The Bitcoin Mail #3 - Bitcoin and Decentralization
Decentralization in Bitcoin, paving the way for Decentralized Financial Applications.
Hello and welcome to the third edition of The Bitcoin Mail, the newsletter to keep you up-to-date with what's happening in the space, and learn a few things about Bitcoin.
If you haven't read them, I advise you to go through the previous posts here first.
In The Bitcoin Mail #3, we'll talk about decentralization in Bitcoin and its impact on new financial applications. Enjoy!
Latest News in Crypto
Cryptocurrency Market Overview
On Monday the 8th, Bitcoin broke its previous all time high of $41,970 from January 8th and is now at around $47,000.
In the meantime, altcoins' market capitalization went past its previous high of $455B, actually starting a new uptrend. Bitcoin dominance has been staying in the 61-64% range, hesitating between taking the lead for cryptocurrencies or letting altcoins shine.
Ethereum finally broke the $1450-1500 mark, and is now sitting at around $1800.
Tesla adds $1.5B in bitcoin to its balance sheet
The big news of these past two weeks has been Tesla adding $1.5B in Bitcoin to its balance sheet. The company also plans to accept bitcoin as payment for its cars in the near future.
As we discussed in TBM #2, bitcoin is considered a reserve asset by more companies by the day. Seeing one of the most innovative company and the wealthiest man in the world both endorse the digital currency is definitely a game changer.
Now we can wonder who will be the next major actor to buy Bitcoin: another big company? A country? A bank?
The Fed Published a Research Paper on DeFi
On February 5th, a research paper titled "Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets" has been published on the Fed's website, showing clear interests in DeFi from US central bank.
The paper is a rather in-depth piece, perfect to understand the foundations of DeFi.
While Bitcoin fights for to be recognized as a reserve currency, the adoption of decentralized financial protocols seems to be finding its way much faster into people's minds. In fact, adoption hasn't stopped growing since June 2020, with the value locked in these protocols going from $1B to more than $40B recently, an impressive x40 in 6 months.
Topic of the Week: Decentralization in Bitcoin, paving the way for Decentralized Financial Applications
In today's topic, we'll see what decentralization is and how Bitcoin was effectively the first financial application of a decentralized protocol: decentralized money & store-of-value. As such, it started a profound trend in decentralization of financial applications, and paved the way for the boom we see today in this application of cryptocurrencies technologies.
Advantages of decentralization
No Single Point of Failure
Most services we use today are centralized: they are run by companies or institutions that we trust to do what's in our best interest. In exchange of that trust, they have total control over the services they provide, and they become a single point of failure. If the company is down, you can't access the services you were relying on. A real-life example happened a few weeks, ago with Google. There servers went down for a couple minutes, and a significant amount of businesses lost access to their emails, calendars, were cut on calls, etc .. This is because Google is centralized and has a single point of failure. Decentralized systems, such as Bitcoin or the internet, have multiple access sources so that if any fail and others will take on the work.
No third-parties: reducing costs & inefficiency
In some cases, using centralized third-parties also adds cost and inefficiency. The financial system we use today is one such example. In addition to actually holding people's money, banks and financial institutions create inefficiencies as soon as transactions need to happen outside their closed systems.
Decentralization in Bitcoin
Bitcoin is the first decentralized money protocol ever created. It is decentralized in three core aspects: access, rules, and in how it operates.
Decentralized access
First, Bitcoin is a completely open protocol. Anyone in the world with access to internet can connect to the Bitcoin network and start using it to send bitcoins. The implications of having a payment system and currency equally accessible for everyone in the world is just incredible.
Decentralized rules
Then, the rules of the system are decentralized. There isn't a single entity responsible for governing Bitcoin and deciding how it should work. These rules are public and everyone can see them. A broad mix of people from all around the world are continuously having discussions about those rules so that changes or improvements can be made. To be implemented, these changes need to be accepted by the majority of the network.
Decentralized operations
Finally, Bitcoin is also decentralized in how it operates on two levels.
After gaining access to the network, anyone can start verifying transactions by running a node. (more on what a node is here) This is very accessible for anyone being a little tech savvy, and only require very few resources.
In theory, the process of confirming transactions and securing the blockchain, called mining, is also accessible by everyone. In practice, it is done only by dedicated mining companies with specific hardware and resources. It is still decentralized and miners are located all over the world, though highly concentrated in China.
Paving the way for Decentralized Finance (DeFi)
By actually achieving decentralization of money over the internet, Bitcoin laid the foundations necessary to build all types of decentralized financial applications online.
Core financial sectors like trading, lending, or borrowing, are being disrupted by decentralized protocols already functional today. In the meantime, new business model and applications of these decentralized technologies are being explored, which should lead to key innovations in the years ahead.
I hope you enjoyed this third edition of The Bitcoin Mail. If you have any suggestion about the newsletter or want to know more about these topics, don't hesitate to reach out!
Have a good weekend and see you in two weeks time 👋🏼