Hey folks,

Welcome to week 4 of Finshots Cracks Crypto, where we’re trying to make sense of this fascinating world of digital technology, asset, currency or whatever you want to call it.

The last story explored how Bitcoin solves issues like trust, scalability and decentralisation that plagued money for centuries. And it went on to talk about Bitcoin beyond money.

Today, we’re taking it a step further to understand cryptocurrency’s big shift and its evolving use cases.

And to do that, we’ll divide this story into two parts. The first part is where we’ll settle one big question - ‘Why Bitcoin?’ Why not just any other digital currency? In the second half we’ll talk about the major shifts in the crypto space. And trust us, both these parts are more connected than you think.

Alright, so, why pay so much attention to Bitcoin? Why not just blockchain? Why not Ethereum? Why not any of the thousands of crypto tokens out there? If Bitcoin is the king, isn’t there a chance another cryptocurrency could topple it?

Well, there are many right answers to this. Some say Bitcoin wins because it’s built on sound monetary policy (decentralised + a fixed supply of 21 million bitcoins) and nothing comes close to matching it. Others point to its first-mover advantage or its resistance to and an impracticality of a 51% attack (where no single entity can control most mining power to alter transactions). And so on and so forth.

But one of the favourite answers comes from the bitcoin advocate Andreas Antonopoulos, who puts it simply - Bitcoin wins because it's a dumb network.

You see, "dumb networks" are like a dumb pipe—they simply move data from one end to another without any analysis or interference. This keeps the core of the network unchanged, allowing innovation to happen at all the edges of the network. Just like Forrest Gump says, crazy is as crazy does. A dumb network will always be that core network and do the same tasks. Now, contrast that with smart networks, like your banking app. Every new feature must be built into the core system and controlled by the bank. The innovation is not at the edges of the network, but at the center (i.e. with the bank). If you want an upgrade, you wait for them to build it, test it and roll it out. Slow. Bureaucratic. Permission-based.

This difference isn’t just in theory. History has practically shown us why dumb networks win.

Take Usenet for instance. There’s little chance that you’ve heard of it because it was one of the earliest forms of digital communication but super slow, clunky and far from efficient. Heck, it would take hours to send and receive a simple message between two devices. And then someone solved that issue with email and transformed communication. But even then, skeptics claimed that the internet wouldn’t be able to handle more complex applications. Papers were written predicting its inevitable crash under the weight of multimedia and large-scale data exchange.

Yet, the internet didn’t break. It evolved. Soon, multimedia messaging became possible. And then, the web arrived, letting us share images, videos and interact in ways that were once tossed as crazy.

And during all these times, the internet network (dumb network), where all of these applications were built, did two things -  

1.     It failed gracefully. It failed at Usenet while succeeding at email. It failed at email while succeeding at the web. It didn’t scale in a perfect, linear fashion; it just kept absorbing innovation from its edges. Maybe that’s how networks scale after all. They don’t scale. They fail gracefully while succeeding.

2.     It was an open source network all along. Anyone can access the internet with a connection and it followed the same standard for everyone that was in its code. The core network didn’t need to change; innovation happened around it. And that gave the internet a great time to fail at occasions yet succeed in the long run.

Contrast that with a smart network like landline networks. Features like caller ID, call waiting and speed dial required upgrades at the centre. The phone company had to approve and implement them before you could use them. Innovation was slow and centralised. Neither did the network have time to fail (as it's core was constantly changing), nor was it open source (which again limited its innovation and use).

Now, back to Bitcoin. Bitcoin is a dumb and open network. And as more people work on it and innovate, its adoption scales. That’s why despite being the oldest cryptocurrency, it’s stayed #1 since day one.

And that brings us to the second part of this story.

You see, Bitcoin had one of its worst price years in 2014 (over 50% fall!). But if you were only looking at the price, you missed the real story. That year, the Bitcoin network quietly deployed two game-changing innovations: multisig wallets and hierarchical deterministic (HD) wallets.

And before we tell you about them, let’s quickly understand the layers of any blockchain. That will help us visualise how innovations actually pan out on a blockchain.

• Network layer ― moves transactions and data between the computers in a blockchain network (imagine a postman).
• Core blockchain layer ― defines the rules for verifying and adding transactions on a blockchain (rules for the postman).
• Scaling layer ― helps process transactions faster and more efficiently without changing the core blockchain rules (postman finds faster delivery routes to handle packages efficiently).
• Application layer ― this is the layer where users interact with the blockchain with crypto wallets, apps, smart contracts, etc. (special postman for special types of package delivery).

And in that fashion, the multisig wallet was built on top of the Bitcoin network’s Scaling layer.

What did multisig and HD wallets do? Well, they allowed an enormous amount of services and products to be built at the edge of the Bitcoin network. Here’s how…

Multisig

Multisig (short for multi-signature) was a small but powerful upgrade to Bitcoin’s security and functionalities. Normally, a bitcoin transaction needs just one key to approve it, like having a single key to a safe. But with multisig, multiple keys are needed, making it far harder for hackers or fraudsters to steal funds. This simple tweak not only made Bitcoin safer for businesses and escrow services but also paved the way for shared wallets, multi-user accounts, and enhanced financial controls.

Here’s a simple representation:

The above wallet will require multiple approvals from co-signer to authorise a transaction, whether it’s transferring funds, a program upgrade or handling over authority. So instead of a single key, it uses multiple signers to verify transactions.

Now, there are various multisig wallets. For instance, in a 2-of-3 multisig wallet (see the image), at least two out of three owners must approve a transaction before it goes through. So yeah, the way you can structure and use these wallets is endless.

HD wallets

Say you had to juggle dozens of passwords for different accounts. It would be a headache, right? That’s how regular Bitcoin wallets work. Every new Bitcoin address you create has its own private key. Lose a key, and you lose access to your bitcoin. That means you have to back up (safekeep) each key (password) separately. But HD wallets fix this by generating all your keys from a single ‘master key’ linked to a seed phrase. So, you only need to save this one seed phrase to restore everything. If you ever lose your wallet, you can use the seed phrase to restore all your addresses and access your Bitcoin.

Again, a simple reference:

The above image in simpler terms says that an HD wallet starts from a single seed and generates a tree of private and public keys. The master key creates multiple child keys, making it easy to manage multiple addresses and secure backups. And the extended public key let's you generate new addresses without exposing private keys, keeping funds safe. Now, let’s say in the future you want to delegate a task to AI that needs both information and funds. Instead of risking your private keys, you share the extended public key, allowing AI agents to work while you stay in full control.

These two seemingly small upgrades to the Bitcoin network set the stage for bigger breakthroughs in crypto networks, one of which was Decentralised Finance (DeFi).

Imagine multisig wallets applied to financial services. That’s DeFi in a nutshell. And it helps you do finance without banks.

DeFi movement aims to recreate traditional financial systems, like lending, borrowing and trading, without intermediaries like banks or brokers. Instead, it relies on smart contracts that are self-executing programs stored on a blockchain.

For example, if you want to earn interest on your savings, you don’t deposit money in a bank. Instead, you lend your crypto to a liquidity pool of a DeFi protocol, where other users can borrow from that pool. Interest rates are determined algorithmically based on supply and demand. Want a loan? No need for credit checks or banks. Just put up crypto as collateral and borrow instantly.

The applications are endless, but the table below shows how DeFi scales traditional finance to the next level.

And how do you participate in this DeFi system?

Enter Altcoins or Alternative Coins.

Taking the same internet and email example. Email was a revolutionary way of communicating. But today we also have Instagram and X, and all these platforms serve some unique utility for users.

The same happens in crypto with altcoins.

Bitcoin was a revolutionary start. But it’s a one-trick pony focused on being a decentralised store of value. It wasn’t designed for complex applications like DeFi.

It’s not built for every use case. It’s a master of one trade, and jack of some. And that’s why altcoins, like bitcoin, with different capabilities and use cases are invented. For instance, Ethereum enables decentralised applications (dApps), Monero focuses on privacy, Solana aims for speed. Each cryptocurrency has its niche.

However, altcoins also come with risks. Many have central teams that control the network, pre-mines where developers keep part of the coin supply before it’s available to the public (giving them an unfair advantage) or lack true decentralisation. Many altcoin projects fail, and scams are common. But the best ones drive innovation, much like how some internet apps flop while the ecosystem keeps evolving.

And that brings us to one last question - If there are so many altcoins, won’t they threaten Bitcoin’s existence?

Well, a tiny concept to answer this is what economists call the ‘Tragedy of the Commons’. It says that there’s a shared pasture where every farmer grazes their cattle freely, as much as they want to. But soon, the pasture is overgrazed and there’s nothing left for anyone. It’s a case where individual incentives lead to collective disaster.

Bitcoin, however, operates in an opposite fashion.

Instead of individual incentives leading to collective destruction, Bitcoin’s open nature means participation strengthens the network. Every miner, node operator and developer makes the system more secure and valuable. Its adoption and use strengthens the network instead of depleting it.

And because this cooperative foundation has been built over time, switching from Bitcoin to another crypto isn’t just inconvenient. It’s pointless.

After all, better systems don’t replace old ones because they’re shinier or more advanced. They replace them when the old ones fail. When the old ones degenerate and start malfunctioning. Bitcoin? In 16 years, it hasn’t been hacked or compromised at the protocol level. It’s not the best, but it’s unstoppable.

Email didn’t replace the internet; it thrived because of it. Similarly, altcoins don’t replace Bitcoin, they exist alongside it, building on its foundation.

So let’s say if the US government launched its own Bitcoin-style network tomorrow it would matter only if it was truly open and decentralised. Even then, Bitcoin’s first-mover advantage, unwavering security, high switching cost, and network effect would still keep it on top.

And that’s where we’ll leave it for now.

In the next story, we’ll explore the wild world of dApps (decentralised applications), NFTs (non-fungible tokens), Web3 and how they’re reshaping the crypto as well as internet economy. So stay tuned!

Until then…

Don’t forget to share this story on WhatsApp, LinkedIn and X.

P.S.: There’s even a website called Bitcoin Deaths that tracks every time someone declares Bitcoin dead or irrelevant or a fad. Bitcoin has so far kept smiling back.

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