This is a post I wrote last year on another forum before I discovered this community, but recently revisited to see how my thinking has evolved. I think I'm a bit less XRP maximalist now, but my underlying confidence in XRP remains. XRP has become much more decentralized in the last year, and I realize now how loaded that term is.
The debate on the future of XRP is the third rail of crypto politics. Other than Bitcoin vs. Bitcoin Cash, no other topic elicits such polarizing perspectives. From an ideological standpoint true to Bitcoin’s genesis, this is understandable. The community that created Bitcoin values a decentralized, anonymous currency. Between forks and new entrants, there is now significant competition and intense, often personal, debate about the future of crypto assets. This analysis describes Bitcoin’s competitive advantages, and why they are not permanent or insurmountable. More centralized blockchains, such as XRP, are better positioned to create value unencumbered by ideology that hinders mass adoption. This framework also applies to competition between EOS and Ethereum, articulated by Miles Snyder of Multicoin Capital. The future of crypto assets is not winner take all, because of different market niches pursued by various blockchain protocols. However, this framework suggests more growth potential and market capitalization for XRP if Ripple is able to deliver on their value proposition and fend off non-tokenized competitors such as R3.
Blockchain Structural Tradeoffs — Trilemma Decisions
The Monetary Theory Trilemma faced by Central Banks is a useful framework to compare the fundamental structure and tradeoffs crypto assets must choose. In a Trilemma, only two of the three variables can be controlled, forcing an entity to make a choice with tradeoffs.
In fiat monetary policy, governments must decide to choose between free capital flows, controlling exchange rates, and independent monetary policy (interest rates). Wealthy countries have typically opted to allow their exchange rates to the U.S. dollar to adjust, or “float”, in order to have a free flow of capital and the ability to adjust their monetary policy to control inflation. But it’s not one size fits all. Historically, China has controlled capital flows in order to keep its currency relative weak (fixed) to the US dollar to maximize the advantage of its export economy.
Crypto assets face a similar decision and must choose between security, decentralization, and scalability. This was noted in a recent interview with the former lead developer for QTUM, Stephen Ju, who said “The Bitcoin and Ethereum or other blockchain platforms currently, most of them face scalability problems. In the blockchain industry, scalability, decentralization and security — these three cannot work together.”
For the creators and early adopters of Bitcoin, this was a straightforward decision, because they built the bitcoin blockchain specifically for the idea of a nearly anonymous, peer-to-peer transaction network where security and decentralization were paramount. As the network has grown, Bitcoin has had to make difficult choices with the block size debate, competing visions that claim they support the original vision, and resulting hard forks that this analysis argues have been costly. Follow on competitors, including XRP, are not constrained by the same ideology.
If the goal is world-wide mass adoption, scalability is the bedrock that a blockchain asset should start from. Value must be created for consumers and investors who care more about scalability and security and are willing to sacrifice decentralization. Bitcoin has devoted considerable resources to address this issue, and the Lighting Network’s off chain approach may succeed, but it’s a more challenging path to success and is driven by the headwinds of bitcoin’s core value of decentralization.
In the Gallic Wars (58–50 BC), The Romans conquered the Gauls and consolidated Julius Ceasar’s power. Key to this success was Rome’s centralized organization and unit discipline. The Gauls were loosely organized into competing tribes and were known as fierce warriors who fought as individuals on the battlefield. They were ultimately defeated by the more organized, centrally managed Romans, who fielded highly disciplined Legionaries, the premier military units of their era. One formation that demonstrated Roman discipline was Testudo (Latin for ‘Tortoise’) a battlefield tactic in which the Romans closed ranks and covered all sides with shields. This defensive tactic allowed was the antithesis of the Gauls approach to combat, but ultimately won the war. There is a parallel and lesson to be learned in the competing visions playing out in blockchain development today.
Can centralized crypto assets organizations deliver value for consumers as scale better that decentralized networks like Bitcoin? On one hand, there are fundamental advantages that decentralized organizations enjoy. There is no way for any government on Earth to “shut down” Bitcoin. Nor are there key leaders who could be removed that would keep the Bitcoin blockchain from continued development.
Leadership decapitation will never apply to Bitcoin, but there are significant tradeoffs. The hard fork and civil war between Bitcoin and Bitcoin Cash is one of the fundamental side-effects that decentralized blockchains face. This debate has cost time and resources fighting over ideology while not advancing towards the one thing that will lead to mass adoption of cryptocurrency- creating value for the user. As a distributed organization, the Bitcoin community couldn’t agree on the use case and market they were trying to target (peer-to-peer vs store of value) resulting in the hard fork that led 20% of the mining nodes down the Bitcoin Cash fork. Since then, the hard forks continue with Bitcoin Gold, Bitcoin Dark, Bitcoin Prime, etc. These are wasted resources and brand dilution in a competitive market.
Contrast this with the extremely centralized approach of one of the most successful companies of the internet era, Amazon. They have created widespread adoption and value across numerous markets. Jeff Bezos has a very useful framework for strategic decision making, “disagree and commit”. He encourages lively debate within Amazon, but at some point, a decision must be made in order to move forward cohesively and effectively. He might not agree with a course of action, but he can commit if he sees that his key leadership want to go a certain direction. This mindset permeates the rest of the organization. Although everyone might not all agree, they move forward with one common purpose, analogous to a Roman Testudo moving through a battlefield. Bezos credits this philosophy with their ability to move quickly in competitive markets.
Imagine if Amazon lost 20% of its team when they purchased Whole Foods or launched their streaming service? Without leadership, which is by nature centralized, an organization is hindered in how quickly they can respond. Speed and adaptability is a structural competitive advantage Ripple has over the Bitcoin community. Even Bitcoin Cash has an informal leadership structure in Roger Ver that provides a North Star that Bitcoin lacks.
Competitive Advantages of Bitcoin
Despite its lack of central leadership and speed disadvantage, Bitcoin currently enjoys several competitive advantages over XRP and other crypto assets that have allowed it to maintain 35–50% of the total crypto market cap over the last 6 months. While significant, none are permanent, insurmountable barriers for XRP, or other assets, to surpass Bitcoin.
1) First Mover Advantage — Bitcoin was the first cryptocurrency and therefore enjoys a head start on the competition. However, as an open source community, competitors are able to imitate or fork the Bitcoin protocol which would not be possible against an incumbent company with proprietary technology. There are no NDA or non-competes in effect to protects Bitcoin from the competition. The first mover advantage is not a useful a framework for a decentralized, open-source framework.
2) Network Effect — Metcalf law states that the value of a network is the number of participants squared. This suggests that perhaps First Mover Advantage of Bitcoin has led to Network effects creating a defensible competitive advantage. But in the decentralized, fast-moving crypto ecosystem, this network effect is not solid ground. Consider the volatility of the market as a proxy. XRP, ETH and BCH experienced rapid gains in price in 2017 that led to speculation that the “flippening” — replacing BTC as the largest crypto asset by market cap, was imminent. Although this hasn’t yet happened, the lesson learned is that this is a volatile, fluid environment and a large network doesn’t guarantee a sustainable competitive advantage. We are still early in the race and much of the infrastructure to support these currencies is still in its infancy. Partnerships with tech networks for XRP or other crypto assets have the potential to surpass any Network Effect advantage that Bitcoin has enjoyed to date.
3) Brand Recognition — “How to Buy Bitcoin” was #3 on the most Googled “How to” phrases in the world for 2107. This brand recognition and widespread adoption provided the groundwork for futures contracts (see barrier #5). But this brand recognition can’t be easily defended and actually comes with a cost unique to Bitcoin. A private company has legal recourse to defend its brand within the court system. Amazon can sue for infringements on their brand identity. As a decentralized entity, Bitcoin doesn’t have this lever to pull and has spent resources and energy in defending their brand in a very inefficient means. This was highlighted in a recent interview on Peter McCormack’s “What Bitcoin Did” podcast, where James Lopp described the confusion about Bitcoin vs Bitcoin Cash. “At Bitgo we’ve had so much support and engineering resource consumption due to user confusion of sending Bitcoin to Bcash addresses and vice versa”.
4) Gatekeeper Currency — Bitcoin is the default currency that drives the entire crypto economy. It is the entry point from fiat into the crypto asset investing for most investors who want to purchase altcoins. However, many exchanges are offering more altcoin trades for Ethereum. For example, Bittrex offers 192 BTC-Altcoin pairing and 65 ETH- Altcoin exchanges. Developments such as atomic swaps will make it easier to exchange between crypto assets without Bitcoin as an intermediary of the transaction. There is not a compelling reason for the future of all crypto assets to have BTC as the foundation currency.
5) Futures Contracts — The Chicago Board Options Exchange (CBOE) began offering futures for Bitcoin in December of 2017 and the Chicago Mercantile Exchange (CME)followed soon after. This allowed investors to offer futures contracts for Bitcoin, controlling volatility and hedging risk. Although the contracts are settled in fiat, future markets on CBOE and CME provide Bitcoin an investment product that gives it more legitimacy to non-crypto investors and ultimately is intended to reduce volatility. This is a significant competitive advantage to allow institutional money to flow into Bitcoin, elevating the market cap, reinforcing and amplifying Gatekeeper Currency, Brand Recognition, and Network Effect advantages. If Bitcoin is able to maintain this barrier, it’s likely that the flood of institutional money would establish it as a world currency and store of value that would keep it as the dominant crypto asset. However, CBOE has already said they intend to look at other assets to list on their futures markets. “Being in product development our task is to look for new products all the time, so we are constantly evaluating that market, and we are evaluating other cryptocurrencies too”, said Dennis O’Callahan, CBOE’s director for product development in an interview with CoinTelegraph. Although Bitcoin has a temporary, and significant, advantage, this appears to also be a temporary state, not a long-term structural advantage.
Ripple — A Centralized Blockchain Creating Value for its Target Market
Ripple is the antithesis of the Bitcoin approach to building a blockchain network. No mining is required and Ripple is a private company. They depend on a significantly smaller pool of hand-selected nodes, but this is not a deterrent for adoption in their target market. Conversely, this structure is more palatable and adds more value to their target market (banking executives) than a decentralized, anonymous network. There is no compelling evidence that this node centralization results in significantly more risk for a 51% attack for the Ripple blockchain, although potential censorship/central control is a reality.
Early pilots by numerous banks suggest that this approach is working with the adoption of the XCurrent, a first step for XRapid and XRP adoption by banks. A key risk for XRP’s future is that banks will use XCurrent without the follow-on adoption of XRapid and XRP. However, from the perspective of targeting a customer segment and building a product for that market, the effort is more strategic and focused than Bitcoin’s internal debate over a store of value vs. peer-to-peer rapid, cheap transactions. Broadly speaking, if a product is not embraced by the consumer, the company/organization/currency should make it better, or competitors will fill the market demand. If XRP is not adopted by the banking industry, Ripple is better positioned to develop a new strategy, quickly adapt, and respond to the market’s needs better than Bitcoin, to the benefit of XRP.
Centralized vs Decentralized Competition in Smart Contracts Platforms: EOS vs. Ethereum
EOS also has a strategy that decentralization does not add as much value as scalability and speed by adopting a delegated Proof of Stake. This contrasts with the emphasis on decentralization, the value-add for Ethereum. While decentralization and censorship resistance will add value for certain applications of the future, it’s likely that more applications will value speed and scalability for the majority of use cases over censorship concerns or decentralization. An in-depth analysis of EOS is available by Miles Snider of Multicoin Capital. Similar to XRP vs BTC, decentralization will not be as valuable for the mass market as it was to early creators and users.
Conclusion- XRP versus Bitcoin
Maximalists in different crypto tribes tend to view adoption as a zero-sum game that will leave only one winner. A more likely scenario is that many of the crypto assets fail, but several find their respective niche in the market (daily peer-to-peer transactions, store of value (digital gold), international remittance, decentralized smart contracts, etc). However, for each market, once an asset is entrenched the Network effects will eventually become a more formidable competitive advantage.
One of the criticisms of XRP or EOS is that they are more centralized. As argued here, in terms of a scalable, global network this is not a compelling justification against mass adoption. The majority of consumers do not care whether or not a blockchain is centralized. There is more value in reducing the cost and increasing the speed and cost to send money around the world and user experience. These are not tied to an ideology of decentralization or libertarianism. Coupled with the slower decision-making process inherent to a decentralized organization, this shackles how quickly Bitcoin can respond to market forces, and is to the advantage of XRP. For these reasons, the latter will ultimately become a larger, more valuable crypto asset than Bitcoin.