maximizes security and decentralization, at the cost of speed. By keeping the block size small, it makes it possible for people all over the world to run their own full nodes, which can be used to verify the entire blockchain. Widespread node distribution (over 10,000 nodes) helps ensure decentralization and continual verification of the blockchain.

Bitcoin Cash potentially increases transaction throughput with bigger block sizes, but at the cost of lower security and less decentralization. In addition, it still doesn't come anywhere close to Visa in terms of transaction throughput, so it doesn't really maximize any variable.

Similarly, there are protocols like the Lightning Network and other smart contract concepts that are built on top of Bitcoin, which increase Bitcoin's scalability. Lightning can perform tons of quick transactions between counterparties, and reconcile them with Bitcoin's blockchain in one batch transaction. This reduces the fees and bandwidth limitations per small transaction.

Additional layers built on top of Bitcoin can do an arbitrary number of transactions per minute, and settle them with batches on the actual Bitcoin blockchain. This is similar to how consumer layers like Visa or Paypal can process an arbitrary number of transactions per minute, while the banks behind the scenes settle with larger transactions less frequently.

The market has already spoken about which technology it thinks is best, between Bitcoin and others like Bitcoin Cash. Ever since the 2017 hard fork, Bitcoin's market capitalization and hash rate and number of nodes have greatly outperformed Bitcoin Cash's. Watching this play out in 2017 was one of my initial risk assessments for the protocol, but three years later, that concern no longer exists.

Bitcoin isn’t competing with Ethereum, Bitcoin Cash, Litecoin, or any of the other thousands of crypto networks out there. Bitcoin is in a realm of its own. The rest of the cryptocurrencies are competing with companies like Apple, Google, Square, PayPal, Visa, etc.

Bitcoin is the .com domain. It dominates the search value layer. These other altcoins are .net .co .io .org. .shop etc and are fighting in a room of their own.

So when you look at the cash you want to invest, are you going to buy the .com domain or settle for .net?

I hope you all have a great weekend,

-molesy

As a reminder, this is not financial advice. Do your own research. 

Nothing in this newsletter constitutes investment, accounting, tax, or legal advice or is a recommendation that you purchase, sell or hold any security or other investment or that you pursue any investment style or strategy.

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