Gold has been the world’s dominant store of value for the past 2,700 years. With a total market capitalization of $7 Trillion, it is one of the largest asset classes worldwide, it’s no wonder why it gets such constant attention.
Despite this long history, gold’s very nature keeps it from becoming fully integrated into today’s digital world.
A millennia ago, provable scarcity was enough to make gold “great money”. Today, scarcity is no longer a sufficient competitive advantage. The majority of economic activity in today's world takes place in the digital realm where heavy, physical currency could never keep up with the ebb and flow of transactions.
Gold is expensive to store, expensive to protect, and holdings are expensive, if not impossible to audit. Efforts to create digital representations of gold only give the false illusion of having solved these problems.
The gold backing the digital representations still has to be stored by a central authority and buyers can’t but trust the issuer to indeed own the gold needed to back them. The world urgently needed a digitally native store of value.
This is precisely what pseudonymous programmer Satoshi Nakamoto delivered in 2009 in the form of Bitcoin, now often referred to as “Digital Gold”. On the contrary to Gold, an individual could store $1 Billion worth of Bitcoin in a hardware wallet no larger than a USB stick, and send that same amount to another continent for less than $1 in fees.
Accomplishing a similar feat with Gold would require military-grade protection, a multi-month timeline, and millions of dollars in total costs and fees. Has Bitcoin replaced gold as the new standard? Is it the new pinnacle store of value?
Many Bitcoin skeptics attack Bitcoin by claiming that its lack of merchant adoption strips the asset from all its value. Murad Mahmudov, CIO of Adaptive Capital, disagrees and instead suggests that for an asset to become a good medium of exchange, it must become a store of value first, making merchant adoption a point of lesser importance in the early days of Bitcoin.
Mahmudov’s thesis is based on the belief that merchants value price stability in a currency above all else and that they won’t accept payments in an asset that can fluctuate by up to 20% in a single day.
An asset achieves a Store of Value status when a large group of people hoards it expecting it to appreciate in value, or at least to conserve it, over the long run. This is precisely what Bitcoin supporters have been doing since the digital currency’s very inception, an activity that has resulted in close to a 1,000,000% return against the US Dollar in little over a decade.
That said, just because one of the loudest critiques of Bitcoin is not valid, does not mean that there are no valid criticisms. By digging into some of the biggest clashes in the Bitcoin community over the past years, Bitcoin’s greatest shortcomings can be summarized in three points.
First, there is no formal process by which code updates are pushed to Bitcoin and the process is controlled by a group of “Core Developers”, leaving regular Bitcoin holders without a say in what functionalities are to be implemented.
Secondly, Bitcoin’s security model assumes that the network’s “Miners” (individuals with powerful computers securing the Bitcoin network) will always be incentivized to protect the network from bad actors while leaving actual BTC holders with no ability to do so.
Third, Bitcoin does not have a funding mechanism and hence people working on the protocol are fully dependent on external donations, which can result in conflicts of interest.
Self-Amending Digital Gold
Decred was launched in late 2016 by ex-Bitcoin developers in an effort to solve the above-mentioned problems which have been eroding Bitcoin since the very start. The name “Decred” stands for “Decentralized Credits”, and similarly to Bitcoin, is also a censorship-resistant cryptocurrency with a capped supply of 21 Million coins.
Decred has implemented a system whereby code updates are decided not just by miners, but also by Decred (DCR) holders. Meaning that DCR holders have a say in the future of the currency by being able to suggest changes to the network, or vote on changes suggested by other Decred holders.
That’s in strong contrast to Bitcoin, where BTC holders have no rights whatsoever and decisions are only made by miners, resulting in devastating community clashes, like the Bitcoin Cash hard fork.
Further, Decred holders that wish to participate in steering the future of the network are not left unrewarded. Individuals that decide to “stake” their DCR to participate in Decred’s governance are referred to as “stakeholders” and earn a fee for their effort. At the time of writing, this fee compounds to an approximate 10% ROI per year, paid in DCR.
Decred’s hybrid consensus system also increases the cost of attacking the network significantly by enabling stakeholders to keep PoW miners in check. To illustrate this point: If Decred had the same market capitalization as Bitcoin, Decred would be approximately 41 times more expensive to attack.
Last but not least, Decred has also solved the funding problem that plagues Bitcoin. Instead of relying on donations, ten percent of all generated DCR flow into the “Decred Treasury”. This war chest, currently holding 614,000 DCR, provides the necessary funding to pay for work related to improving the Decred protocol and promoting its adoption.
Decred’s treasury can be the source of a powerful virtuous circle, the more the DCR price rises, the more valuable the Decred Treasury becomes, enabling Decred’s stakeholders to invest more into pushing development and adoption further.
Humanity will always seek a way to store value. Potentially more so now than ever with worldwide debt hitting unprecedented levels and MMT experiments showing no signs of getting to a halt.
As Gold has proven not to be compatible with an increasingly digital world and Bitcoin can’t effectively adapt to community initiatives, there is a void for a self-amending store of value which just maybe, might be filled by Decred.
Disclosure: I am/we are long DCR-USD, GLD, BTC-USD.