Bitcoin stands as the inaugural and most widely recognized cryptocurrency, holding the largest market capitalization. Nevertheless, numerous proponents of Bitcoin emphasize a significant distinction between Bitcoin itself and the broader cryptocurrency landscape. Michael Saylor, the founder of MicroStrategy and a prominent advocate for Bitcoin, articulated this perspective during an appearance on CNBC’s “Squawk on the Street.” He remarked, “Speaking for all the bitcoiners, we feel trapped in a bad relationship with crypto, and we want out.”
What accounts for such a pronounced separation between terms that seem closely intertwined both in language and technology? It is important to note that all cryptocurrencies are constructed on blockchain technology, which facilitates the transfer of digital assets via a decentralized network that continuously maintains and updates the expanding ledger of transactions.
The fundamental principle of “bitcoin, not crypto” is rooted in the idea of decentralization. To date, no other blockchain has been able to match Bitcoin in this regard. Nevertheless, it is possible to harmonize this viewpoint with the presence of alternative blockchains by acknowledging the distinct functions they fulfill.
Decentralization Is A Spectrum
Decentralization serves as a remedy for the shortcomings associated with central authorities. Bitcoin represents a groundbreaking advancement in establishing a genuinely decentralized system for value transfer, relying on cryptographic principles and economic incentives—specifically, the issuance of new bitcoins and transaction fees directed to miners. In exchange for their efforts, miners allocate resources towards specialized hardware and consume significant amounts of electricity. Their primary task involves solving proof-of-work for each block, thereby ensuring the security of the blockchain. Miners are driven by the imperative to maintain the safety, functionality, and, crucially, the censorship-resistance of Bitcoin.
An alternative to Proof of Work (PoW) is Proof of Stake (PoS), which necessitates that validators stake the blockchain’s currency to demonstrate their integrity. This consensus mechanism and its various adaptations have become increasingly favored among blockchains due to their capacity for enhanced scalability. Nevertheless, PoS has the potential to foster an oligarchic structure. The greater the number of coins staked, the more likely one is to successfully add a block and receive a reward. This accumulation of wealth enables further staking of additional coins. In contrast to Bitcoin miners, whose influence remains static after mining a block, PoS validators have the opportunity to expand their power.
Moreover, concerns regarding centralization are not limited to the PoS consensus. Issues such as a limited number of nodes, liquid staking protocols that aggregate user funds, nodes operated by centralized entities, substantial hardware requirements, and centralization risks associated with maximal extractable value (MEV) practices represent significant challenges that many blockchains encounter.
On the Ethereum network, which is recognized as one of the most decentralized blockchains aside from Bitcoin, approximately 35% of staked assets are attributed to the top three decentralized liquid staking services, as reported by Dune Analytics. An additional 20% is derived from the leading three centralized services. Furthermore, 69% of Ethereum nodes are managed by three centralized providers, while 90% of the blocks are organized by merely three builders specializing in MEV optimization. The Ethereum blockchain, with a size of 1.16 TB, is nearly double that of Bitcoin’s 604 GB, complicating participation for average users.
Indeed, many blockchains exhibit a significantly lower degree of decentralization and, consequently, reduced resistance to censorship compared to Bitcoin. Furthermore, in contrast to Bitcoin, which Satoshi Nakamoto entrusted to the community within two years of its inception, the majority of other blockchains remain closely associated with their original founders. This group of insiders, which includes early investors, frequently maintains substantial control, particularly through the possession of pre-minted coins, thereby further consolidating their wealth and influence.
It would be premature to conclude that the entire cryptocurrency sector is without value. Decentralization exists on a continuum, and even platforms that are less decentralized provide users with greater freedom and control compared to conventional web services. This characteristic enables them to cater to a range of applications beyond mere financial transactions.
Not All Cryptocurrencies Are Currencies
Bitcoin’s main objective is to establish and maintain a form of independent currency. As an increasing number of individuals trust bitcoin as a substitute for conventional currencies, its value rises correspondingly.
Most other blockchains, such as Ethereum and Solana, were developed as versatile platforms for smart contracts. Their primary objective is to facilitate the creation of decentralized applications, commonly referred to as dapps. By leveraging these blockchains, the forthcoming phase of the internet, termed Web3, has the potential to introduce innovative applications across various sectors, including gaming, social media, finance, commerce, and more.
From this viewpoint, ether, the native currency of Ethereum, should not be classified merely as a cryptocurrency. Although it can be traded or invested in, ether serves more as a utility asset within the Web3 ecosystem rather than as a general medium of exchange. Its main function is to support the Ethereum blockchain by acting as a payment method for transactions and providing incentives for validators. As the popularity of Ethereum-based dapps continues to rise, the demand for ether is expected to increase to accommodate transaction fees.
Smart contract platforms are typically managed by founding teams that function similarly to conventional businesses. These teams address challenges such as securing funding, resolving technical issues, fostering community engagement, and promoting their offerings. The worth of the native coins associated with these blockchains is indicative of the quality of their efforts, which separates them from the concept of a truly independent currency.
Within the Web3 ecosystem, many view such organizational structures as essential for driving innovation, a perspective that is difficult to contest. Nevertheless, prioritizing efficiency over decentralization contradicts the principles of the cypherpunk movement. This situation further exacerbates the distinction between Bitcoin and other cryptocurrencies.
Blockchain-Based Tokens
In addition to native cryptocurrencies such as Bitcoin and Ether, blockchains accommodate a diverse range of tokens, each serving distinct purposes and exhibiting varying degrees of decentralization. These tokens encompass stablecoins, memecoins, protocol tokens, and numerous other digital assets that can be readily generated through smart contracts. While these tokens coexist within the blockchain ecosystem alongside native coins, their value is contingent upon the specific project that created them.
For an extended period, tokens have been a source of contempt for bitcoin maximalists, who regard all cryptocurrencies other than bitcoin with disdain. A multitude of scams associated with these tokens has inflicted considerable reputational harm on the cryptocurrency sector, adversely affecting bitcoin as well.
However, with the emergence of Ordinals and Runes, certain bitcoin enthusiasts have begun to reevaluate their perspectives on tokens. These protocols, which attribute value to satoshis (the smallest units of bitcoin) or facilitate the creation of tokens on the Bitcoin network, have ignited conversations regarding innovative applications for the blockchain.
Following the initial excitement, both protocols are now experiencing only limited adoption. Since reaching their peak in 2023, daily Ordinals inscriptions have decreased from more than 400,000 to approximately 40,000. Similarly, Runes etchings have plummeted from over 35,000 in April to fewer than 400. Currently, bitcoin’s primary function as a superior form of currency remains its most significant application, overshadowing other potential uses.
In summary, bitcoin continues to excel in its decentralization and serves primarily as an alternative currency. In contrast, the wider cryptocurrency landscape appears willing to sacrifice some degree of decentralization in pursuit of innovation and new applications. Consequently, bitcoin and the broader crypto ecosystem are becoming increasingly differentiated.
