There is virtually no one who knows Bitcoin better than Ben de Waal. The 40-year old New Zealander is a Bitcoin pioneer who has been around since its genesis. Ben is active as Head of Software Development at Northern Bitcoin. We talked to him about Bitcoin as a new currency, as digital gold and as means of payment – enlightening insights from an insider.
Ben, you have been a “Bitcoinist” right from the very start. If Bitcoin is genuinely to become the world’s digital currency, it needs to be accepted by the mainstream. Up until now, it seems that so-called “innovators” and “early adopters” are the ones most keen to become involved.
The value of Bitcoin, by which I do not mean the exchange rate, but its fundamental value, lies in its intrinsic properties as a superior form of money. It is therefore only a question of time until Bitcoin becomes the currency people will prefer to hold over other currencies. This said, people don’t accept a new technology without a reason. Bitcoin is often portrayed as a speculative asset or as a payment network. Currency speculation is not something that many people want to be involved in. Since cash, debit cards, credit cards, PayPal and many other more recent technologies function as extremely efficient and effective payment networks, they do not see any need to use Bitcoin. It may therefore be a very long time before Bitcoin arrives in the mainstream, possibly several generations – but this will only be the case if the Bitcoin ecosystem is not proactively developed.
What do you think motivates people who have already embraced Bitcoin?
For the majority of people living in modern democracies with relatively stable economies there is no strong incentive at the moment to acquire Bitcoin – aside from long-term savings, currency speculation, as well as a certain anonymity associated with the transactions. In repressive systems or in unstable economies, by contrast, the incentives are already considerable. Above all, the possibility of acting without government censorship and of averting hyperinflation. If, on the other hand, there are many people who do not yet hold bitcoins, I believe this is because of the effort involved in acquiring them, as well as concerns about how to keep them safe once they have bought them, compounded by the feeling that they are not really able to use them.
That sounds as if there is a great deal of uncertainty about Bitcoin …
That is absolutely correct. I would even go so far as to say that a lack of knowledge is the main reason why the majority of people don’t have any bitcoins yet. Added to this is the fact that a little knowledge is a dangerous thing. Confused messages have been spread about people becoming rich through “magic Internet money” or that criminals use it for online transactions. Only few have recognized the huge advantages that Bitcoin offers and are aware of the disadvantages and risks associated with the fiat currency which they currently use.
What possibilities are there for accelerating acceptance?
In my opinion, there are two approaches that that are synergetic and can be actively pursued. The first approach consists of doing something to rectify the lack of knowledge I mentioned before. The basics of what Bitcoin is and is not must therefore be communicated much more strongly. If “Bitcoin” is offered as a payment option alongside “PayPal” and the “credit card”, many people think that Bitcoin is some sort of payment network. This is naturally not the case. Along with basic information on Bitcoin itself, general economic principles must also ideally be elaborated on, as most people don’t know a great deal about them. This includes, for instance, the properties of money, as well as the way in which the value of goods and services is set in the markets. Once people have understood this they will also understand that Bitcoin is actually money and not just an asset, and above all why it is a much better form of money.
And what is the second approach for speeding up acceptance?
The second approach is that using Bitcoin to pay for the everyday things of life is quite simple. The emphasis here is on “simple”. In reality, however, if you want to buy goods or services paying with Bitcoin is generally not offered as an option at the moment. If it is, paying with Bitcoin is still slower, more expensive and more difficult, both for retailers and for customers. Consequently, neither of them has much interest in payments done with Bitcoin, which also explains why the option is so seldom offered. The good news is that there are meanwhile many solutions that can make things smoother. Take a simple purchase transaction in a store, for instance. Here, multiple options for improvement are already on the cards, from the wallet application that the customer can use for payment, the payment technology used for handling bitcoin transactions, and on to accounting and reporting software used by retailers. Other processes will also be simplified, such as buying Bitcoins with fiat money, for example.
For many people, however, buying bitcoins themselves and storing them in their own wallets is still too complicated. When will owning Bitcoins be as normal as owning a bike?
As I said before, people will only adopt a technology if there is a reason to do so. A reason might be happenings and events that force people away from their existing currencies. Here I am thinking of occurrences such as severe economic recession, a failing economy, or governments that use currency to control and manipulate the people. On the other hand, people might come to Bitcoin for positive reasons. Complex and expensive processes as are prevalent in a fiat monetary economy due to intermediation and middlemen can be made leaner or cut out entirely by the Bitcoin system.
And are further adjustments to the Bitcoin system necessary for this to happen?
With the first example, no further changes to the Bitcoin system are needed. It is already perfect, as the Bitcoin currency already has the requisite properties of healthy money to be present in an economic crisis. In the second case, the development of new tools for simplifying and making the whole Bitcoin system even more efficient is underway. It is currently the most active area of developing the Bitcoin ecosystem, with tens of thousands of companies and developers across the world working on systems, currency gateways and exchanges, sats back systems that are essentially cashback systems, and so much more.
Another topic concerns fluctuations in the Bitcoin exchange rate. How are these explained over time?
Bitcoin will always track the development of the economy. If Bitcoin were the only global currency, this would quite simply result in a stable economy with deflationary pressure, on the one side, and inflationary pressure on the other. Deflationary pressure reduces expenditure during economic growth while inflationary pressure increases expenditure when the economy is in decline. This interaction ensures that growth on the one hand and decline on the other are kept in check. In other currencies, volatility is carefully controlled and managed by the central banks that adjust supply. The European Central Bank describes its main mandate as “preserving the purchasing power of the euro”. By definition, Bitcoin is naturally unable to undertake these deliberate supply adjustments.
What needs to happen to ease the current fluctuations? Does the volume of the Bitcoin market play a role here?
That’s right! Bitcoin is not the global currency, well not yet. Instead, what we are talking about is a 150 billion dollar market. At first glance, that may sound like a lot. In effect, however, it equates to around only 4% of the size of the entire German economy. These small dimensions mean that its exchange rate is disproportionately affected by the trading volume. Money flows in these volumes would scarcely make the currencies of other larger economies budge by one tenth of a percent. This supposed problem will resolve itself over the course of time. Bitcoin’s algorithm ensures that the supply of new Bitcoins will dwindle over time, which will drive up the value in line with the conventional supply and demand model. The consequence of Bitcoin gaining value over time is that the countervalue in money necessary for a shift in the market value also increases. Volatility will therefore decline at ever faster rate. I believe that, by the end of the 2020s, Bitcoin will probably be less volatile than many national currencies.
Will the time come when using Bitcoin to pay for a cup of coffee in the city is the norm, or will Bitcoin be used more for transferring larger amounts across borders?
The main concern here is not the currency itself but which payment technology is being used. Bitcoin’s “integrated” payment technology consists of so-called base layer transactions that are directly recorded in Bitcoin’s blockchain. This is relatively inefficient, slow and expensive as space in a block is by its nature a valuable and limited resource. Although possible in the past and at present in many beautiful cafés and bars across the globe, buying a cup of coffee with a base layer transaction is therefore something that will not be around in this form in the future. Luckily, there are also other payment technologies, the most promising being Lightning Network.
What are the advantages of Lightning Network when paying with Bitcoins?
Lightning facilitates transactions between the participants via a network of connected channels without recording each individual transaction in the blockchain. Each participant is only connected with a few other Lightning nodes, but payments can be routed via the network to other participants with no intermediation. And it is up and running already! In October, for instance, I took part in “The Lightning Conference” in Berlin. At the conference, I myself bought several coffees and a lot of very good ice cream from “Chipi Chipi Bombón” that exclusively uses Bitcoin via the Lightning Network. In the evening I enjoyed a beer at “Room 77” in Kreuzberg and had my dinner delivered by “Food for Coins”, both of which I paid for through the Lightning Network. As these technologies mature, this can be expected to become increasingly normal and ultimately possible anywhere instead of in a few future-oriented businesses.
Some cryptocurrencies offer faster transactions and lower fees than Bitcoin without using technologies of the “second layer” such as Lightning Network, don’t they?
Each improvement in the speed or the fees with the base layer transactions only comes at the unacceptable cost of drastically compromised security. Creating a financial transaction system that is faster and cheaper than Bitcoin would be easy to do, but not without huge risks to security. The simplest way would be to completely eliminate the necessity of a blockchain, for example, and to record everything in one single database that would then be stored at Amazon Web Services. This is much faster and cheaper than Bitcoin, but if a hacker gets in, the whole system will be at risk. An even worse scenario is that someone authorized to access the system is motivated to do so by greed. A system of this kind is based on trusting that those responsible have no criminal intentions and that the architects of system security perform that task perfectly.
This also applies to traditional financial systems. Banks charge high fees and interest rates on loans that are above the interest rate on deposits specifically because guaranteeing that a system is as secure as possible is an expensive business. Nonetheless, the past has always shown that banks are not absolutely secure, both physically and electronically, and that they never will be as long as they remain such alluring targets for criminal activity. The Bitcoin system has been designed to prevent the system from being duped. There are no centralized supervisory authorities to make decisions and no centralized information database. Consequently, there is no one who can abuse their authority nor is there a point of attack for hackers who could destroy the system.
Do you think that Bitcoin is digital gold, or more like a new currency? And where is it headed?
In my opinion, this question makes a distinction where there is none. Digital gold is a new currency. Physical gold was also an excellent currency up until the advent of ever stronger networking and globalization that made gold impractical due to its lack of divisibility and weight. At a later point in time, the impossibility of moving gold digitally was another factor. The unsecured fiat currencies we have today have never been the norm from a retrospective standpoint. They are experiments that have frequently ended badly over the course of the centuries. Our current system has been around for longer, but has caused far-reaching financial crises and a ton of difficulties for many people, purely for the reason that it can be manipulated.
The return to Bitcoin that, as digital gold, does not display the same weaknesses as physical gold, is much the same as any other currency we have had in the course of history, but minus the problems that we see in the current fiat system.
How will Bitcoin mining change once all the bitcoins have been mined?
The miners are paid with new bitcoins for the blocks they find. As replenishing with new bitcoins halves around every four years (210,000 blocks), it will be another hundred years and more until the process is completed. However, the reward for miners for a block will have attained a level long before that which is a great deal lower than the transaction fees inherent in the block. From this time onward, the distribution of new bitcoins for the miners will be a great deal less relevant. Instead, their income will be based above all on transaction fees. Presumably, little will change with the basic business of mining itself. It will, however, provide economic incentives to behave differently. The miners will probably integrate themselves much more strongly into the other aspects of the Bitcoin ecosystem than before, as they will have greater incentives to promote a strong fee market.
How will the roles of Bitcoin and its forks such as Bitcoin Cash and Bitcoin SV be distributed in the future? Will we end up with only “one Bitcoin”?
Yes, in the end there will only be “one Bitcoin”. From an economic standpoint, the Proof of Work within Bitcoin is a technology that converts energy into monetary tokens. If there is more than one kind of monetary token with different values, it makes sense that the necessary work will move in the direction of what is most valuable. There are different reasons why it is currently advantageous for miners to mine different tokens and derive profit from this. Firstly, we have the volatility of the markets, secondly the economic viability for influencing the market value, and thirdly a mining industry in its nascent stage where a switch in technology may deliver significant advantages. These reasons disappear when the markets grow and mature, and with them the less valuable tokens. Quite apart from the economic game theory, the current acceptance and discussions about Bitcoin are evidence that the network effects of Bitcoin would be more than sufficient for it to hold its ground in competition against alternative cryptocurrencies even if these cryptocurrencies were to display the same properties as Bitcoin. As no competitor cryptocurrency is in a position to replicate all the properties of Bitcoin, this is a essentially a guarantee of their demise compared with Bitcoin.