As Bitcoin continues to reach all-time highs, a lot of people are once again wondering why it has any value at all. After all, Bitcoin is not backed by a physical commodity like gold, or the world's most powerful military, as is the case with the USD. Even so, the value of Bitcoin has gone from zero to seventy thousand dollars over the span of 15 years, leading a lot of people to wonder "why"?
How could something that's purely digital and not backed by any goverment or physical commodity be worth so much, and why do cryptocurrencies continue to gain adoption and increase in value? As time goes on, more and more people come to realize the true underlying value of Bitcoin and other decentralized blockchains.
Immutable and Permissionless Transactions
Bitcoin was the first immutable database to ever exist, meaning that it's impossible for a single authority to modify a transaction record after it has been committed to the blockchain. Bitcoin is very different from a Mainframe, Oracle, or MySQL database, whose records can be easily modified at the whims of an administrator.
Bitcoin is also permissionless, meaning that anyone in the world can use its payment network to send money, without having to register with a government or a bank. These novel characteristics of immutability and permissionlessness are what make Bitcoin so valuable. For the first time in human history, you can be the true owner of your money, without having to trust anyone, or hold onto anything physical.
But what if we were to take away the permissionless aspect of Bitcoin, and make it so that people had to request permission to use Bitcoin? Would it be so valuable if that were the case?
Compliance
While Bitcoin continues to protect individuals from irresponsible monetary policy and unjust confiscations, it also rubs governments the wrong way, as they no longer have total control over the movement of money. To appease authorities, a lot of crypto startups now claim to be "compliant", to allow for transaction and account censorship.
For example, a few months ago Solana introduced the idea of token extensions, which give blockchain projects the ability to enforce regulatory compliance on tokens. With these extensions enabled, a user would have to complete a KYC (know your customer) process in order to participate in trading real world assets (RWA), for example.
Furthermore, Houdini Swap on Arbitrum (an Ethereum L2 solution) also recently announced that it has enabled compliant transactions.
https://twitter.com/HoudiniSwap/status/1778534440052097314
- HoudiniSwap
These developments in crypto compliance beg the question, if a blockchain is permissioned, what sets it apart from a traditional database? The argument is that compliant blockchains are essentially very inefficient distributed databases, something that could be easily replaced with a more efficient Oracle or MySQL database.
Transparency
The difference between a permissioned public blockchain and a traditional database is that one is transparent, while the other is not.
Despite the fact that transactions could be censored on a permissioned blockchain, it would have to be done so transparently, for the entire world the see. Contrast this to the black box of traditional finance, where we haven't a clue if a bank suspends an account, or modifies a record in their database.
For example, some DePIN tokens on Solana could be frozen by a central authority via the freeze authority account. However, if such an action were to be taken, it would be immediately known to the entire community, and they would be demanding an explanation on social media.
In a previous article, we discussed the advantages and disadvantages that come with transparent cryptocurrencies.
Permissionless Vs. Compliant
In this post we covered that Bitcoin has value because it was the first immutable and permissionless payment system to ever exist in history. Those in power don't like the idea of anyone in the world being able to use a payment network without approval, so some startups are developing compliant blockchains.
While we may see both permissionless and compliant blockchains existing in harmony with each other for some time, once people get used to the idea of being the true owner of their assets, compliance-based chains may not get the traction required for long-term success.
If you learned something from this article, be sure to check out my other posts on crypto and finance here on the HIVE blockchain. You can also follow me in InLeo for more frequent updates.
Until next time...