Competing cryptocurrencies have been in the news lately. This VICE Motherboard roundup is a good list of some of bitcoin’s most promising challengers. But it makes a comparison which reveals a view often expressed but is probably misguided about the nature of cryptocurrency competition. “Is there room for more than one sheriff in town?” writer Alec Liu asks. “In the case of Facebook, competitors with similar functionality never made it, regardless of apparently advantageous tweaks to the original formula.”
The comparison makes sense at first. Most people use only one kind of money, and Facebook has no obvious remaining competitors, besides the much-less-used and very different Twitter, Instagram and Snapchat. But here’s why a better analogy for the battle between bitcoin and altcoins might be Netflix and Hulu.
Competition is pretty powerful. People don’t take risks with their time, money and reputation, with the possibility of losing all and failing publicly, if they’re secure in their domination of a market. The possibility of getting trounced is what motivates people to try to generate value in new ways. Competition, then, spurs the kinds of risks necessary to innovate. Innovation is the only way to create new wealth. Resources are finite. Innovation is infinite. The wealth created through innovation leads to longer lives, greater levels of prosperity and more free time, allowing people to learn about themselves and the world around them.
But, competition is also costly. Many powerful firms have been crippled or taken under by their inability to compete with upstarts. IBM, Xerox, Circuit City, all once-powerful tech behemoths, have all been taken out or scaled back considerably since their heydays.
Competition is also costly for consumers. Consider VHS versus Betamax. Or Nintendo versus Sega. Or the iPhone versus Android. Or Mac versus PC. What they all have in common is this: Most people will use only one. It’s simply too expensive, relative to the benefits, to use both competitors. Few people want to buy, and learn to use, two different systems.
But one thing that technological innovation does is move people away from expensive hardware. According to the Chicago Tribune, when the VCR was introduced in 1975, the average cost for one was between $1,000 and $1,400. In 1975 Sears was selling their cheapest (black and white) television for $500 in today’s dollars. Their best color TV would set you back about $2,600.
Today your laptop, which does much more, but will also play movies from the internet, likely costs less than Sears’ crappiest black-and-white television, even with a Netflix subscription included.
Netflix and Hulu are the VHS and Betamax of today, competing for watching-stuff-at-home customer dollars. But one huge difference is that low investment costs mean that they can both compete with each other for a long time. Betamax and VHS knew that one of them would need to become standard, because few people were going to buy both kinds of players. Legend is that when the porn industry took up VHS, its fate as the default video format was sealed.
Not so with Netflix and Hulu. Investment cost, and therefore the cost to switch, is minimal. In fact, both services are so cheap and their services different enough that many, many people pay for both. Or, they do what I do and pay for Netflix and share with their sisters, who pay for Hulu Plus and share with them. Hulu Plus and Netflix are still very much competing. Most people do not pay for both. When Netflix found success in creating an original series, House of Cards, which begot another incredibly successful series, Orange Is The New Black, Hulu also got in on the game, creating several lower-budget original series which non-subscribers can watch for free.
People are still talking about competition between bitcoin and altcoins such as Dogecoin or NXT like they are VHS and Betamax. But they are much more like Netflix and Hulu. Netflix and Hulu have opened up a new world of original content creation without middlemen and have helped normalize the internet as a source for television and movie watching. Similarly bitcoin and altcoins are opening up new worlds of payment options without middlemen and normalizing the internet as a source for banking services.
In addition, crypto is following this competitive innovation model; only instead of both branching into original content shows, Florincoin is the first cryptocoin to introduce messages in transactions, and bitcoin will be introducing this feature as well.
Yet in some ways, even the Hulu/Netflix analogy is inapt. In several dimensions, cryptocurrencies transcend competition. After all, all moderately successful ones are based on open source code. All attempts at cryptocurrency based on closed-source code (I only know of one) have failed miserably. Active altcoin development with open-source coding means a diverse set of developers fix problems, and this problem-solving ends up helping all cryptocurrencies run smoothly.
In addition, unlike traditional competitors, crypto developers actually work together for each other’s mutual benefit. For instance, Litecoin and Bitcoin developers joined forces to create a large bounty for the person who found a fix for a bug affecting both currencies, and the fix was found. Another great example of mature cross-community communication can be see in JR willet’s post on the Mastercoin Blog, where he asks Vitalik (lead developer of Ethereum) for advice. Vitalik has written two features for Mastercoin.
It is because currencies have been so dreadfully difficult to exchange that we have previously taken for granted the need for one dominant currency, just as there was a need for one dominant video format. But exchanging cryptocurrencies is actually even easier than switching from Netflix to Hulu.
No one can look at the carcasses of once-successful companies, or their VHS (or DVD) cabinet and deny the destruction aspect of creative destruction. And the thought of people competing brings to mind the opposite of cooperation. Backstabbing and wanting people to fail are horrible things to contemplate. Yet cryptocurrencies are harnessing the creative aspects of creative destruction, namely innovation and its natural result, prosperity, while discarding some of the nastier aspects.
It would be surprising, and actually a little sad, for one cryptocurrency to dominate. Whereas Netflix and Hulu are constantly innovating, there were basically no changes to the VHS format until the DVD arrived and made it obsolete. Similarly, fiat money hasn’t seen any innovation in the last hundred years. The greatest benefit and promise of bitcoin the currency is the potential to innovate our currencies. Competition enables and incentivizes innovation. Long live bitcoin. Long live altcoins. Long live competition, and the prosperity it creates.
The post Do Cryptocurrencies Really Compete? Learning From VHS, Betamax, Netflix and Hulu appeared first on Bitcoin Magazine.
February 24, 2014 at 04:55PM
