Viewing Bitcoin and Ethereum as Competitors is Fundamentally Wrong

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The steadiness and infrequency of change in Bitcoin’s most important processes is an essential feature exclusive to digital scarcity and the relative success of networks in the category.

Every individual, entity, or country in the world has equal access to the initial creation of coins as it relates to digital scarcity. The PoW consensus mechanism is the necessary element of BTC and digital scarcity that allows for the fair distribution of, and a competitive environment around, the creation of new supply. PoW networks don’t distribute supply until users voluntarily join the network to discover it (no premine or presale), and require input resources in the form of energy and hardware to generate new coins. This requirement in the process of discovering supply associates a cost with discovering new Bitcoin (new coins aren’t free), and adds a competitive, game theory element to those who are working to obtain new supply. Competition among those discovering new BTC has a positive feedback loop for network security as each party works to outperform the other, and is an outcome that can only be achieved by the structure of its corresponding force.

The creator(s) being unknown is another characteristic that is exclusive to Bitcoin and digital scarcity. From an abstract point of view, Satoshi’s anonymity is believed to be a major contributor that allows Bitcoin to scale as an asset without bounds. Knowing that there isn’t a central individual behind a network that gains outsized power as a result of it holding trillions of dollars in value, is key to mass adoption in the eyes of many community members.

 

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What is digital utility?

Digital utility pertains to the implementation of blockchain in applications that are used to deploy value (i.e. lending protocols, decentralized exchanges, and DAOs); the value deployed can come from network native sources, digital scarcity, or any other form of digital input. The purpose of networks in this force is to provide the infrastructure necessary to deploy said value. Native smart contracts, the use of Proof-of Stake (PoS), and frequent and impactful improvement measures are the differentiating factors that fuel digital utility and give it its unique composition and use cases.

 

Manifestation of Digital Utility in ETH and Other Networks

Holding nearly half a trillion dollars in value, Ethereum is the leading digital utility platform in the ecosystem. Other prominent utility-based networks include Binance Chain, Solana, and Terra. The top qualities of these networks that distinguish digital utility include native smart contract capabilities, Proof-of-Stake consensus mechanisms, and evolving policies around their supply, capability, and functionality.

Smart contracts are the engines that power the many decentralized applications (dapps) across utility-based networks. They are the piece of infrastructure that outlines and executes the underlying terms of an application, which encapsulates everything that makes up their supporting ecosystems (i.e. lending, borrowing, swapping, staking, and any DeFi app). Without the implementation of smart contracts, digital utility wouldn’t exist. Having smart contract capability baked into the networks’ Layer 1 (base layer) gives the contracts increased security and separates digital utility from digital scarcity.

Networks in this force primarily leverage a PoS consensus mechanism, which, unlike PoW, doesn’t require input costs relating to distribution, and includes premines or presales. Instead, transactions on PoS networks are approved by the random selection of validators in proportion to their holdings of the network’s native cryptocurrency. So,  validators with larger holdings are more likely to be selected to validate transactions than those who hold less. The absence of input resources allows transactions to be validated at a faster rate, which is critical to the functionality of utility-based networks. Solana, Terra, and Binance Chain are examples of PoS networks; Ethereum is a PoW network in its current state, but will migrate over to PoS pending the successful implementation of ETH2.0.

Improvement proposals on utility-centric networks are more frequent and often have larger impacts on their functionality and composition, when compared to their digital scarcity counterparts. For example, EIP-1556 (Ethereum Improvement Proposal) changed the network’s process for distributing network fees (gas). Gas was previously distributed to miners who held up the network, but is now burned and removed from the circulating supply as it is spent. Additionally, EIP-4488, a recent improvement proposal, is aiming at limiting the bottom line fee charged by the network. Changes that have impact on functionality and tokenomics are seen across all networks with a utility focus, which is an attribute necessary to their scope and is exclusive to the force of digital utility.

 

Working in Tandem

There’s been the argument that the BTC can have smart contracts and that ETH (or any other utility first network) can act as “super sound money.” While it is possible to bend each network to seemingly make the case, the fact is, by nature, digital scarcity isn’t the most efficient platform for utility, and digital utility doesn’t hold the most efficient framework for scarce, hard money. Thus both forces need each other in order to have the greatest impact.

Digital scarcity and utility have already begun working together in the digital and physical economies; which highlights the importance of their cooperative relationship, and suggests a deepening merge is on the horizon.

 

The Digital Economy

Quantifying the relationship of utility and scarcity in the digital economy offers insight into the already established intersection and its impact.

The minting of BTC on Ethereum has escalated exponentially over the last two years. As it currently stands, there is approximately 318,300 BTC minted on Ethereum, or ~1.52% of BTC’s maximum supply. This number has grown by nearly 114% over the last 365 days, and around 37% over the last six-month period. There is almost $16 billion of Bitcoin on Ethereum, at a market value of $50,000/BTC, which is ~3.1% of Ethereum’s market capitalization. The chart below highlights the historical growth in BTC on the Ethereum network. The steady upward trend suggests that BTC seldom leaves Ethereum (burned) after it has been minted, further promoting the fact that they work efficiently together.



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