Another Cryptocurrency Will Make It Obsolete

Since bitcoin was created, thousands of other “cryptocurrencies” have appeared. The internet is full of videos in which a supposed expert explains why the latest cryptocurrency is better than bitcoin. Anyone who begins to take an interest in this technology will sooner or later ask the following question: if there are already thousands of new cryptocurrencies, why won’t a better one come along? The question makes sense. There is a reason why it is practically impossible for another currency to surpass bitcoin. But it requires an understanding not only of the technology itself, but of the creation process and the early years of operation. Before moving on to the argument itself, let us first look at why there are so many.

Thousands of Cryptocurrencies

The reason there are thousands of different cryptocurrencies and more keep being created is that Satoshi decided bitcoin should be a free software project and released it under the MIT license. The MIT license, among the many types of open source licenses, is also one of the most permissive. As we saw in the first part of the book, this license allows the source code to be freely copied, distributed, and modified. It even allows exact copies or modifications based on it to be sold. In short, anyone can do whatever they want with it.

As a consequence of this, creating a new cryptocurrency is something that a person with programming knowledge can do in an afternoon. They can download bitcoin’s software, change some parameters, compile it, and start it up. Moreover, if for example we change the constant defining the average time between blocks from 600 to 60 seconds, the new cryptocurrency could be announced to the world as a bitcoin that is ten times faster and with ten times greater transaction capacity. And all without lying! By changing a single parameter¹ anyone can launch their own cryptocurrency.

If it is so simple to make it ten times faster and with greater capacity, why do bitcoin blocks appear every ten minutes? Or why not change the block size so that more transactions fit in each block? Both things are trivial to do in the source code --- it is simply a matter of changing two constants. The issue is that these changes would erode decentralization, the fundamental property of bitcoin without which none of its other properties would exist. This battle over increasing the block size --- or more precisely, over taking control of bitcoin’s development --- was in fact fought between 2015 and 2017. Jonathan Bier provides an excellent account of the main events during those two years in his book The Blocksize War^↗.

Returning to our argument, since it is very easy to create a new cryptocurrency and equally easy to make changes that allow one to announce it is better (faster or with greater capacity), thousands have appeared and more will continue to appear.

The Scammers

Let us now imagine Mr. Fraudster, a professional con artist who makes his living deceiving people. Mr. Fraudster is enormously attracted to this technology because it is a wonderful vehicle for doing what he does best: scamming people. And what is more, he can do it under the guise of acting entirely legally, creating jobs and “innovating”. What does Mr. Fraudster do? First, he creates a coin from a few simple changes to bitcoin’s software. He then creates a professional-looking website and negotiates with one or more exchanges to have it listed among the cryptocurrencies users can buy. Since Mr. Fraudster controls the entire supply, it is very easy for him to manipulate the price. He has a pump-and-dump scheme all ready to fool everyone who cannot tell the difference between bitcoin and his cryptocurrency. Finally, Mr. Fraudster pays² certain “trading expert” influencers to rave about it and how it is going to appreciate in value, and the price starts to rise. This in turn reinforces the belief that those influencers really are trading experts, which feeds back positively into the price, which rises parabolically. When the price is high enough, Mr. Fraudster begins selling the tokens he previously assigned to himself to the poor unsuspecting people who do not understand what they are buying. Mr. Fraudster makes handsome profits, which he can use in part to repeat the scheme until eventually he has sold all the coins, the price goes to zero, and the coin disappears. Mr. Fraudster has walked away with millions of dollars from everyone who was searching for “the next bitcoin”.

If Mr. Fraudster’s greed does not exceed his intelligence, he may not sell all his coins and drive the price to zero immediately. That way the scam is less obvious. Instead, once he has sold many of his coins and made a lot of money, he simply stops employing developers, the promised features never materialize, there is no activity, and nobody actually uses the coin. Gradually the coin languishes and its value tends progressively toward zero --- but from the outside the project looks like a failed venture rather than what it actually is: a scam.

Unfortunately, Mr. Fraudster is not an isolated case. Many people have gotten rich with this scheme because it works very well. It has only one problem: it is a scam and therefore completely immoral.

Monero

Many of the existing cryptocurrencies were not created from such simple changes as those described above, but involve more complex modifications. Some, for example, change the consensus algorithm by removing proof of work; others keep the proof of work algorithm but change the hash function used for mining; others change the type of signatures used in transactions. Another category changes the programming language, and almost all change the emission curve --- generally with a greater number of coins --- to exploit the unit bias³. Some make a certain amount of sense a priori --- Monero, for instance, uses ring signatures that provide far greater privacy than the signatures used in bitcoin, since transactions are confidential. It may be one of the few honest attempts to create “a better bitcoin”. Of course, greater transaction privacy comes at a cost --- it is not free. On the one hand, the ring signatures used in Monero take up far more bytes than bitcoin’s ECDSA or Schnorr signatures, so capacity is much lower. On the other hand, it has the major disadvantage that it is not possible to verify that the total coins in circulation matches what the software itself claims, since the amounts moved in transactions are not public. This means that a software bug that created more coins would go unnoticed --- something that could not happen in bitcoin.

The total number of bitcoin is always verifiable by any participant in the network. If a bug were to create more than the protocol’s emission schedule specifies, it would be detected by the network’s nodes and corrected immediately. In fact, exactly this kind of bug occurred in bitcoin’s early days. In August 2010, block 74638 contained a transaction that spent half a bitcoin and created two outputs of 92233720368.54277039 bitcoin each. The code validating the transaction did not account for outputs so large that they could cause an overflow error in the variable used to calculate the sum of the outputs. Following the overflow error, the software accepted the transaction as valid. For a few hours, the blockchain had 184 billion bitcoin. One of bitcoin’s early developers, Jeff Garzik, spotted the strange transaction and posted a message on the forum. Within a few hours, Satoshi had released the code correcting the bug, network users updated their nodes’ software, and the chain resumed building blocks from the new block 74638, invalidating the block containing the transaction that exploited the bug.

Ethereum

Another “cryptocurrency” that takes a different approach and might appear legitimate is Ethereum. It is oriented toward enabling all kinds of smart contracts --- that is, its main strength is programmability. Bitcoin is also programmable and certain smart contracts can be implemented in it, but programmability in bitcoin is limited to establishing certain complex spending conditions, such as specifying that a coin can be spent jointly by the holders of keys A, B, and C, or after one year by any two of the key holders, or after five years by just one of the keys. These kinds of conditions, and more complex ones, can be programmed in bitcoin. Ethereum’s creators proclaim that Ethereum is far more versatile because it has a Turing complete programming language,⁴ unlike bitcoin, which has a programming language (Script) that is not Turing complete.

Far from being a problem, the fact that Script is not a Turing complete programming language is a very sound design decision. Script has no loop structures, which means it is impossible for the validation of a transaction to leave the network’s nodes stuck in an infinite loop due to a badly programmed transaction --- whether by accident or intentionally. In general, by not being Turing complete, the attack surface is much smaller, and therefore bitcoin is also far more secure and less error-prone than Ethereum.

But beyond security, the truly critical aspect is decentralization, and in this regard Ethereum fares very poorly compared to bitcoin. First, Ethereum’s launch was far from what it should have been to be considered decentralized. In July 2014, its creator, Vitalik Buterin, conducted the initial sale of 60 million ether created before the blockchain was launched, and assigned 12 million additional ether to the Ethereum Foundation and certain developers. That is, before launch, 72 million coins already existed from the genesis block --- a practice known as premining. Second, even today, ten years after its creation, the ecosystem follows the direction set by Vitalik, who is regarded as the leader guiding the project --- a fact that has had some very visible consequences. In April 2016, through a series of smart contracts, the DAO (Decentralized Autonomous Organization) was launched. The DAO’s goal was to become a kind of investment fund with no employees and no physical address, but instead run through a set of smart contracts on the Ethereum blockchain. The idea behind the DAO was that operations would be directly in the hands of token holders rather than delegated to managers, which in principle guaranteed that invested funds would be used in the owners’ best interests. In June, a hacker discovered a bug in the smart contract code that allowed them to extract a third of all the funds.

And this is where Vitalik stepped in. After analyzing what had happened, Vitalik decided to perform a hard fork, splitting the chain from the block prior to the supposed hack. He had just torn down Ethereum’s original motto, “Code is law”. The official motto remained the same, but the real motto had changed to “Vitalik is law”. The truth is that it had always been so, but the DAO hack made it evident to everyone. Following that hard fork, others came, always according to Vitalik’s directives. The emission curve has been changed, and even in 2023 the consensus algorithm was changed, replacing Proof of Work with Proof of Stake, which further erodes the project’s already weak decentralization.

The case of Ethereum is very representative because it is a cryptocurrency in which the creator continues to be the leader --- a kind of messiah. This means the code is changed according to his directions, which reveals a strong point of centralization. The code may still operate peer to peer, but in reality it is an enormously centralized project.

Decentralization

It is not possible to analyze every cryptocurrency, since they are created faster than anyone can keep up with. It would also be a waste of time. Fortunately, it is possible to conduct an analysis that applies to all of them. To do so, there is a very important fact we must observe: a blockchain is slow and inefficient and serves only one purpose: decentralization. It is very important to be aware of this --- it is a fundamental tool for distinguishing signal from noise. The wings of an airplane only make sense for flying. Adding wings to a vehicle that cannot fly, no matter how many wings you add, makes no sense. The wings are just extra weight and extra volume that also add cost. Analogously, a blockchain only makes sense if it is decentralized, because if it is not, anything it does can be accomplished far more efficiently without using a blockchain. A centralized blockchain makes as much sense as a train with “wing technology”.

And when it comes to decentralization, the difference between Satoshi and every other cryptocurrency creator is enormous:

• Satoshi discovered digital scarcity, and therefore that peer-to-peer electronic cash was possible, and published his discovery.

• Following the theoretical discovery, he created (invented) the software that implemented his idea.

• Furthermore, he donated his invention to humanity anonymously. Not only did he create it without premining, but the coins he mined in the early years --- spending his own electricity when they were worth nothing --- remain unspent and will very likely remain so forever.

• As if all of this were not enough, when the project was still in its early phase, he disappeared.

If we compare all other cryptocurrencies against these four components of decentralization, none of them comes even close. First, nobody has discovered anything of comparable magnitude. As a consequence, they have not invented anything significant either --- they have merely copied the invention and made some modifications. As for the “donation”, the situation is even worse. First, they have nothing to donate because they have not discovered or invented anything significant. But beyond that, in many of them there is a clear attempt at enrichment by the creators, through a premined launch. A premine, as we saw in the case of Ethereum, means that the cryptocurrency’s promoters --- far from wanting to donate their invention to humanity --- reserve a percentage of the total supply for themselves before the currency even begins to exist. Many even conduct ICOs (Initial Coin Offerings) --- that is, sales of tokens before those tokens exist on the chain. In the first two components --- discovery and invention --- all cryptocurrencies score zero or very close to zero. But in the donation component, they do not score zero (for donating nothing) --- they score negative. It is a negative donation, also known as theft, because they intend to enrich themselves by deceiving people. One of the most notorious scams was Bitconnect. Its founders promised a one-percent daily return, paid using the very money raised from token sales (the definition of a Ponzi scheme), which totaled 2400 million dollars. When the founders performed the final rug pull, the token went from $400 to zero and tens of thousands of investors lost everything.

But the scam does not have to be so obvious. The line separating the failure of a supposedly legitimate project from an outright scam is not clearly defined. On the contrary, it is quite blurry. Mr. Fraudster and the Bitconnect promoters are clear scammers, but Mr. Bright seems like an honest entrepreneur. He has had an idea that he claims will improve logistics for any company. To pursue it, he creates a new blockchain with a token called log. After building a professional-looking website and writing a whitepaper outlining an exciting roadmap with all the features to be developed over the next five years, he conducts an ICO selling millions of the new logs for “just” $0.10 each. It seems like a bargain --- it only costs ten cents and who knows, someday it could be worth thousands of dollars! Tens of thousands of investors buy a total of 100 million logs, allowing Mr. Bright to raise 10M$. Some of the initial money is used for marketing, which does cause the token to appreciate for several months. Project development slips behind schedule, planned milestones are not met, and expectations for the token’s utility go unfulfilled. The initial enthusiasm gradually fades, the project languishes, and after five years it dies in obscurity. How can we know whether it was all a scam or simply a failed project? What portion of the $10M did Mr. Bright use for his own salary and that of his collaborators in development? What portion of the premined coins he assigned to himself did he sell? Was it really necessary for the foundation running the project to be headquartered in the Bahamas? Perhaps Mr. Bright was not a scammer but simply a dreamer who believed he had a brilliant idea and convinced many people of it, even though the idea was neither brilliant nor solved any real problem. Or perhaps Mr. Bright is a very professional scammer, far more intelligent and careful than Mr. Fraudster, who disguises his scheme as a project that simply failed. We do not know --- but from an investor’s perspective, it makes no difference. Even projects whose leader is not a conscious scammer may still be scams.

Finally, as for disappearance --- nobody except Satoshi himself seems to understand that something decentralized cannot have a leader. The reality is not that they do not understand it; it is that they have no interest in understanding it. Almost all cryptocurrencies have a creator seeking to get rich. There is nothing inherently wrong with wanting to get rich, obviously --- but if the way to do so is by deceiving people, that is morally reprehensible and illegal in many jurisdictions. A blockchain like Mr. Bright’s is a centralized token, and if it is advertised as decentralized, all alarm bells should be ringing, because they are already trying to deceive.

There is a very large difference between the software’s communication protocol being peer to peer and the cryptocurrency being truly decentralized. The protocol must be peer to peer --- but that is not sufficient, since there are many centralizing forces at work in various respects. In bitcoin, there are economic forces pushing toward the centralization of miners. There are also economic incentives driving the centralization of mining pools. Although the software is free, as we have seen, there is a group of developers responsible for maintaining the main client repository, and these developers are not immune to donations from powerful interests that may try to influence the software’s evolution. Exchanges also have an incentive to grow ever larger by concentrating trading activity. In every component there are centralizing forces, and if any one component is centralized, then regardless of how decentralized the others may be, the cryptocurrency is centralized.

And the reality is that although all cryptocurrencies are promoted as decentralized, none of them actually are. All of them have some component dependent on a central authority. This is, ultimately, the great difference between bitcoin and the rest.

There is no second best.

— Michael Saylor

This sentence from Michael Saylor perfectly summarizes this chapter. What is the second-best cryptocurrency? There is no second best. The others are something else entirely --- they belong to a different category.

But we are still missing part of the answer, because even though no such currency exists today, how can we be certain that there will never be one that makes bitcoin obsolete? This seems impossible to answer, but let us consider what would have to happen for another cryptocurrency to one day displace bitcoin.

Without doubt, it would have to be a radically better technology that made it better money. Being slightly better in some regard would not be sufficient to compensate for bitcoin’s more than fifteen years of head start as the first mover. It would have to be substantially better in some key aspect of bitcoin --- such as privacy or scalability, areas in which bitcoin is not especially strong. All of this without compromising decentralization, of course. Any improvement that sacrificed decentralization would not be a real improvement at all.

First, it would also have to have an anonymous creator who disappeared in the early years, donating their invention to the world without claiming anything from it. Otherwise it could not even dream of approaching bitcoin’s level of decentralization. But if a technology were ever invented that represented a clear improvement and its creator had no intention of enriching themselves from it but rather donating it anonymously to humanity, then why would they create a new coin and throw away all the network effect already achieved by bitcoin? Why waste the entire ecosystem of exchanges, wallets, payment processors, the Lightning Network, mining hardware, and so on that has been built around bitcoin? If the creator had no intention of getting rich, the natural path would be for that technology to be incorporated into bitcoin. And that is, in fact, what is happening. Bitcoin in 2025 is far better than bitcoin in 2009. This is precisely why all the brilliant minds in the ecosystem who are not seeking to enrich themselves illicitly are working to improve bitcoin --- in versatility, privacy, and scalability. It is not possible for a “new bitcoin” to emerge and displace bitcoin. It will be bitcoin itself --- the same set of 21 million coins, with the same origin, the same history, and the same set of unspent outputs --- with the new technology incorporated.

Satoshi gave us an opportunity to achieve the separation of money and the State and thereby solve countless problems in today’s world. That opportunity is bitcoin, and if bitcoin fails, it may not be possible to try again.