The Impetus for a Banking Revolution
Written by Nick Giambruno via InternationalMan.com,
Global Consumer Transactions
Every day, there are more than 2 billion consumer transactions globally. Major companies like Visa, Mastercard, and American Express process a significant number of these payments. However, Bitcoin does not have the capacity to handle this volume. The Bitcoin network can only process around 576,000 transactions a day, which is approximately 0.029% of all the world’s consumer transactions. This is why it was never feasible or desirable to record every Starbucks or McDonald’s transaction on the Bitcoin blockchain.
The Importance of Decentralization
If Bitcoin had to record every consumer transaction on its blockchain, or even a fraction of them, it would require a large-scale operation with costly data centers. This would mean only large entities could run the Bitcoin software, and the average person would not be able to participate in enforcing the consensus parameters and the protocol. This would undermine Bitcoin’s decentralization, as a few large entities would solely validate and enforce the protocol. Therefore, Bitcoin's value proposition as a global money relies on being neutral, censorship-resistant, accessible to everyone, and controlled by nobody.
Monetary Layers
When you use your credit card to buy a coffee at Starbucks, the money doesn't land in Starbucks' bank account when Visa approves the transaction. Instead, a payment processor collects the money, aggregates a bunch of other transactions over a period, and then uses a commercial bank, which uses the Federal Reserve (the central bank of the US), to move the money from the payment processor’s bank account to Starbucks’ bank account for final settlement. This layered approach is used by all successful financial systems to scale, including the one based on a gold standard, the current fiat currency system, and now Bitcoin.
Layer 1 and Layer 2 Transactions
Layer 1 transactions represent the ability to perform irreversible transactions that can transcend borders. In the current fiat currency system, Layer 1 involves the central bank clearing transactions for final settlement. Under a gold standard, the central banks of two nations used to settle balances between themselves with physical gold. Transactions on the Bitcoin blockchain are comparable to these. They represent final international settlement and clearance.
Layer 2 transactions, on the other hand, involve systems built on top of Layer 1 that offer more convenience. Using a credit card to pay for a cup of coffee is an example of a Layer 2 transaction. It involves a credit card company and a payment processor that enable convenient transactions on top of the Federal Reserve’s clearance for final settlement.
The Future of Bitcoin
Bitcoin's base layer could never process the world’s consumer transactions, and that’s not a problem. Bitcoin is not just a new way to make payments, it is a superior alternative to central banks. It provides a foundation for a new financial system that is decentralized, politically neutral, accessible to everyone, controlled by nobody, censorship-resistant, immutable, trustless, totally resistant to debasement, and not dependent on any third party.
Many Layer 2 solutions for Bitcoin will inevitably emerge. Today, the Lightning Network—an open, peer-to-peer network built on Bitcoin that allows for nearly instantaneous transactions and almost zero fees—is the most prominent. Tomorrow, it could be Bitcoin banks and federations.
Bitcoin Banking
Bitcoin banking is NOT competing with self-custody. It competes with other custodial solutions like Coinbase, ETFs, and the traditional banking system. Bitcoin banks are not as good as self-custody but not as bad as holding your BTC in an exchange. They are somewhere in the middle. It’s a trade-off and a reasonable one for some people.
In any case, I strongly advocate Bitcoin self-custody so that you have total financial sovereignty over your money. However, as Bitcoin continues its ascent to the world’s dominant money, it will become significantly more expensive to self-custody, pricing out many people. That’s an excellent reason not to delay learning to self-custody—I suggest doing it as soon as possible.
Conclusion
Bitcoin is a revolutionary innovation for the base monetary layer, something that hasn’t happened since mankind discovered gold’s potential as money thousands of years ago. It’s a quantum leap forward compared to other base monetary layers because it cannot be monopolized.
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