Back to Basics: What Makes a Bitcoin Valuable?

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In the wake of falling bitcoin prices, critics are asking a familiar question, “What makes a bitcoin valuable?” There is a misconception that the Bitcoin Blockchain can be separated from bitcoin the currency, individual units representing a portion of the Bitcoin network. If a Bitcoin was worth $0, then a Bitcoin miner has no incentive to allocate their computing power to the Bitcoin network.

The incentive for allocating computing power to process Bitcoin transactions is a payout in Bitcoin, collected via transaction fees or block rewards and distributed proportionally based on computing power. The Bitcoin network currently has a limited degree of value as a near-frictionless, non-censorable value transfer network. As long as the value of a Bitcoin is larger than 0, an incentive will exist for the allocation of some degree of computing power to the Bitcoin network. That is the floor. The ceiling is nearly limitless due to the future functionality offered by the world’s first distributed immutable ledger. This future value will be realized through the creation of Bitcoin specific applications. These applications will involve value, such as gambling or a decentralized competitor to eBay, but will operate using cryptocurrencies instead of fiat currencies.

Open Bazaar is a developing project with the aim of revolutionizing peer-to-peer transactions. While an eBay transaction can cost upwards of 10% of the total value involved in the transaction, Open Bazaar plans to offer a similar functionality for a fraction of the cost through a decentralized autonomous model. The most important component of this decentralized system is the rating mechanism. As a buyer, you will logically only do business with a seller who has a perfect feedback rating. A seller will be accountable to a buyer because a negative review will hurt their future sales. A buyer with a history of leaving exclusively bad seller reviews will not be sold to.

This system is a transparent, pseudo-anonymous alternative to traditional centralized methods of doing commerce over the web. This option will gain traction through being a cheaper alternative to existing models. It will also be the first true international marketplace, as it will not physically exist in one location and will allow anyone, from any country, to sell anything they would like, assuming they are able to transport their goods to the buyer to complete the sale. When thinking solely of physical goods this can be quite limiting, though it still offers immediate benefits to those with access to international shipping. While most transactions are made for physical goods, what about digital goods like an e-book or Netflix subscription? This would allow a consumer in a country with an undeveloped banking structure to pay for a video streaming service to use on their laptop.

In the United States, online gambling has been outlawed and this ban is enforced through payment processors. Without a method of funding or receiving USD, online gambling in the United States dried up. This ban could be challenged by Bitcoin by reintroducing a funding method to the existing online gambling infrastructure. If a future gambling platform was set up in an autonomous manner, like Open Bazaar, it would be impossible to shut down.

Open Bazaar and a number of existing and developing gambling applications are immune to censorship because they do not exist in one physical location and maintain themselves automatically through minimal fees associated with use of the program. For instance, a gambling program could pay for itself to remain hosted on the Namecoin protocol (A decentralized web protocol built on top of the Bitcoin Blockchain) by charging a minimal rake fee. This fee would be collected and allocated for .bit domain maintenance, all of which would be done without human interference.

I predict that we will see the development of profitable DACs (Decentralized Autonomous Companies) as distributed data storage solutions emerge, such as Storj. As smart contracts are developed by Counterparty and other Bitcoin 2.0 protocols, it will become possible to issue tokens that will contain a contractual right to a portion of a dividend automatically issued by an autonomous program. There are already multiple successful instances of crowd funding through tokenization, notably Swarm, Koinify, and Storj.  The arrival of programmable money offers the capability for computers to complete immutable programmable commerce. And that is just the tip of the iceberg.