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What Makes Up the Bitcoin Economy?

What do we mean when we say, "the Bitcoin economy?" What comprises it? Trust Machines explains.
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What Makes Up the Bitcoin Economy: Abstract 3D Bitcoin and Lens Shown
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Bitcoin has revolutionized the way we think about money and launched us into a new age of financial infrastructure.

Unlike our traditional fiat currencies, this 14-year-old virtual currency comes with its own self-sustaining ecosystem, where every network interaction contributes to the stability and governance of the network.

But what exactly is the Bitcoin economy and why do people refer to it as “circular?”

Let’s take a deeper look into Bitcoin's economy, its benefits, its challenges, and its potential to dominate the future of the blockchain landscape.

What makes Bitcoin valuable?

“Value” is kind of a subjective and arbitrary concept. In most cases, you’ll find that something is “valuable” to a person when it has relevant use cases or holds some level of importance to them.

Whenever the conversation of Bitcoin’s value comes up, it often devolves into a debate of whether or not bitcoin can be classified as “money” or “a legitimate currency”. The most prudent starting point for these discussions, then, would be defining money and the nature of currency itself.

What is money?

Money has many definitions, but the simplest way of identifying it is to look for the three core functions that give it value in modern society:

  • Medium of exchange
  • Store of value
  • Unit of account (Measure of value)

Taking it a step further, in addition to these three core criteria, there are six key attributes used to determine an asset’s viability as a currency for an economy:

  • Scarcity
  • Divisibility
  • Acceptability
  • Portability
  • Durability
  • Resistance to counterfeiting (uniformity)

Over the centuries, we have seen money evolve as human societies grew and evolved. From barter, to precious metals, to paper (fiat) currencies, to digital currencies… our monetary systems have always been dictated by our needs at the time and the resources that were readily available to us.

With bitcoin easily fitting each of these descriptions, the answer’s pretty clear then: yes, bitcoin is a form of money.

The difference with Bitcoin

The question that normally follows here is, “Why use bitcoin as money when our financial institutions already have money that works?”

The simple answer: because bitcoin works better.

With money backed by nothing more than faith (“fiat”) in the governing bodies of the central bank that issues it, there can be no real scarcity. As we’ve seen in recent years, inflation is real and the Fed’s money printer does, in fact, go brrrrrrr.

And having a single authoritative figure in charge of the decision-making for an entire economy’s currency leaves room for corruption and non-transparency.

With the Bitcoin network, powered by the computational energy of Bitcoin miners, the world finally had an option that was transparent with distributed authority among its participants.

John Law, a notable Scottish economist, stated that “everything receives a value from its use, and the value is raised [or lowered], according to its quality, quantity and demand.” He also wrote, “money is not the value for which goods are exchanged, but the value by which they are exchanged.” Here, he essentially claims that the truest measure of a currency’s value is its demand and its ability to stimulate activity in and around an economy.

Going by Law’s standard then, the increasing value of Bitcoin is confirmed by its rising demand (increasing amount of active network usage), which stems from its high quality (practical transactional utility with high security for users) and limited quantity (a scarce supply of only 21 million).

The Bitcoin Economy

The Bitcoin blockchain has two components:

  • An economy (the network and its ecosystem),
  • The money that runs that economy (bitcoins, the currency).

The "Bitcoin Economy" refers to the ecosystem of individuals, businesses, and services that use and interact with Bitcoin and the broad range of technologies surrounding its base layer.

This economy encompasses every network action, from mining, to trading, to the development of new technologies and applications built for Bitcoin.

What makes it circular?

Bitcoin exists outside any of our current global financial infrastructures. While many still associate Bitcoin with these systems, it’s its own entity, facilitating its own user interactions and economic activities, completely independent of our fiat systems.

And it’s important to remember that Bitcoin wasn’t designed to accompany the fiat system; it was made to replace it. This means that inevitably, the two systems would be in competition for global market share.

This new financial system facilitates all actions on its network, with its only fiat interactions being the onboarding and offboarding processes. This means that aside from entering or leaving the economy itself, everything of value (assets, data, information, etc.) remains in the ecosystem and is continuously cycled between users.

Every network action starts and ends within Bitcoin.

The challenges of development

With fast and inexpensive global transactions, paired with the ability to store your wealth in a deflationary asset, Bitcoin has not only brought financial inclusion to many unbanked and underbanked communities, but has also provided a means for people to hedge against the inflation that we see with today’s fiat currencies.

For years, there have been discussions on expanding the scope of Bitcoin’s functionality, but core developers have always been slow and methodical in their approach to changing Bitcoin’s core design… and for good reason. This ensured that Bitcoin’s core values (decentralization, security and stability) were never compromised for the sake of “progress.”

In addition to this slower development, there have been several challenges that needed to be overcome, like:

  • Wide-scale, global adoption
  • Mainstream acceptance by merchants, consumers, and governments
  • A consensus mechanism that was difficult to efficiently scale
  • Short-term volatile movement with the price of Bitcoin
  • Regulatory uncertainty and inconsistency

These challenges didn’t stop developers and builders from getting to work, though.

The new era of Bitcoin innovation

In recent years, Bitcoin’s ecosystem has been rapidly growing, as developers find solutions to expand Bitcoin’s functionality without compromising its security.

A study by The Block Research shows that these innovations, born out of the need for more development within Bitcoin’s ecosystem, often fall into two main categories:

  • Currency/asset innovation
  • General-purpose innovation

For Bitcoin’s “currency innovation,” we see projects like the Lightning Network, an L2 solution built on top of Bitcoin that facilitates high volumes of faster, more efficient Bitcoin transactions, directly improving the base layer’s inefficiency with smaller payments.

While improving the currency aspect had been the primary focus in Bitcoin’s earlier years, recent developments have seen more attention shift to assets and general-purpose innovation. Due to Bitcoin’s lack of core functionality in these areas, blockchains like Ethereum have been dominating these sectors for years.

This is where solutions like the Liquid Network, RSK and Stacks come in. With the Liquid Network, we see more of a focus on the issuance and settlement of Bitcoin-based assets, like security tokens and stablecoins. Meanwhile, projects like RSK and Stacks have introduced the possibility for things like DeFi, NFTs and smart contract development within Bitcoin’s ecosystem.

The decentralized nature of the network is reflected in the variety and diversity of these many network contributions.

With these (and so many more) innovations steadily closing the gap between Bitcoin and other dominant blockchains in the space, the one factor setting Bitcoin apart from the rest is its superior security.

Rapid development has become the norm in the space, with many projects adopting the “move fast and break things” ethos of today’s tech giants, coming at a great cost to their security.

With the increasing user appetite for these (currency, asset and general-purpose) innovations in the crypto space, these Bitcoin solutions present significantly broader utility to users with vastly lower risk.

What’s to come for the Bitcoin Economy?

To sum it up in one word: growth.

As it stands, Bitcoin and other cryptocurrencies currently make up a minuscule percentage of the global economy - the hundreds of billions of dollars in the crypto space are just a small fraction of the tens of trillions in global fiat currencies and traditional assets. And despite its increasing user activity, bitcoin’s still not widely accepted as legal tender, with its high short-term volatility often painting it as a risky investment.

If you zoom out and look at the broader picture, though, you see the image that Bitcoiners see.

Bitcoin has only been around for about 14 years - just a blip in the timeline of human history. And in this short time, it has become a force of nature, bulldozing along the natural evolution of money and technology.

Fiat is slowly dying - we see glimpses of it every day. And with each story of a failing currency or a collapsing economy, more people are willing to “take the risk” on Bitcoin because they don’t have much else to lose. 

The potential for growth of the Bitcoin economy is significant. Still unsure? Well, just look at some of the data and stats:

  • The global cryptocurrency market cap sits at over $1T, with Bitcoin alone being almost 50% of that value.
  • Only around 4.2% of the world's population owns and uses crypto (meaning even less use Bitcoin).
  • Bitcoin’s daily transaction volume in recent years often exceeds 200,000.
  • Over 40% of global institutional investors either own bitcoin or have some desire to invest in the network.
  • Companies, like OpenNode and Strike, have developed solutions that make it easy for merchants to accept Bitcoin payments.
  • Decentralized solutions, like LNSwap (a Trust Machines product) and Bisq, allow for direct peer-to-peer trading without centralized authorities.
  • Other projects, like Sovryn and Arkadiko, have brought decentralized financial services (DeFi) to Bitcoin’s ecosystem.
  • NFT marketplaces, like Gamma, have become a hotbed for the new wave of NFT degens.
  • New innovations, like Ordinals (data inscriptions on satoshis) and sBTC (a decentralized, two-way Bitcoin peg), are introducing never before seen Bitcoin functionality.

All in just 14 years.

And everything in the Bitcoin economy comes full circle. By design, Bitcoin will increasingly rely on revenue from transaction fees to incentivize the miners that secure the network. More development leads to more network interactions, leading to more transaction fees, which creates more mining incentives, increasing the network’s security and encouraging more development and usage.

Thus, increasing the accessibility of the Bitcoin blockchain is a key step in unlocking the next massive wave of adoption, as it would undoubtedly circle back to the original ethos of crypto (security through decentralization), leading to more market share for Bitcoin and its blossoming economy.