Let me start off by saying that I understand that I am making a bold claim. Bitcoin was the first cryptocurrency, has a $700 billion market cap, and has its own personal chadlike cheerleader.
Seriously, I want some of whatever this guy is smoking.
Extraordinary claims require extraordinary evidence. So let me lay out my thesis.
Bitcoin as a store of value
I believe scarcity, decentralisation, immutability, security and predictability over time to be the primary determinants in what makes #Bitcoin a store of value that can justifiably compete with gold. Aside from scarcity, all these factors ultimately boil down to the primary innovation in Bitcoin?—?the PoW consensus method.
Competition for rewards in mining leads to an ever increasing hashrate, which effectively protects the network from 51% attacks. I see issues with this in the long term.
Mining economics
Mining is an industry where focusing on cost above all else is paramount. Income is uncertain, since the Bitcoin price is determined by outside forces. This ruthless focus on cost efficiency manifests in every aspect of the mining business?—?electricity cost, equipment cost, access to cheaper capital, and efficiency in maintenance of ASICs. Optimizing these factors leads to profit. This leads to constant innovation, with more energy efficient ASICs being the largest area of competition.
While this might seem great, I see danger in the fact that Bitcoin mining is effectively the ultimate “economies of scale” market, since unfettered economies of scale lead to centralization over time.
Centralization risks
I am not alone in this?—?there is ample research on ASIC manufacturer consolidation. Currently, just two parties manufacture 90% of all ASICs on the market. Even without digging into the risk that this poses in terms of potential concentrated vulnerabilities, an oligopoly or monopoly on manufacturing the backbone of an immense store of value is a major danger in the long run.
The danger doesn’t end there. Centralization in mining seems just as big a threat. While currently only 4 mining pools need to collaborate for a 51% attack, people often point to mining pools consisting of many different individuals and mining farms. However, recent research suggests that there is also centralization within mining pools with a small number of actors (<20) simultaneously operating across mining pools, receiving >50% of the BTC payouts. To add to that, malicious actors don’t need 51% of the hashrate to be able to do damage, selfish mining can do damage at lower levels.
Our results suggest that individual miners are simultaneously operating across all three pools and that in each analyzed pool a small number of actors (?20) receives over 50% of all BTC payouts. While the extent of an operator’s control over the resources of a mining pool remains an open debate, our findings are in line with previous research, pointing out centralization tendencies in large mining pools and cryptocurrencies in general.
My point here isn’t that this has happened, or that it will happen soon, but that Bitcoin does centralize over time both in theory and in practice. Decentralization is the core pillar of Bitcoin’s security, and this centralization trend which is incentivized by the very aspect that makes Bitcoin Bitcoin is a danger to its status as a store of value.
So.. how is Nano a better store of value?
I’m glad you asked! I think the reason that Nano is more suited as “digital gold” in the long term boils down to how the Nano consensus protocol incentivizes decentralization.
Open Representative Voting
Nano uses a consensus mechanism called Open Representative Voting. Essentially, 1 Nano = 1 Vote. You can either run your own node, or vote for a node to represent you, and nodes then validate transactions. These nodes do not receive any fees, which is important.
Because Nano has no fees, there is no direct monetary incentive to run a node. Because there are no fees, there is no advantage to being responsible for 10% of consensus rather than 1% of consensus.
Therefore, any node that aims for a large share of consensus is suspicious, prompting Nano holders to delegate to a different node. To 51% attack the network, you therefore need to convince other people to act against their own interests or to buy up a majority stake in the network. Having bought a majority stake in the network (at immense cost), attacking the network means you are destroying your own value.
Alignment of interests
Because there are no fees, everyone’s interests are aligned. The value is not in what can be extracted from the network (fees), but in the network itself.
This alignment of interests removes centralization over time in theory, and this is borne out in practice?—?you can literally see decentralization increasing over time. This leads to a more stable state of decentralization in the long run.
But wait, why would people run nodes without fees?
The answer lies in the value of the Nano network. While there is no monetary incentive, this also means Nano has no fees. It’s also instant with transactions confirming within a second, uses extremely little energy, has no inflation and scales well. It’s a very efficient value transfer system that has value for a lot of groups. Merchants can save on transaction fees, and migrants can send remittances home. The possibilities of a borderless, feeless and instant currency are unlimited. Any business using Nano and profiting from the network has an incentive to keep the network running, and therefore has incentive to run a node.
Nodes are relatively cheap, due to Nano transactions being so lightweight and efficient. The network can currently handle 200 transactions per second, running on nodes that cost $10-$20 a month. This is no theoretical exercise?—?the biggest node is currently a forum that uses Nano called Nendly, the second largest a payment processor called Kappture. Many exchanges (Kraken, Binance, Huobi, KUCOIN etc.) also run nodes, both because they profit from the network and because running their own node allows them to confirm Nano deposits, independently and trustlessly.
Other advantages of Nano over Bitcoin
It seems almost childish to ask it, but would you rather have a store of value that takes time to send back to an exchange and costs you fees to send back to an exchange (exorbitantly high fees, if the network is clogged because more want to liquidate), or one that is instant and feeless?
In other words, would you rather have a store of value that is also a brilliant medium of exchange, or one that has no actual use outside being “stored”?
To recap, and for those who scrolled to the bottom for the tl;dr
I believe Nano is a better store of value than Bitcoin is. While mining Bitcoin has economies of scale meaning the big get bigger, Nano incentivises decentralization by having no fees. The value of a decentralized store of value is in the security that decentralization brings with it, and Nano’s increasing decentralization while Bitcoin centralizes over time means that Nano has the better incentive structure in the long term.
I hope you enjoyed reading this, if you want to learn more about Nano I’d recommend joining us over on /r/nanocurrency.
