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Bitcoin LN 101
Orange pilling the population is essential for Bitcoin’s growth. Network effects are a natural force, and Metcalfe's Law applies to the situation.
Every orange pill adds a user to the network and gets humanity significantly closer to hyperbitcoinization. Or, as Kemal puts it, “Each new user increases the value of the network proportional to the square of all connected users of the system. Successful communications networks grow slow at first, and accelerate later.” That’s Metcalfe's Law and network effects working in tandem.
A faction of Bitcoiners is pushing the spend and replace meme to evolve BTC into a true and tested medium of exchange. This is not a whim. Each orange pilled merchant is a monumental step on the road to glory. However, for the network effects to stick, the ecosystem has to transact in Bitcoin. Creating a Bitcoin economy is the mechanism that will get us out of the KYC and AML trap that the legacy system set up for us.
Even though every day, a clever bitcoiner creates a much-needed off-ramp that facilitates transacting with the fiat world, there’s a clear path to complete independence. To explain how we get there, let’s go back to Kemal’s tweets: “Here's the neat part: once a threshold has been crossed, users will have to go through fiat less and less, which means the KYC chokeholds become more and more irrelevant.”
According to Metcalfe's Law, a network becomes more valuable and appealing with each new user. A larger user base usually attracts even more people, it’s the nature of the game. Some people call that "network effect snowball." New users create momentum, and once the snowball reaches a certain size, nothing can stop it.
Is Bitcoin reaching that breaking point? Maybe, but the network can’t sleep on its laurels. The orange pilling has to continue. And mutating into a true and tested medium of exchange might be the action that pushes the network over the edge.
According to Kemal, bitcoiners and analysts often apply Metcalfe's Law to Bitcoin in the wrong way. Let’s break this down. The problem is:
So, for the length of this article, let’s forget about Bitcoin full nodes. Let’s talk about the users instead. Every user who can willingly send and receive Bitcoin, it’s a participant on the network. Every participant in the network, makes it grow exponentially both in value and range.
In an email to Blink’s newsroom, Kemal elaborated:
“By applying Metcalfe's Law to bitcoin in a wrong way, there is a critical insight that bitcoiners have been overlooking. In my humble opionion, this insight is the key to winning against all fiat currencies, accomplishing what Satoshi, Hal and Cypherpunks before them set out do, and ushering in a global free market economy based on sound money.”
Let’s explore this idea.
Some might argue Bitcoin has already won. The reality is that it will be a fight until the very end. Other cryptocurrencies are dead in the water, sure, but the war is not over. Bitcoin has network leadership, and adoption is growing all over the world, but governments and traditional finance will not give the keys to the kingdom that easily.
The Bitcoin network has an ace up its sleeve, though. Driving Bitcoin adoption through everyday transactions. Orange pilling merchants and adding new users to the network. Using the accumulated network effects as a springboard to propel Bitcoin to new heights.
What are network effects, though? It’s as easy as this: once a product, service, or platform is ahead, it tends to stay ahead. We see examples of this every day, the leaders in each category dominate, and everybody else fights for second and third place. For a formal definition, let’s consult with the Harvard Business School:
“The term network effect refers to any situation in which the value of a product, service, or platform depends on the number of buyers, sellers, or users who leverage it. Typically, the greater the number of buyers, sellers, or users, the greater the network effect—and the greater the value created by the offering.”
Also, “markets in which network effects play a major role are often referred to as winner-takes-all markets.” Money, as you probably guessed, is the biggest winner-takes-all market there is.
Newer and more Internet-focused, Reed’s Law proposes that networks grow even faster than the square of all connected users because of communities and subgroups within them. Or, as this article puts it:
“Reed’s Law suggests that the value of a network isn’t just in the number of its users or the connections between them, but in the myriad ways these users can group and regroup.”
If we’re taking Reed’s Law at face value, networks grow “at a rate surpassing both the number of participants and the number of possible pairwise connections.” Considering how active and passionate the Bitcoin community is, and the number of factions and secret groups already active, the big breakout moment might be just around the corner. Orange pilling has to continue, though.
At the moment, there are 59 projects listed on the Federation of Bitcoin Circular Economies’ website. That number is growing each and every day. The organization’s “about” page says: “Within a Bitcoin Circular Economy, BTC is continuously circulated between individuals, businesses and other entities as a means of payment for goods and services and for settlement of other financial obligations.”
Each Bitcoin Circular Economy creates hundreds of new connections, and the whole organization then connects to the larger, worldwide Bitcoin ecosystem. The network effects are hard to ignore.
According to Kemal, the realization that every new user exponentially grows the value of the network is “an insight that is understood intuitively by bitcoiners who live in bitcoin circular economies where bitcoin is a currency with very high acceptance, but is completely alien to LARPers on Xitter who have notifications on for Michael Saylor.”
A bitcoiner living in a circular economy, Bull Bitcoin’s Francis Pouliot, recently tweeted this theory: “By paying for everything with Bitcoin, you are likely to end up spending less Bitcoin (opportunity cost) then people who have never spent Bitcoin their entire life.” Pouliot resides in Costa Rica’s Bitcoin Jungle, and if his theory holds water, the benefits of spending BTC might be even greater than the network effects it generates.
According to Francis Pouliot, when you spend your Bitcoin these effects are in play:
“1. Economic: spending fiat is the same thing as spending Bitcoin in terms of opportunity cost because you could have been holding Bitcoin instead of the fiat
2. Psychological: Spending Bitcoin makes you a more careful consumer.
3. Psychological: Spending Bitcoin puts you in a bitcoin satsflow mentality and motivates you to earn more Bitcoin.”
Spend and replace, bitcoiner. Let’s create a Bitcoin economy, contribute to the network effects, and accumulate even more sats in the meantime.
We could define Nostr as “a simple, open protocol that enables truly censorship-resistant and global value-for-value publishing on the web.” Its decentralized architecture is Bitcoin-inspired, and the protocol natively includes the ability to tip with Sats. While the user base is still mostly Bitcoiners, Nostr recently celebrated its first five million transactions.
In time, content creators of all kinds will realize that they can monetize their work directly and get the support of their audience. No middleman. No corporations banning your content or expropriating your identity. And those content creators will bring their audience with them. For all of this to happen, they will have to learn about Bitcoin and join the Bitcoin economy.
Of course, as we already established, every orange pilled new user will contribute to Bitcoin’s network effects in an exponential way. Fasten your seatbelts; things could get out of control very soon, very fast.
According to some people, ETFs contribute more to Bitcoin adoption than civilian bitcoiners ever could. They couldn’t be more wrong. Why? Because an ETF holder is not a node in the Metcalfe's Law sense of the world. An ETF holder can’t send or receive BTC. When big institutions as the ETF issuers or the new and shiny Bitcoin Treasury Companies acquire Bitcoin, they neutralize it.
There are no logical connections between the ETF holder and a Bitcoin user. Not to mention that ETF participation and Bitcoin Treasury Companies stock are heavily KYCd, completely custodial, and extremely confiscatable. So, most of the characteristics that make Bitcoin the best money ever created evaporate.
To make things worse, Jesse Myers forecasts that in a few years, “Bitcoin Treasury Companies will hold 50% of all BTC, way more than most Bitcoiners are prepared for.” Half of the existing Bitcoin neutralized, a scary proposition if this article’s thesis is correct.
How can the Bitcoin network respond to this looming threat?
By transacting in BTC and making it the most convenient medium of exchange, of course.
