Elon Musk Should Listen to Cathie Wood on Bitcoin
Part of what many observers expected to see during Wednesday’s Bitcoin (BTC) discussion featuring Ark Invest CEO Cathie Wood, Tesla and SpaceX CEO Elon Musk, and Square and Twitter CEO Jack Dorsey was a debate regarding the merits of Bitcoin’s multi-layer approach to scaling versus the alternative of increasing transaction capacity at the base blockchain layer.
While this direct confrontation between the panelists did not really happen, contrasting comments made by Wood and Musk illustrated the key area of disagreement in this technical debate and why Musk’s Dogecoin (DOGE) experiment is unlikely to succeed.
Wood explains Bitcoin’s value proposition
At the beginning of Wednesday’s livestream, Wood was asked by Square Crypto’s Steve Lee to explain what originally sparked her interest in Bitcoin. In her response, Wood recalled that her former mentor and economist Arthur Laffer (of Laffer curve fame) referred to Bitcoin as the sort of “rules based monetary system” that he had been waiting for his entire career.
Later in the talk, Wood added, “The role that [Bitcoin] is playing, given that the rule is a quantity rule [of] 21 million units, is really a store of value role.”
Put differently, the main purpose of the Bitcoin blockchain in the context of the bitcoin asset’s utility as a store of value is to enable a monetary policy that is “set in stone” (as Bitcoin creator Satoshi Nakamoto put it many years ago) and cannot be corrupted by a trusted third party such as a central bank.
Wood also mentioned the fact that various apps around the use of bitcoin as medium of exchange can be built on top of the base Bitcoin blockchain, although high-value transactions do already take place on the base chain as well.
Musk wants to test bigger blocks on Dogecoin
Shortly after Wood’s explanation regarding the main utility of the Bitcoin blockchain as the foundational layer of a new monetary network, Musk was asked for his thoughts regarding bitcoin’s ability to scale as a means of payment. While Musk has received heavy criticism from some Bitcoin enthusiasts over statements he’s made regarding Bitcoin’s scalability, his position came off as more nuanced in the livestream.
“Bitcoin, by itself, simply cannot scale to be the monetary system of the world at the base layer. But with a second layer, this is possible, depending on how that second layer is implemented.”
Musk added that he holds much more BTC than ethereum (ETH) or DOGE, and that he would like to see Bitcoin succeed. However, he also sees value in pushing the limits of on-chain scaling with Dogecoin.
What Musk gets wrong
The key point that Musk did not attempt to dispute in Wednesday’s discussion was that changing Bitcoin’s base layer at all, especially in a way that increases the cost of operating a full node, weakens the credibility of the rules of the network. Going back to Wood’s points on the value proposition of the Bitcoin blockchain, large changes made at the base layer potentially harm the credibility of bitcoin’s monetary policy and the crypto asset’s utility as a store of value. In the past, the market has been unwilling to risk bitcoin’s utility as a store of value in favor of perceived advantages associated with smaller-value transactions, as was the case with the failure of SegWit2x.
As Lee rightly pointed out, there has already been plenty of debate on this topic throughout Bitcoin’s history, and it’s not like Musk is proposing anything new here. Bitcoin Cash (BCH) even tried to piggyback on top of Bitcoin’s monetary network effects to implement a much higher block size limit and failed miserably. For many, a more practical way to build on Bitcoin’s existing network effects is through the use of secondary-layer networks like the Lightning Network and sidechains, which don’t necessitate the creation of a new, separate cryptocurrency. And to Musk’s credit, he’s also open to the potential of this scaling philosophy.
@NeerajKA Dogecoin Cash is the real Dogecoin. Or is it Dogecoin EV (Elon’s Vision)?— Daniel McNally (@sangaman)
It appears that the “I’m new to Bitcoin and I’m here to fix it” meme applies quite well here. Of course, that tends to apply to nearly everyone when they get involved in the space for the first time, and it’s definitely magnified in this situation due to Musk’s celebrity profile. That said, it’s understandable that Bitcoin users have become annoyed by Musk’s and others’ recent rehashing of old discussions and ideas.