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December 2024

Bitcoin’s Emerging Moat

By | In my opinion | No Comments

Good Day,

The classic definition of emergent, as coined by philosopher G. H. Lewes in 1875,

is something which emerges from the interaction of simpler components, but these phenomena cannot be fully understood just by analyzing the components themselves.

Instead, the whole system exhibits properties and behaviors that are novel and unpredictable based on its individual parts.

This definition emphasizes several key aspects of emergence:

1. New properties: Emergent properties are novel and not present in the individual components.

2- Interaction: They arise from the interaction of unlike components within a system.

3- Irreducibility: The emergent property cannot be reduced to or fully explained by its constituent components.

4- Unpredictability: The emergent property is not easily predictable from knowledge of the individual components alone.

A moat in the context of Bitcoin is a deep & unique advantage that has arisen through its unique properties & the assurances it provides. These fundamentals create user demand, provoking self-strengthening feedback loops.

Both Bitcoin & its users are independent systems in their own right yet converge to produce what I’d describe as emergence.

As Bitcoin’s userbase scales in time, so too does trust in its technical operation.

That’s because the more transactions it processes, verifies, & confirms, the deeper embedded its ledger becomes within the Bitcoin system, thereby making it much more difficult to change or contest.

In doing so, it further reinforces its censorship resistance, which in turn reinforces its immutability & scarcity.

The more dependable this loop becomes, the more utility for Bitcoin is built out, naturally. Momentum in adoption ensues; demand increases globally, effectively completing yet another turn of this expanding circle.

Now also consider that Bitcoin is a peer-to-peer digital monetary network with a purpose to solve many of today’s unfavorable fiat monetary conditions; thereby, as the value of each bitcoin increases, it seemingly justifies it as a solution to prospective interests & users alike, adding another powerful feedback loop.

Through a combination of factors like network effects, data accumulation, inimitable properties, & user loyalty, Bitcoin is poised to exponentially grow even stronger, in my opinion.

It would be remiss of me to omit the power of cumulative advantage that Bitcoin has established for itself also. More on that in the below X link:

https://x.com/MikeCautillo/status/1326467376771182592

The cumulative advantage phenomenon is especially important as it relates to the distinction between Bitcoin & what is marketed as other “crypto”.

More on that here:  https://www.linkedin.com/pulse/beyond-pale-mike-cautillo-q1trc/?trackingId=jhGtye%2FuT9mrlaLuq%2F7FhQ%3D%3D

Buffet has often spoken about moats in the business sense. Identifying lasting moats in the companies he invests in has been the cornerstone of his unparalleled financial success.

Although unlike traditional moats that a business builds through control or deliberate pricing/positioning of its products or services, an emergent moat as per Bitcoin forms spontaneously, grassroots even, as its network becomes increasingly effective.

Here are some of Bitcoin’s distinct properties that fundamentally contribute to its emergence:

Immutability: Bitcoin’s blockchain is a decentralized & publicly verifiable distributed record, making it censorship resistant to tampering or revision. An increasingly probable assurance of permanence builds immense trust as it proves historical transactions in a transparent way.

Free & Open Source Software (FOSS): Bitcoin is software that is both free to use & whose source code is openly available for anyone to inspect, modify, and distribute. This model promotes collaboration & transparency.

Network Effects: The more people use & trust Bitcoin effectively, the stronger the network becomes, creating a positive feedback loop. New participants are attracted to its growing purchasing power, security, & adoption, reinforcing its value.

Decentralization as Security: Unlike traditional financial systems controlled by a central authority, Bitcoin’s peer-to-peer nature spreads its security across a vast network of nodes & proof-of-work mining operations. This decentralization coupled with its ASICs enhances its moat, as there is no single point of failure.

Scarcity and Value Proposition: Bitcoin is designed with a fixed supply cap of 21 million coins, making it inherently scarce & more resistant to inflation than traditional currencies. This scarcity, combined with its growing user base, boosts its long-term value. Albeit Bitcoin has a finite supply, it’s highly divisible enough to distribute across billions of user’s demands.

Digital Gold: Bitcoin is increasingly seen as a store of value similar to gold, with additional advantages like ease of transfer, divisibility, & a secure, digital ledger. This positioning solidifies its status as a “moat” by distinguishing it from other assets.

Trust and Transparency: The public, verifiable ledger allows anyone to audit the transactions & verify the history of Bitcoin, fostering trust in a system free from the manipulation or obfuscation that can occur in centralized systems.

Economic Resilience: Bitcoin’s decentralized structure makes it resistant to censorship & less vulnerable to geopolitical risks, further enhancing its utility as a global financial asset & bearer instrument.

Path Dependence: The development of Bitcoin’s code, network, & ecosystem over the years creates a form of “path dependence,” where its early adoption & ongoing technological improvements contribute to its competitive edge- furthering its advantage.

User Growth and Utility: With its ledger history & verifiable transactions, Bitcoin has steadily attracted a diverse user base, from retail investors to large institutions, strengthening its position as an essential financial asset.

Deflationary Mechanism: Bitcoin’s declining block reward schedule creates a supply shock over time, incentivizing holders & long-term investment, which adds to its moat by increasing scarcity & user loyalty.

Scaling: The development of Layer 2 solutions & complementary technologies (e.g., the Lightning Network) boosts Bitcoin’s utility for microtransactions & everyday use, supporting a broader user base and enhancing its moat.

Emergent moats can be quite powerful. In part because they become less breakable & more resilient as they increase in size. They’re often fundamental innovations that take on a life of their own—a life humanity cannot see themselves doing without.

They’re also innovations that can efficiently distribute resources at scale, insofar as the smaller local system is also the architecture for the larger global system—fractal-like.

Think of electricity, information theory, the internet protocol, etc.

All these revolutionary discoveries are now ubiquitous & near impossible to abrupt on a global scale.

Even if one were to imagine the very unlikely scenario of an EMT-like strike severely disrupting communications, there exists immense incentive to “reboot” prior states asap, as mass suffering ensuing would be a near certainty & coordination near impossible, thereby presenting very dangerous environment for both infrastructure & its users.

Throughout his storied career, the ever-brilliant systems thinking pioneer, Dr. Russell Ackoff, believed that creativity was an emergent property of complex systems—meaning it arised naturally from the interactions within the system rather than being imposed from above.

He argued that organizations & technologies should be designed to allow such emergent creativity to flourish.

The absence of gatekeepers in Bitcoin’s ecosystem has indeed allowed such creativity to emerge. By removing intermediaries, Bitcoin & its users are thus far flourishing like a forest would, on fertile ground, seeding insatiable curiosity & innovation—growing fresh trees of prosperity for what are hopefully many future generations to come.

I’m grateful for you taking the time to read my notion today & throughout 2024. Merry Christmas & all the best to you & your loved ones.

Until 2025,

Mike Cautillo