Let me posit two reasons why, over the past month, bitcoin has surged to its highest level since mid-August and outperformed every other major asset in both crypto and traditional markets.
Together, they highlight the unique advantage that Bitcoin draws from its status as the oldest, most established and most decentralized protocol and from a surprising new opportunity to harness that.
- The arrival of the Ordinals Protocol, which enables users to inscribe references to digital art into small transactions on the Bitcoin blockchain, essentially creating Bitcoin-based non-fungible tokens. This has demonstrated a new, high-value use case for the longest-running cryptocurrency chain. Already, one report from research firm FSInsight argues that an Ordinals-driven resurgence in development and the expansion in the total value transacted and secured over the Bitcoin blockchain should drive up its price.
- A string of U.S. regulatory actions has highlighted the risks that many, if not all, major non-Bitcoin blockchains will fall afoul of the Securities and Exchange Commission Chairman Gary Gensler’s hardline position that most tokens are securities. It appears bitcoin is the one reliable exception to that. That’s making it attractive in relative terms to Ethereum’s ether, Solana’s SOL and all others.
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Many “maxis” might celebrate this moment as proof that their beloved Bitcoin is proving itself as the one and only – except perhaps those who see the addition of “JPEGs”to its blockchain as an abuse of Satoshi’s original intent to form a new system of money.
But I’ve never thought it constructive to view the crypto landscape through the maxis’ zero-sum-game lens. And right now, while it might seem as if they should be running a victory lap, it’s possible to look at that same landscape and see a much more integrated, constructive future for all crypto protocols emerging out of this moment.
Over time, I see a situation emerging in which Bitcoin functions as a kind of uber-anchor for everything. Its role will be to be a kind of ultimate “layer 0” record of truth. Meanwhile, Ethereum and other smart contract platforms could take on higher-level functionality, with each specializing in different types of transactions and data-processing that the rather clunky, limited-function Bitcoin blockchain is not built to perform. It will need greater cross-chain operability, but there are plenty of people working on that.
Most other layer 1 crypto protocols – meaning base-layer blockchains with their own native tokens – are based on a proof-of-stake consensus mechanism, including Ethereum. With the Securities and Exchange Commission shutting down Kraken’s staking service in the U.S., signaling that it will be difficult for all but the most sophisticated retail U.S. investors to participate in those blockchains’ validating networks, investing in ether and other such tokens seems poised to become the domain of institutional players.
This is not ideal – especially because of the risk of censorship and regulatory capture that comes from centralizing staking pools in corporate hands. But here’s where, in a world of integrated, interoperable cross-chain transactions, Bitcoin’s base layer of immutable record-keeping could act as protection against such threats.
Bitcoin’s wide, geographically dispersed community of users and miners ensures that governments will have a hard time shutting it down. The fact that Satoshi’s absence has left authorities with no lead developer to subpoena also puts this in a different realm from all the other protocols for whom there are mostly identifiable founders.
The bottom line is that Bitcoin has proven to be sufficiently decentralized that U.S. authorities have conceded that the leading cryptocurrency is not a security. In this new, politically tense environment, this gives it a distinct advantage.
Bitcoin finds a new community of innovators
It’s also why the Ordinals Protocol is so important. The Bitcoin blockchain now has a purpose beyond peer-to-peer payments, whose mainstream appeal has always been undermined by regulation of the on- and off-ramps to the banking system and by bitcoin’s own price volatility. Now that it incorporates NFTs – the most important crypto innovation since Bitcoin itself – the Bitcoin blockchain is engaging with creators of digital content, the backbone of the internet economy. That will unleash a torrent of new creative innovation in the space.
As that happens, it will drive others in the crypto community to build better bridges and integrations between Bitcoin and alternative protocols. It could accelerate the work already being done by developers working on Cosmos, Polkadot, Polygon and other bridging and interoperability protocols to build mechanisms for moving assets across chains and reduce crypto industry participants’ dependencies on singular layer 1 blockchains.
Already this week, the NFT Capsule team at blockchain services company Bloq launched “Ordinary Oranges,” a collection of Bitcoin-inscribed NFTs that are accessible on the Ethereum mainnet and have a “burn” option that returns the NFT to the Bitcoin chain.
The beauty of such arrangements is that users can have the security of a Bitcoin-proven asset while also tapping the greater programmability of decentralized applications and layer 2 protocols running on the Ethereum virtual machine, as well as the deeper liquidity that exists in Ethereum-based NFT marketplaces such as OpenSea.
I see these kinds of developments leading to a more integrated crypto ecosystem in which different protocols perform different functions, with all of it anchored into a 15-year-old deeply established proof-of-work blockchain that no U.S. regulator can shut down.