Bitcoin Season 2
Bitcoin's next act is starting. LFG!
We are at the dawn of the next era for Bitcoin. I’m seeing more and more data points that suggests that Bitcoin is at the early stages of an evolution. Consider the following data points:
Demand for ordinal inscriptions has kept the Bitcoin mempool full since April and make up the majority of Bitcoin transactions.
Bitcoin L2s and sidechains are organizing and collaborating on a Bitcoin Builders Association and I’ve heard Bitcoin Unleashed will have over 500 developers in attendance.
In private conversations, many large bitcoin businesses have signaled a need to support a larger bitcoin economy in order for their business models to work.
These are but a few data points that suggests that the next big story in crypto will be an evolution in the OG. But before we explore that story, let’s review where Bitcoin is at today.
What was Bitcoin Season 1?
If I’m being honest, and feel free to disagree, Bitcoin is the only true product-market fit that crypto has found with a mass audience. Bitcoin’s narratives as a store-of-value, fiat hedge and cheap, trustless cross-border payment system has attracted the attention of hundreds of millions of people, including major financial players and governments. Bitcoin is certainly the only blockchain project my mom could name (and I work for a blockchain project!) and in the minds of most of the world’s population crypto and blockchain are Bitcoin. Nothing in crypto comes even close to Bitcoin’s brand recognition. Season 1 of Bitcoin built this brand recognition and established the product-market fit.
Many people may not remember, but Bitcoin hasn’t always had a clear product-market fit and its early history shows a struggle between understanding what use case Bitcoin intended to disrupt first. Even at the inception there was a tension between the vision of Bitcoin as a currency in a “peer-to-peer electric cash system” (Bitcoin’s whitepaper) and the vision of Bitcoin as a hard asset in a world of increasingly soft assets (as demonstrated by “Chancellor at the brink of a second bailout for banks" in the Genesis block). However, those of us old enough remember the Cyprus “bail in” in early 2013 as a clear delineation point for when Bitcoin found a strong use case as a monetary asset outside the control of government officials. That event, and the success of Bitcoin relative to the success of Bitcoin Cash and Bitcoin SV after the block wars in 2017 sealed the direction for Bitcoin for Season 1.
It was precisely because Bitcoin chose a path of representing a store-of-value and a fiat/inflation hedge and not a medium of exchange (aka cash) in the 2010s and because world events have supported the need for a store-of-value and fiat/inflation hedge that Bitcoin has succeeded in Season 1 of its journey. It’s market position (or better said as market dominance) as a permission-less way to store value and as a hedge against long tail fiat and inflation risks has led to significant adoption and made Bitcoin an investable asset for even the biggest global financial players. This market dominance will only grow moving forward, as demonstrated by the flight to Bitcoin during the US regional banking crisis earlier this year.
What is Bitcoin Season 2?
If Bitcoin Season 1 can be categorized as Bitcoin finding its product-market fit as a store-of-value and fiat hedge, then what exactly is Bitcoin Season 2? Well, to understand that, you need to understand the history of all money. But before we begin, you need to understand that the true output of Bitcoin Season 1 is this: trust. Financial participants now have trust in Bitcoin on many different levels: (1) trust that the monetary policy won’t be changed, (2) trust that there is non-speculative demand for Bitcoin (aka, product-market fit) and (3) trust that external parties (mainly governments) can’t destroy that demand.
The history of money has gone from a bartering currency (3000+ years ago) to an official currency (1000+ years ago) to a paper currency (500+ years ago) to a fiat currency (more recent). During the Official Currency Era of money, central authorities would mint currency literally created out of materials of value. Usually this was silver or gold. The participants in this system had trust in the system because they could always melt down their currency into the object of value if the currency ever failed to serve its purpose. This era is typically referred to as the era of sound money because the currency literally made a sound when dropped. However, the Official Currency Era also had it drawbacks: participants could cheat by clipping parts of a coin (thus reducing that specific coin’s value) and assembling a new coin from the clippings and the government was limited in its ability to create new coins based on the availability of the underlying material, severely limiting the ability to grow their economy. These downsides produced inefficiencies in the economy. The Official Currency Era is very similar to Bitcoin Season 1 in that it produced hard money, but did so with drawbacks that led to market inefficiencies. In the case of Bitcoin, those efficiencies are seen in high transaction costs and low transaction throughput.
The drawbacks of the Official Currency Era led to the Paper Currency Era in which governments realized they could reduce the economic inefficiencies while at the same time maintain trust in their currency by issuing paper money that was redeemable for the material of value (for example, gold and silver). This allowed for far less inefficiency due to coin clipping and allowed the government a sense of control over the economic activity. The efficiencies inherent in paper money meant that currencies that “went paper” outperformed the metal-based currencies until practically the whole world adopted paper currency. In the same way that the Paper Currency Era was identifiable as a reduction in the inefficiencies created by the Official Currency Era, Bitcoin Season 2 will be identifiable by a reduction in the inefficiencies of Bitcoin Season 1. And in the same way that the world adopted paper currency because the efficiency of paper currency led to natural selection (those that adopted it succeeded over those that didn’t), Bitcoin Season 2 will be adopted because the people, organizations and businesses that adopt it will outperform those that do not.
So what exactly will be Bitcoin Season 2? It’ll be the flourishing of the paper currency equivalent of Bitcoin: layer 2s and sidechains. Bitcoin Season 2 will see a mass adoption of new tokens/coins that are pegged 1:1 to native Bitcoin… in the same way that paper currency (don’t confuse paper currency with fiat currency) could be exchanged 1:1 with the underlying material of value, new Bitcoin L2s and sidechains will be directly exchangeable for native Bitcoin, inheriting the trust of the Bitcoin layer. But more importantly, Bitcoin Season 2 will be a flourishing of economic activity built on top of the Bitcoin layer. This could be economic activity similar to the types created on Ethereum (DeFi, NFTs, GameFi, etc) or even a movement of activity off Ethereum and onto Bitcoin, however I predict the form that this economic activity takes will be quite different (that’s a topic for a different post).
There is an important distinction between Bitcoin Season 2 and the Paper Currency Era and that, as everything in money, has to do with trust. Paper currency required trust in two things that Bitcoin layer 2s and sidechains won’t require: trust in a central authority to hold the material of value in reserves and trust that the central authority will also permit the peg in / peg out. The Paper Currency Era ended when both of those trust assumptions were broken (one example is when Charles De Gaulle famously requested France’s gold reserves held by the US, resulting in Richard Nixon abolishing the gold standard for the US dollar). Bitcoin L2s and sidechains will not have these trust assumptions because the peg in/peg out will be controlled via immutable smart contracts and native Bitcoin reserves can be verified on the Bitcoin ledger.
Will there be a Bitcoin Season 3?
The arc of Bitcoin is following the arc of money history, albeit in a much smaller timeframe. Money history is currently in the Fiat Era, where most currencies are not backed by anything except the trust in a central authority. To be fair, because the Fiat Era is so new, history may end up proving that this was not an era after all, but rather was an experimental blip. This would be true if world currencies ended up going back to a gold (or other precious metal) standard in order to build trust back into the currency. Many economists and gold bugs believe this is the natural outcome of the fiat experiment. So your belief in whether or not there will be a Bitcoin Season 3 will be heavily tied into your belief into whether the world will return to the Paper Currency Era.
However, one thing I am confident about is that as the Bitcoin Season 2 era plays out and Bitcoin L2s and sidechains proliferate, many will try a “fiat approach” to L2s and sidechains. This approach will be identifiable by a move away from the 1:1 peg back to native Bitcoin. It’s hard to imagine this ever being adopted from today’s framework, however 200 years ago it would have been hard to imagine a currency not being backed by anything other than trust in the central government. For sure, people and companies will try to create a Bitcoin Season 3, however it’ll be the market that decides whether those attempts succeed.
What to expect in Bitcoin Season 2?
Bitcoin Season 2 will lead to an exciting and innovative time in money history. A clear line can be drawn between the Paper Currency Era and the Age of Exploration and Global Trade. In the same way, Bitcoin Season 2 will kick off not only vast economic activity built on top of the Bitcoin layer, but also innovative uses for money that the world has never seen. Future articles from me will focus on what this innovation might look like, as well as what to look for in Bitcoin L2s and sidechains that could lead to their success or demise (hint: it comes down to trust). Follow along if you are interested in exploring this topic more. I also recommend subscribing to the Very Good Bitcoin Club to watch Season 2 play out before your eyes.
Cheers to Bitcoin Season 2!