Unbounded Capital book busts blockchain industry’s ‘faulty assumptions’

We mentioned the new ebook from Unbounded Capital last week, which states the investment firm’s decision to focus solely on the Bitcoin SV (BSV) industry. This not only requires a justification for investors, but also a detailed explanation of why everyone else has got it wrong. So what are the digital asset industry’s “several faulty foundational assumptions” that will likely end in disaster for most of them? Let’s take a look at the book.

The rest of them are wrong, and here’s why

Unbounded states from the book’s outset that its take on the digital asset industry is a contrarian one (for now). In any industry and particularly in investments, it takes courage and a degree of risk acceptance to take an alternate view. Certain assets can make money for their investors, and ideas can build profitable careers, whether they’re worthy or not. Following the herd can bring its own rewards through self-fulfilling prophesies and the book acknowledges that “bit of Silicon Valley wisdom that the best technology doesn’t always win.”

In such circumstances it’s necessary to publish a lengthy document explaining your position, since contrarian views don’t get as much play in the mass media. Ask most non-industry people about blockchain and they’ll mention they’ve heard something about Bitcoin, and possibly Ethereum. Revealing to industry insiders and outsiders alike that you support Bitcoin, but not the one they’re thinking of, is a challenge. It’s the reason Bitcoin Core (BTC) still has a market cap at all.

Certainly, other VC firms in the digital asset space have sought the high-profile blockchains with more mainstream-familiar brand names. Unbounded mentions investors like a16z, Pantera Capital, Bitbull Capital, Blockchain Capital, Digital Currency Group and Multicoin Capital. It was an article about the last of that list that prompted this book.

As someone who’s reported on the “blockchain industry” for seven years I understand how the endless parade of new projects gets confusing and tiresome. The next greatest thing is out before the last greatest thing has gained any traction, each one purportedly solving the problems of those before it that no-one even knew existed.

Circular reasoning

Unbounded Capital states a set of “faulty” assumptions most in the digital asset industry seem to share, and how these assumptions have produced a “circular chain of reasoning” that render most blockchain projects unscalable, and both economically and legally infeasible.

So what are the assumptions? They are: Bitcoin can’t scale and is inefficient; “decentralization” is necessary to make Bitcoin valuable because it provides “censorship resistance” and “trustlessness”; and that Bitcoin exists outside the scope of the law. The latter two circle back to the first, its challenges meaning Bitcoin can’t scale to any useful extent.

Those already working in the BSV sector of the industry could be taken aback at the reminder that these assumptions still form the “mainstream” view. Haven’t most of them already been proven wrong? And if they all mean Bitcoin can’t scale, what’s the point of investing time and money in them?

The book looks mainly at Bitcoin (and heavily on comparisons between BTC and BSV). However the same assumptions apply to most other blockchain projects including Ethererum, EOS, Tezos, and literally thousands of others. Many will invest in (and potentially profit from) these others without even being aware of the fundamentals—but this produces only speculative bubbles, not real and long-term value.

BSV has economic incentives based on Bitcoin’s original proof-of-work processing foundation. It provides for unlimited scaling and data capacity, and it takes the realistic stance that Bitcoin must engage existing financial and regulatory structures to gain acceptance. This means refuting the old cypherpunk notion that “code is law” (another mantra that many repeat without bothering to analyze or question its implications).

It’s also ironic that many touting the “code is law”, “decentralization” and “trustless” nature of blockchain assets also make their money trading them on highly-centralized, not-very-trustworthy exchanges where neither computer nor human laws have been much help in stopping corruption or recovering lost funds. But even improving those services won’t make those blockchains more useful, only more tradeable.

Proof of Stake and decentralization

Unbounded also takes aim at blockchain projects that opted for a Proof-of-Stake (PoS) processing model, inspired in part by the notion that Proof-of-Work (PoW) is unsound. Misunderstandings and environmental hysteria have both added fuel to this fire in the mainstream press.

Proof-of-Work uses a lot of energy. Hashing blocks takes energy. This is a major source of marginal cost in Bitcoin maintenance or transaction processing. Many people in crypto consider this to be wasteful. However, what is considered waste by many in the crypto consensus is actually an extremely important signalling function. Hashing is equivalent to sending a signal of investment in the system.

The PoW/PoS debate is one major cause of instability for the Ethereum protocol, which has a stated plan to shift its entire network to a PoS model… at some stage. Unbounded explains some of the perverse economic incentives and consequences PoS contains, and why it does little to address trust and security.

The book also looks at “decentralization,” which has become, er, central to blockchain dogma. BTC in particular has been stunted by its adherence to the goal, which Unbounded argues isn’t even realistic under status quo conditions. The “extra-legal” status and “censorship resistance” this decentralization supposedly offers—even if true—would make BTC unappealing to users and investors on a large scale. What then, is its value? None, it seems.

The case for BSV

So why invest in BSV then, itself a contrarian (to the others) blockchain project that must endure the combined negativity of mainstream finance/technology and the digital asset industry to make its case?

In its conclusion, Unbounded Capital needed to explain how and why BSV is different to all others. After all, the entire industry (including BSV) could be suffering from the collective delusion that blockchains are a desirable or necessary technology at all.

“Bitcoin is often thought of as a digital currency. While this is true, it is inseparable from the fact that Bitcoin is also a revolutionary database.”

Unshackling oneself from the above-mentioned assumptions will open eyes. And once they’re gone, the possibilities Bitcoin BSV offers become more apparent. Finding better, more secure ways to process data may not provide sexy story ideas to the mainstream media, but we need something that works better than the current internet. Something more efficient, economically-incentivized, more permanent, and with a built-in ability to transact. Oh, and it must scale to global proportions, and not raise the ire of governments or business interests who do indeed have the power to limit its use no matter what technologists may promise.

In BSV, great lengths are being made to codify the precise nature of the rules and a culture is being set to maintain these rules. The result is that entrepreneurs who grew frustrated with the shifting landscapes of BTC, BCH, and Ethereum have been flocking to BSV for both the additional scale and the certainty that comes with well-defined, unchanging rules

Unbounded Capital describes the increasing level of development activity on BSV as “extremely exciting”, especially given that Bitcoin’s stable “Genesis” protocol upgrade only went live in early 2020. Put simply, more development activity means more use-cases, more users, and thus more venture opportunity. Whether or not you believe Dr. Craig Wright invented Bitcoin or not is irrelevant.

The firm deliberately timed its book release to coincide with the BTC block subsidy halving. This investment event, with its motives and price moves (based on both hashrates and emotion) more obvious to the mainstream, gives everyone the opportunity to ponder whether BTC can survive long-term, and if so, attempt to explain why. Unbounded has now argued why it can’t—and shown the industry to the lifeboats.

Download Unbounded Capital’s book, “Why Multicoin Capital and the Crypto Consensus are Wrong” here.

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