Bitcoin, El Salvador, and Twitter

Why open protocols win

Sep 27, 2021

Hello readers,

If you’re new to the program, you may not have read the prior report covering the mental model through which we can view blockchain technology. In it, we covered the historical precedence of open source technologies disrupting their closed/siloed data competitors.

If you haven’t read it yet, I suggest you check it out first before reading on. These open-source technologies create intense competition amongst entrepreneurs that ultimately lowers costs for consumers. This typically catches the incumbent industry leaders off guard.

Generally speaking, the high-level trend in information tech goes like this (from the year of the invention):

1947: Transistor → replaced tubes with the semiconductor

1971: Microprocessor → open hardware standard disrupts IBM

1991: Linux → open software standard disrupts Microsoft

2000: Open Hardware & Software leads to the Internet → disrupts media, malls, post office, movie theatres/Hollywood, commercial real estate, etc

2009: Internet leads to Bitcoin & other Blockchains → disrupts…

El Salvador and Twitter recently are in the news. Bitcoin became legal tender in its first nation-state and Twitter is rolling out the implementation of tipping for content creators using the network. Lots happening.

In this report, we’ll explore the *early signs* of this high-level trend playing out in real-time today with blockchains. The latest open-source protocol.

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Let’s go.

The general idea is that open-source protocols collapse and compress the cost of existing technologies, opening up a new layer of value creation. This tends to be quite disruptive throughout history, and when combined with other social/political, economic, or demographic factors can produce dramatic changes in societies.

Why do open source protocols collapse and compress costs?

The key point to focus on here is that open source = anyone can access it. It’s permissionless.

The internet was built on open protocols (TCP/IP, HTTP). The creation of the internet means we can share information and data across a shared global communication channel.

Anyone can access the internet. You just need a phone these days.

This means that anyone can create an internet company. We saw that early on with Google, Yahoo, etc. No permission. Super low barrier to entry. Build it from your bedroom.

Because open protocols allow anyone to access them, they create intense competition amongst entrepreneurs building on them. This ultimately benefits the consumer as the cost of access can be compressed down to zero. The best user experience and brand wins. We see this with Google, FB, LinkedIn, Twitter, etc today.

The next iteration of the internet was communities and social networks. Anyone could create one. Facebook, MySpace, YouTube, Twitter, Instagram, Craigslist, eBay, Whats App, etc etc. Again, no permission. Build from anywhere. No barrier. Free to use.

FB, Instagram, LinkedIn, Google, Netflix, Amazon, etc captured the layer of value creation that was available as a result of the open protocols of the internet. When they did this, they created siloed and walled-off data networks. A strategic move. They did this because they could. And because it is a fantastic business model. Allow free access for users, capture their data via your walled off-network, and sell the data to advertisers. That’s the business model we see today.

The internet ultimately democratized the *access to* and the *creation of* *information.* This democratization was realized through lower costs and less friction. Want to start a blog and create/share information? Go ahead. Now you don’t have to start a media company. Want to get access to some specific information? Just google it. Now you don’t have to go to the library. Want to share some business correspondence? Just send an email. Now you don’t have to write a letter and bring it to the post office. You get the point.

Enter Blockchains

Fast forward to today and the next iteration of open protocols is crypto networks and cryptoassets (public blockchains). Anyone can create one. No permission is needed. Do it from anywhere. This started in 2009 with the invention of Bitcoin.

Bitcoin is an open, permissionless, data network.

In its purest form, Bitcoin is just a decentralized ledger of transactions. We think it’s weird because we are accustomed to these ledgers being held at banks. I’m talking about debits and credits. But there is nothing weird going on here. We are just making things more efficient. Scattering ledgers of debits and credits all over the world. Cutting out middlemen. Removing friction. Increasing productivity.

You know. Tech doing tech things.

With the invention of Bitcoin, we created digital scarcity. We realized we could do peer-to-peer transactions. The ledger keeping score of all these transactions could be held on computers all over the world. And because of cryptography and decentralization, this new ledger is more secure than the ones we use today at banks. It’s free to use. And anyone can access it. At the end of the day, Bitcoin means we don’t need a central intermediary anymore to move value and record the transactions. We don’t need a bank.

Why is it free though? Why does the cost get collapsed to zero for users?

Competition. Anyone can access it. Visa/Mastercard cannot wall off a data network/payment rail this time and charge merchants 2.9% as a “cost of doing business.” Banks cannot charge you to access your funds anymore at the ATM. Or for wires. Or for an overdraft. Or for taking your company public.

There is no ideology or political angle attached to what I’m saying here. It’s simply tech doing what tech does. Does anyone question why we use email? Does anyone think the Post Office is underused? Of course not. Email is just better than writing letters. So we use it.

There’s nothing new here with Bitcoin. It just so happens that tech is disrupting the financial services sector this time. Which makes it appear that Bitcoin is highly controversial. Except it’s not. The incumbents just want you to think it is.

Tying it all together - what does this “openness” mean with Bitcoin?

It means anyone can tap into it.

Twitter just tapped into it. They are integrating with layer 2 scaling solutions (lightning) to allow content creators to receive tips in the form of *bitcoin the asset*. Or *dollars* (or euro/yen, etc) over the *Bitcoin network.*

So what does that mean?

It means that if you have a Twitter account (which is free and global), you can tap into the Bitcoin network to receive instant payments at zero fees. You can transfer value through Twitter (via Bitcoin). Anyone can. Peer to peer. Anywhere in the world. For free.

We cannot do this globally with BOA, Citi, Goldman Sachs, JP Morgan, etc. We cannot do it with Venmo. We cannot do it with Paypal. We cannot do it with Cash App. These are closed, independent networks. They are not globally interoperable with each other. And there are fixed costs to maintain their archaic payment rails. These costs are passed on to consumers. To you and I.

Bitcoin is open. Anyone can access it. It is permissionless. And it works everywhere. The costs associated with its functionality are free to users because they are outsourced to the Bitcoin base layer energy cost. The cost to secure the network. We’ll cover this in depth in the next piece (later this week).

We don’t have to operate in this closed, bifurcated, independent system of rent-seekers anymore.

Bitcoin is an emerging global settlement protocol for *monetary settlement.* The internet is an established global settlement protocol for *communication.*

Let’s talk about El Salvador

El Salvador is a small country of 6 million people.

As of last month, 70% of their population was unbanked. Completely cut off from the financial system.

And 24% of El Salvador’s GDP is remittance payments from immigrants living in America. These are some of the hardest workers out there. And biggest risk-takers.

So why would El Salvador make Bitcoin legal tender?

Because Bitcoin is an *open* network. They don’t have to build it themselves. They can just opt into it. And now their citizens can receive remittance payments from America immediately and at no fee.

And they don’t have to use *bitcoin the asset* to do this. They can send dollars over the *Bitcoin network* and have them land in any other currency, at current exchange rates. This is done utilizing Lighting, a layer 2 scaling solution built on top of Bitcoin.

El Salvadorans used to use Western Union to transfer value from America. But there are only a few Western Unions in El Salvador. So citizens would bus hours to get to one. Upon arrival, there are often gangs outside. And if they make it through the gangs, they would get the money. The blood, sweat, and tears from their family member working in America. Except Western Union would take 15%.

So, by adopting Bitcoin as legal tender, El Salvador cut out all of that nonsense.

It’s always silly in hindsight when we solve things. Isn’t it? I can’t wait to be able to talk about how hilarious it was that we had to pay $5 to take our own money from an ATM.

Some estimates say this is going to cost Western Union $400m/year. This is what tech disruption looks like. That’s $400m in the pockets of the citizens of El Salvador, who on average, earn $300/month. And that is how technology creates abundance. As for Western Union - what can we say? You had a good run.

Open protocols collapse and compress costs.

But the best part of this is that El Salvador is simply leveraging the Bitcoin network. They are a small country. They have very limited resources. They cannot build a global payment network that integrates with a global social network. They do not have the resources to invest in cutting-edge financial innovation. You know. The things that connect people and allow commerce to take place.

So they just opted into the open Bitcoin network.

And now they have Bitcoin developers and Twitter employees working all over the world for them. For free. They outsourced it.

The President of El Salvador seems pleased so far.

Ukraine has already followed. Who is next? Panama?

Is Facebook going to respond to Twitter here?

What happens when restaurants realize they can use the *Bitcoin network* to accept *dollars* and cut out Visa/Mastercard? What happens when online merchants worldwide realize they can use the Bitcoin network?

What happens when everyone realizes what’s going on here?

Your move Visa, Mastercard, Western Union, Paypal, Venmo, Chime, BOA, Citi, JP Morgan, Goldman Sachs, etc.

_____

I’ll leave you with this:

The open protocols (TCP/IP, HTTP) that the *internet of communication* was built on could not be owned.

The open protocols that the *internet of value* is being built on (blockchains) can be owned.

They are called cryptoassets.

Thanks for reading. Up next we’ll get into Bitcoin’s consensus mechanism, security, and economic incentive structure. I want to make sure we have a really sound understanding of the large layer 1 blockchains before we move into some of the exciting stuff happening elsewhere in the tech stack.

As always, for more frequent insights you can follow me on LinkedIn.

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