HOME PERSPECTIVES The Path and Logic from Weak Consensus to Strong Consensus

The Path and Logic from Weak Consensus to Strong Consensus

   Silver Xie  |   2020-02-10

What's one of the most successful values in the past 10 years? I would not hesitate to choose Bitcoin instead of universal value, democracy and freedom. By the time I graduated from university, I witnessed that Bitcoin still had a very weak consensus, and few people knew the Bitcoin itself. But Bitcoin had plenty of loyal fans, which meant Bitcoin could be a surprise to them some day.

 

At that time, the price of Bitcoin was very volatile, but after several years of development, the consensus of Bitcoin network has become very strong, and the price has also stabilized a lot.

 

Bitcoin, as the most widely recognized one among many cryptocurrencies, has a very special status and is currently the only SoV (Storage of Value) cryptocurrency. From the perspective of cryptocurrency market value and long-term technology development, the future DeFi cornerstone will be SoV (Storage of Value). Bitcoin has dominated almost 70% of the global cryptocurrency market.

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This involves a very fundamental consideration, why does the market value of Bitcoin account for cyclical fluctuations, with a minimum of 40% to 50%, it will rise to 70% in a few years, why does the value of digital assets return to Bitcoin again and again ?


The Gold,US Dollar and Bitcoin

Let's look at the basic theories of Bitcoin from another perspective. As one of the ultimate optimists, I conclude that Bitcoin will dominate humanity's biggest consensus shift.

 

Until now, the biggest consensus of mankind is gold. Why does everyone love gold? Throughout the history of human finance, from the heavy metal standard to the gold standard and the successor, the Bretton Woods system, eventually fell apart.


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When Bretton Woods System broke down, the link to gold was severed, but U. S. dollar still relied on gold as a strategy. We can say that the biggest consensus of mankind right now is still gold.

 

So, what is human's biggest consensus shift? The gold consensus has transformed into the Bitcoin consensus, and this is the biggest human consensus shift.


Biggest Consensus Shift

In the history of gold mining for thousands of years, the mining cost has risen linearly, but the mining cost of Bitcoin has increased exponentially, and its growth has no external interference factors and the pattern follows mathematical principles.

 

Bitcoin production is halved every 4 years. The halving of the market will make mining owners reluctant to sell, which will lead to a wave of market growth. Even if miners do not expand the computing power of Bitcoin in 4 years, the mining cost of Bitcoin will double every 4 years, so will the Bitcoin price.

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We assume that the person holding Bitcoin is a Bitcoin believer, the number of Bitcoin holders doubles every 4 years. Driven by the exponential function, this consensus group will soon exceed the number of gold holders.

 

According to the current number of Bitcoin holders can be calculated with a simple mathematical derivation. After a simple calculation, by 2043, the number of global Bitcoin holders will exceed the gold holders, which means that the greatest change in human consensus will come in 23 years.

 

I don't know if you have heard“Bitcoin Difficulty”before. What is Bitcoin Difficulty? Difficulty is a measure of how difficult it is to find a hash below a given target. The Bitcoin network has a global block difficulty. Valid blocks must have a hash below this target。

 

And I still need to introduce the Stock-to-Flow (S2F) model and the evolutionary theory by Stephen Jay Gould to demonstrate why humanity's biggest consensus shift will happen soon.

 

As we know, Stock-to-Flow (S2F) is a relatively recent development in crypto TA and has two concepts of“stock”and“flow”.The S2F is a number that shows how many years, at the current production rate, are required to achieve the current stock. The higher the number, the higher the price. Therefore, everyone understands that there is such a consensus.

 

The index used to quantify the scarcity of assets can be called the "difficulty " of the assets.

 

What is the first consideration if you want to invest in real estate? The answer is Location. Because everyone understands that only fine location is relatively scarce.

 

In human history, the difficulty of many currencies is obviously insufficient, and it is easy to fall into the "cheap currency trap". The most typical example is silver. During the Ming and Qing empires in China, europeans consumed a large amount of silver during the trade with the them, and the price of silver would rise. However, with the discovery and mining of silver in the Americas, the silver output increased significantly and the annual supply Increasingly, the difficulty of silver is continuously decreasing, the spiral of price decline appears, and silver gradually withdraws from the standard currency. However, gold will not fall into this "cheap currency trap", the price of gold will rise, and its output will not rise significantly, ensuring the difficulty of gold.

 

Similarly, Bitcoin will not fall into the "cheap currency trap", and as the price of Bitcoin rises, its output will decline, so that Bitcoin's difficulty will become greater and greater.

 

But what is the relationship between Bitcoin price and its S2F difficulty? First of all, we must understand that the increasing difficulty of Bitcoin S2F is an inherent property, which is mathematically defined and will never change. It can be seen from the above figure that Bitcoin difficulty and its total market value conform to linear regression. To understand why the total market value of Bitcoin always falls near this regression line, it is like figuring out why a drunk man always lays home on the way.


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The evolutionary theory by Stephen Jay Gould is a very classic explanatory model in the stock market. The stock price is like a drunkard walking, and its course is tortuous and unpredictable. Although this drunk man walks, and the path is winding, but the drunk man knows how to go home. In the long run, the drunk man has a path to follow. By the way, the bitcoin price is unpredictable in the short term. In the long run, the Bitcoin price has its own path that is bitcoin difficulty to follow even the difficulty continues to grow.

 

Historical data conforms to such a linear regression, then the future price can be predicted based on the linear regression.

 

According to the model inference, the third Bitcoin Halving is estimated to come on May 2020. After halving, in the next 4 years, the price of Bitcoin will rush to 70,000-90,000 US dollars. The fluctuation experienced in the middle is the way the drunkard walks. This linear regression is like a guide for the drunkard to go home.


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The above is a theoretical deduction. From a practical perspective, it can also make people think deeply. Let me give you a unique perspective on the problem. I call it " The inequality between the digital asset volume and the right to speak". The above picture is a comparison of various assets. Encrypted digital assets are only over $ 0.2 trillion, which means that encrypted digital assets are only one thousandth of real estate assets.

 

Some people would say, Bitcoin even the whole cryptocurrency industry is overhyped. Yes, the numbers don't lie. However, there are always some hidden laws in this world. The volume and the right to speak are basically equal. The development of the encrypted digital economy is an incremental system, while many real estate are stock systems, and economic vitality comes from incremental.


The Winner Takes All

The next question to answer is why encrypted digital assets especially Bitcoin have a trend of " winner takes all".


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We all know that Bitcoin is just a simple PoW coin with a first-mover advantage, why can it eat up the value of countless outstanding late-release projects?

 

After 11 years of ups and downs, Bitcoin has gone from a weak consensus to a strong consensus today. In the process of becoming stronger, it has continuously devoured the market value of all cryptocurrencies. The Bitcoin will eventually be the dominator of cryptocurrency market.

 

In fact, the core of Bitcoin's consensus strengthening is its rising price. Even in the eyes of Bitcoin optimists, Bitcoin has no price, or the price of Bitcoin is 1BTC = 1BTC. The Bitcoin ultimate optimists will doubt their beliefs if the price fails to rise.

 

If we want Bitcoin prices to rise all the way, there is a simple principle of the circulation ratio of bitcoin should be continuously reduced, bitcoin will be mined every day, but there are not many real flow to the secondary market for trading, why? There are two main reasons.

 

On the one hand, bitcoin ultimate optimists hold bitcoin and use the automatic investment plan. On the other hand, everyone's perception is costly, and it is difficult for many new entry funds to get to know all kinds of things. Many people just go straight to invest Bitcoin. Therefore, although bitcoin can be mined every day, the circulation ratio is constantly decreasing, which causes the price of bitcoin to rise gradually, and the halving of the market is the most important factor.


 

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After so many years of development, everyone should understand the rules of encrypted digital assets. Bitcoin is the winner takes all and will always come back every three or four years to devour the market value of other encrypted digital assets. In fact, the logic behind it is also very simple. which is, the requirement for maximizing the value of the network is that everyone becomes a node in the network.

 

As a new value network, Bitcoin has the same network effect as the information network. Only when everyone becomes a node of this network can the maximum value of the entire network be exerted. Therefore, those projects that call themselves second-, third-, and fourth-generation blockchain technology are basically projects that have network isolation effects, so it is also common sense that their market value will be swallowed. If there are projects that do not isolate the network, then everyone must give a look.

 

The above is the fundamental logic of consensus from weak to strong, this process is completely natural. Bitcoin creator, Satoshi Nakamoto, started with some basic assumptions. For example, a deflationary currency can counter the inflationary fiat currency. Since it is formed naturally, it is difficult to copy and build another bitcoin. Since various initial conditions and boundary conditions are different, it is almost impossible to form such a weak consensus and strengthen logic naturally. But is it possible for manual operations? Stay tuned for future articles.


I think we can certainly expect to see more opportunities of development within the industry of blockchain and cryptocurrency. Firstly, Bitcoin will dominate humanity's biggest consensus shift. Secondly, Bitcoin has its own path to follow and has the superior logic on the basis of encrypted digital assets. Finally, the strong consensus network of Bitcoin is naturally formed, and the circulation ratio must be continuously reduced to make prices to rise and the consensus to be continuously strengthened.