Open networks are exactly what they say on the tin: Open. There are no gatekeepers who you need to ask permission from to access the network, or even worse, build a new innovation on top of the network. Bitcoin is an open network and for this reason alone, it will crush the closed networks such as central banks, Swift and the Visa/Mastercard networks.
Some of the other news items this week are:
1. Bitcoin price approaching $50k again
For the last few months, Bitcoin prices have dropped below the high of $60k, flirting with $29k and hovering around $30k for quite a few weeks. Those days seem to be behind us! I hope you took advantage of the massive discount that was available to you and stacked some sats, because Bitcoin is back at $50k again! Do we see the price move back to $60k in the next few weeks? It’s anyone’s guess, but to me, the bull market is still alive and kicking.
2. You can now buy airtime, groceries and more using Lightning in South Africa
Voucher aggregator, Bitrefil, has added additional South African support to its inventory. This means that you can now purchase vouchers from Pick ‘n Pay, Cape Union Mart, Incredible Connection and even Wimpy, using Lightning. Living on Sats is becoming easier and easier for those of us who earn a living in Bitcoin.
3. Bitcoin mining hash rate update
Following the China hash rate exodus a few months ago, hash rate has been steadily climbing. Currently, total network hash rate is approximately 136 ecto hashes per second, an increase of over 20% in the last month. The next difficulty adjustment is currently predicted at 13.6%, indicating that hash power is rapidly coming online in the network. The network is performing exactly as designed, with the difficulty adjustment algorithm balancing the incentive for miners to contribute security to the network autonomously and on an ongoing basis. It’s beautiful.
To see the latest hash rate charts, click here.
Open Networks benefit everyone
Metcalfe’s law states that the value of a network is proportional to the square of the total number of nodes in the network. In plain english this means that as the size of a network increases so does its value. This value is often misinterpreted as financial value, when actually it is better expressed as utility to network participants.
Let’s take the example of a cell phone network to illustrate Metcalfe’s law in action. If only one person has a cellphone, there is no network effect and the value of the network is zero, since you can’t communicate with anyone. But if there are two users, you are both able to communicate with one other person. If there are three users, each user is able to communicate with two others. If there are four users, each user is able to communicate with three other users. You get the picture.
The law can be quantified as follows:
Value of network = (nodes in the network)2
Thus the value of a cell phone network with 10 users is:
V = 102 ;
While a network with 100 users only has ten times more users, than one with ten users, it is worth 10 000, an increase of 100 fold. Thus you can see that the value of a network increases exponentially as user numbers increase.
|Number of users in network||Factor of increase in users||Network value|
|1000||10||1 000 000|
|10 000||10||100 000 000|
So what does this have to do with Bitcoin?
Bitcoin is a network, and as such, as the size of the network grows, so does its value to its individual participants. The more people who own Bitcoin, the more people you can potentially transact with across the network and the more useful the network becomes.
This is all fairly straightforward to understand, and explains why the price of Bitcoin keeps rising over time as the network effect grows. But what does this have to do with open networks?
Bitcoin, according to the whitepaper, is a “peer-to-peer electronic cash system” built on top of a network of nodes, all running the Bitcoin blockchain software and validating all transactions to keep the network in consensus. However, here comes the beautiful part: this network is open to anyone to use, as long as they stick to the rules of the network. If they don’t, their transactions are booted from the network and as a result the network is useless to them. These rules are not enforced by any central party, but by all nodes in the network. Thus if you abide by them, nobody can revoke your access to the network. In reality what this means is that any person who wishes to use the network can do so freely, as long as they follow the rules. This means that they can send and receive Bitcoin in a permissionless fashion, but can also build software on top of the Bitcoin rules without having to ask permission from anyone to access the network.
This is completely different from other financial networks such as those operated by central banks, Swift or the big payment processors such as Mastercard and Visa. These networks are permissioned, meaning that even if you play by the rules of the network, the operators can still boot you off the network, since they are the gatekeepers. The network in essence belongs to them and they get to choose who can use it and who can’t. While this may not be of great concern to you as an end user, who only cares about whether your payment goes through or not, it does have a profound impact on your life.
Permissioned networks are at an inherent disadvantage as scale increases when compared to permissionless/open networks, since all other things being equal, there are artificial barriers placed in the way of the value growth of the network. Permissioned networks create bottlenecks at scale, since the gatekeepers control the innovation process. In large, decentralized, permissionless systems, anybody can contribute to and innovate on products already built on top of the network. The gatekeepers of a permissioned system will simply never be able to replicate the genius that creative people, unencumbered with the narrow requirements of a single organization, are able to unleash on a widely distributed and permissionless network.
Take this hypothetical example: A young, talented software engineer finds himself living in a ghetto in a West African country with tight capital controls mandated by the central bank. The only electronic payment rails which are widespread for business owners to use locally are the Visa and Mastercard networks, but they carry a fee of 3.5% to accept funds in payment. The software engineer’s cousin runs a small shop, which operates on a very tight margin of ten percent. He can simply not afford to reduce his margin from ten percent to six point five percent or he won’t make enough money to survive. Thus accepting electronic payments is not an option for him. His talented engineer cousin may be able to build him a card terminal machine and even write the code for the machine to interact with the Mastercard network, but the folks down at the local Mastercard office won’t allow it. Even if the code written by the engineer is completely compatible with that of the Mastercard network, his terminal will not be allowed to process transactions, not without paying Mastercard their 3.5%. Mastercard permits who can send and receive transactions and thus they will not permit unauthorised vendors onto their network.
The engineer thinks there must be another way, since cash comes with its own costs and security in the township is an ongoing concern. He decides to investigate Bitcoin as an alternative for his cousin’s problem and without having to write a line of code, using open source software that has already been created for this express purpose, he gets his cousin’s shop set up. He doesn’t have to ask anyone’s permission, he just does it, and a few days later his cousin is receiving Bitcoin payments for goods in his store. No gatekeepers to ask permission from, no forms to submit. Now part of the world’s most resilient financial network.
But his cousin isn’t happy with the volatility of Bitcoin. His narrow margins cannot absorb the large fluctuations in price of Bitcoin and most of his customers don’t own Bitcoin anyway, so he is still stuck with accepting the vast majority of his payments in cash. However, due to the currency controls imposed by the reserve bank and numerous other factors such as politics, the value of the local currency starts to drop rapidly, with triple digit inflation being experienced annually. Citizens scramble to acquire a more stable currency, many get US dollars but some get Bitcoin. The price volatility of Bitcoin is less than that of the local currency, which is now in free-fall and US Dollars are still in cash. All of the sudden, the vendor is willing to accept Bitcoin as payment from his customers, as it is still only a small proportion of his customers who want to pay this way. However, he is able to accumulate Bitcoin and preserve his own personal savings in a currency that is both more valuable and more stable than his local currency over time. This carries on for a few years, and he manages to squirrel away some Satoshis as savings. Then one day, something happens in America, and the value of the US dollar rapidly declines. All of the sudden the US dollars circulating in the cash economy are rapidly losing their purchasing power and everyone scrambles to get their hands on some Bitcoin, despite the wide availability of the national digital currency. The vendor already has a system in place to accept Bitcoin as payment, thanks to his smart cousin who knows a thing or two about it. The same smart cousin who now has dozens of staff working under him, rolling out Bitcoin payment terminals to merchants all over the country.
Nigeria is currently experiencing a boom in Bitcoin adoption.
One of the reasons for that is because traditional banking systems are being pressured by the government to cut those critical of it off from their services. Effectively utilizing the tools of financial repression against those protesting the massive government corruption and state sanctioned violence. A feminist activist group protesting the government late last year received over 1.47 BTC ($72k) in donations via Bitcoin, 41% of their total donations, after having their bank accounts frozen.
Open, permissionless networks enable humans all over the world to keep fighting for their freedom, despite the crushing heel of the state seeking to control them.
While the example of Nigeria might seem far off to you, and something that only happens in third world countries, it does happen. Historically, it is the rule, rather than the norm. Control over financial networks is rife in authoritarian states, as tyrannical governments understand that controlling the flow of resources and money controls the people.
Open networks grant their participants the freedom to interact digitally, without being subject to the authority, manipulation or coercion of the gatekeeper. This is truly a revolutionary innovation which rivals the printing press in its effects on the destabilization of the ruling class’ grip on society.
Bitcoin has given us an alternative, not only as a means to break away from monopolized and centralized payment rails operated by Swift, Visa or Mastercard, but also as an alternative to the entire protocol that is central banking.
The open nature of the Bitcoin network means that development in the formative years of the network will be slow. This by nature means that initial user growth will be slow, as only those who are uniquely interested and have a prerequisite set of coding skills can utilize it. However, as these early adopters, hobbyists and cypherpunks build out user-friendly tools to interact with the network, more and more users will join it. As they join, the value of the network grows exponentially, as per Moore’s Law. This value sucks in more developer talent, further building tools on the network which drive its adoption even more. Eventually the sheer volume of innovation cannot be matched by that created on a permissioned network in a centrally controlled manner. Despite the headstart that the permissioned networks have and the money that they can throw at stimulating early growth in their networks. Creativity, trial and error at scale wins the day. Something Heyek called “spontaneous order”.
Today we are living through a crisis of censorship. Information networks created and controlled by Big Tech are being used to exclude those heterodox thinkers who do not follow the officially sanctioned establishment narrative, before the machine is leveraged against them in active disinformation campaigns. Financial networks are being used in the same fashion, with former sitting president, Donald Trump, having his bank accounts frozen by a Miami-based bank. If they can do it to Trump, they can do it to you.
This is why open networks are so important. They provide an alternative to the permissioned networks which will always trend toward censorship. They also hold the inherent advantage of being able to outcompete permissioned networks at scale, despite being slower to grow in their early life. Bitcoin provides society with a permissionless network for money, one of the most important information networks. This is why we say, “fix the money, fix the world”.
Bitvice Podcast and Media
In our most recent podcast, we interviewed Richard Wilkinson about the role that Bitcoin can play in decentralizing power away from the state, particularly in the South African context. Richard is a keen mind, who has thought a lot about Cape Independence, succession and federalism. Catch the video version of the interview here, or subscribe to our podcast.
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By The Horns is a Bitcoin podcast about South Africa. You can follow our discussions via video on YouTube or via the audio version on Spotify, Google Podcasts or Apple Podcasts. If you are listening on a different podcast app, here is our RSS feed.
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If you have been sitting on the fence about when is the right time to buy Bitcoin, or you don’t quite feel like you have all of your questions answered and are still unsure, why not have them answered by myself? I am making a few time slots available over the next few weeks dedicated to answering your questions one on one.
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While it may seem that the authoritarians have the upper hand, the best and brightest are working on Bitcoin. Join us!