Bitcoin Capabilities: store of value, medium of exchange and unit of account
Bitcoin is a commodity-baked currency and network. In this article, I spoke about bitcoin capabilities, as a store of value, medium of exchange, and unit of account.
INDEX
1- Bitcoin what is it
2- Capabilities
3- Bitcoin medium of exchange
4- Store of value
5- Unit of account
What is it
If you ask 10 people to define Bitcoin you will get 10 different definitions.
This is, in my opinion, one of the most eloquent video from Mr. Peter Van Valkenburgh, Director of Research, Coin Center recorded in 2018.
The fact that doesn't exist a standardized taxonomy to define Bitcoin and other blockchains is a limit for mainstream understanding, but also it is a sign of an evolving, still early stage, technology.
What always fascinated me about Bitcoin is that the definition, and future vision, are subject to a single individual interpretation that reflects academic studies, professional experience, and personal interest. Below, I elaborated on my interpretation of Bitcoin technology, which reflects my studies in Computer Science and my +18 years of experience in Web 2, digital transformation, and innovation.
Bitcoin (like other blockchains) is a network effect technology that requires massive adoption in order to work, only achievable like the Internet, with global standards, open protocols, and a layered development like TCP/IP. Bitcoin the network, and protocol, is the payment layer Internet was missing.
Bitcoin is a global public financial network where, for the first time, remittance and settlement take place within the same ledger. Money is not any more credit, but the value physically exchanged in a digital form, almost real-time, represented by the commodity (bitcoin), baked by energy, and transmitted via the Bitcoin base layer and Bitcoin’s Layers 2 protocols.
Bitcoin is the future self-sovereign financial infrastructure, where the monetary policy is hard-coded within bitcoin nodes, and secured by miners, rather than by central banks, and unpredictable government policies. It is a medium of exchange through Layer 2 networks, that allows micropayments at the speed of light, and low cost. Bitcoin is a store of value because is a fixed supply commodity, scarce and deflatory, that will substitute gold, and become, in the next future, the new global reserve currency.
Capabilities
Misconceptions around bitcoin, force people to think about it only as a store of value, without perceiving the enormous potential that bitcoin base layer, combined with L2 payment networks has, as a medium of exchange.
Even more difficult is to digest bitcoin as the commodity defining the unit of account!
A medium of account is the commodity defining the unit of account. A unit of account is a specific amount of the medium of account. For example, for the gold standard the medium of account is gold, while the unit of account might be one ounce or one pound of gold of specific purity.
Following this definition above, since bitcoin is divisible in Satoshi (sat), sat unit of account is a specific amount (1000,000,000,000 sat) of the medium of account bitcoin.
There are plenty of use cases where bitcoin can be applied. Some of them are straightforward, but the majority, haven’t built yet the business model to prove market fit. Like the internet in the early days, retail and businesses didn’t know yet how to leverage the open, decentralized network, in order to create revenue streams and a new economy around it.
The understanding of bitcoin as a hard commodity seems even more far away.
Bitcoin currency, and network, have introduced a variety of capabilities, that combined, will foster a new economy, based on instant, macro, and micropayments, running on a global public infrastructure decentralized, open source, and internet native.
Hard commodities refer to energy and metal products, while soft commodities are often agricultural goods.
Below I listed a set of capabilities that stand out as a medium of exchange, store of value, and unit of account, compared to traditional solutions. However, this list isn’t complete, because as usual, with the advancement of bitcoin research and applications, many more of them will be discovered.
Bitcoin Medium of Exchange
In order to understand why there are plenty of Bitcoin use cases ready to be unfolded, should be clarified first, the capabilities of bitcoin the currency, along with Bitcoin the network. Below are some of the main ones:
- Efficient: money transfers have final settlement t0, processes are Peer-to-peer, streamlined without 3rd parties and no counterparty risk (less expensive, more secure and private), decentralized.
- Scalable: the number of transactions per second (TPS) through L2 networks (Lightning, Liquid…) can reach 20.000 TPS, compared to Visa 1,700 to 2,000 transactions per second (TPS) on average, and Bitcoin, 7 transactions per second (TPS)
- No need for an internet connection to make a bitcoin transfer. Payments and money transfers can be done and received from everywhere, to everywhere in the world. On the contrary, payment using L2 Lightning network needs an internet connection.
- Cheap: cost-effective for retail and businesses. Today, micropayments through a digital channel are not doable since the fee would be more than the actual amount transferred. On the other side of the spectrum, macro payments are not doable as well without going through a long bureaucratic process, where you have to justify why you need your money! From the perspective of businesses and corporations, they can potentially plug into a global public infrastructure that does not need maintenance operations (OPEX), since payment rails are internet native and open-source. From Blockstream’s article Increasing Interoperability Between Bitcoin’s Second-Layer Protocols, in a high-fee scenario, using liquid on lightning, users can expect upwards of 99% savings using the Liquid swap feature.
- Easier integration than payment gateway: through APIs or SDKs, it is native to the internet, and doesn’t need KYC and AML. Businesses can become their own bank since they can send and receive money without having a bank account.
- No vendor lock-in: Bitcoin payment is not vendor lock-in, you do not rely on a specific private platform/solution, but on a public decentralized infrastructure that works on protocols and standards, open-source.
- Assets tokenization with a native token: with L2 liquid protocol, assets can be tokenized making Bitcoin also suitable for capital market digitalization offering a financial layer.
- Privacy: bitcoin is an open network where transactions are visible to anyone, and users are pseudo-anonymous meaning that by retrieving the public addresses you can link them to the owner, but through Layer 2 solutions for example, you can’t see what and the amount of value transfer. In the near future with the advancement of the technology, more sophisticated L2 features will be developed to preserve the confidentiality of value transfer.
Bitcoin Store of Value
Not credit, but hard money. Bitcoin is a currency backed by energy, transformed through technology (a combination of hardware and software) into a scarce commodity in the form of value transfer peer to peer through a secure open network, decentralized. With transactions finality t0, the transfer of value is not based anymore on credit, but sound money that reaches the receiver almost real-time, worldwide.
For this reason, bitcoin is great as an inflation hedge and currency devaluation. Bitcoin is a hedge currency risk: hedge against currency fluctuations as currency exchange rate risk in trade finance.
Bitcoin is the solution to inflation: in this video Parker Lewis beautifully explains foundational concepts about bitcoin, crucial to understanding its value, and its difference from other digital assets, here summed up:
Combining the bitcoin currency and network’s capabilities as a store of value and medium of exchange, it is evident that many use cases will come up, disrupting the digital, physical, and macroeconomic scene, in undeveloped countries first, with geopolitical transformation, and then, also in developing countries.
Bitcoin Unit of account
Bitcoin is a currency-backed commodity. Instead of explaining how bitcoin mining works, which could be a bit too complicated because disconnected from everyday reality (although mining is what connects the digital with the physical world), I would explain the importance of PoW elaborating on bitcoin (or sats!) as a unit of account.
The definition of commodity from Investopedia:
- A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type.
- Commodities are most often used as inputs in the production of other goods or services.
- Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options.
- Hard commodities refer to energy and metal products, while soft commodities are often agricultural goods.
- Many investors view allocating commodities in a portfolio as a hedge against inflation.
As per the image above, the common four commodities categories are: energy, metals, livestock meat, and agriculture.
Commodities end up in landfills. Recycling commodities make up a large part of the waste stream is a matter of critical importance. Most businesses today are under pressure to reduce waste and ensure that their carbon footprints and environmental impact remain as low as possible. Ensuring waste is managed efficiently thereby cutting costs, is an attractive option for most businesses.
Landfill gas (LFG) is a natural byproduct of the decomposition of organic material in landfills. LFG is composed of roughly 50 percent methane (the primary component of natural gas), 50 percent carbon dioxide (CO2) and a small amount of non-methane organic compounds
Bitcoin medium of account and its commodity-denominated unit of account sat, not only is the buy product of the hard commodity, energy, but combined with technology, transforms the harmful greenhouse gases emitted by the other commodities (like landfills metal, livestock and agriculture) into electricity and heat.
Electricity and heat are essential for civilization and economic progress, and bitcoin mining is the foundation of a new circular economy based on a self-sovereign currency, that comes from the hardest commodity: energy.
Bitcoin mining, following PoW consensus algorithm, transforms:
- stranded energy from renewable natural resources like wind, solar, hydro, into electricity and heat
- Co2 and methane harmful emissions from non-renewable energy sources such as coal, natural gas, derived gas, crude oil, petroleum, into electricity and heat.
Conclusion
The misconception about bitcoin arrives to the point of questioning bitcoin utility. Elaborating the value of bitcoin, in terms of capabilities as a unit of account, medium of exchange, and store of value, should give an idea of the macroscopic magnitude of the utility of bitcoin.
Bitcoin is a currency, a commodity, a network.
Once you understand bitcoin capabilities as a store of value, medium of exchange, and unit of account, you will understand also that the utility of bitcoin (use cases) will concretize, gradually, with the unfolding of their surroundings adapting to the new digital gold standard, which runs on a global, public, digital rails (financial infrastructure), at the speed of light.
The reality of the fact is that it takes years to connect all the pieces of the bitcoin puzzle. Those who fell into the rabbit hole are driven by instinct that lets them see a holistic vision of the future becoming clearer with time, while curiosity drives the learnings fostered by the obsession to complete the puzzle, once you understand that is not about bitcoin, but is about the meaning of human existence.
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