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Topic: What is giving Bitcoin its value? The ultimate answer is: Skin in the game. (Read 691 times)

sr. member
Activity: 358
Merit: 254
void
When asked what is giving Bitcoin (or any other cryptocurrency) its value...
...Anyone can draw their own conclusions.

RQ alias Cryptorobert


in order to justify about good and evil you need to dig deep.
dear Cryptorobert , at first thank you for this great Essay.

i am reading rarely myself , i am lost in my mental adventures all my life (50+).
here in this forum sometimes i take the risk to read a couple of threads.
most of times if i feel the need to reply i am posting off-topic no matter how hard i try.

i may post objections about threads title structure, or make suggestions for alter titles...
sometimes i will make the usual mistake here to turn against someones reply  Grin

due to respect vs your OP i will try harder this time :

every thought,idea,technology,logic model,scheme in our modern society has layers.
when we talk about something with layers ,discussions can messed up mostly because
there is not obvious on which layer each one of us thinking within.

here is my multipart conclusion and comments :


1. The whole OP lies on layer-0 , there are millions BTC texts incapable to stay there.
2. Skin of the game is the value source not only for BTC but ... for whole humanity since Adam and Eve.
3. BTC for common people is perhaps a lost cause, not enough skin for them it seems.
4. Petition to capable thinkers i can address here : give us ideas to regain some skin  Grin
5. Do not curse Capitalism , we are what we do , and we finally are Money hunters.
    It is matter of survival not something 'evil' anymore.
6. Treating your crypto assets as MONEY is reasonable and justified.
    However , try to think them coins as mental pets sometimes.
    It may give you human inspiration , BTC as idea is better than many books.

...6331 Thank you OP and sorry if i missed again to stay on-topic  Embarrassed


Greetings from Greece
Elias Ch.

**
legendary
Activity: 4172
Merit: 4341
bitcoins value is not about nodes. nor about investment.
for instance.

if 10 people bought 1btc at $7k. that does not mean that bitcoin holds $70k value.
bitcoin is not backed by dollars. the market price is fluid based on the current sale price of a single coin.

someone could sell a coin for $1 and instantly make the price $1.. and them other 10 people have just lost. and they had no way to intervene

..
nodes have no value. they do not build up a cost. infact millions of people use lite wallets and custodial services.

what does actually build up price support to keep some value is the mining cost. yep mining is the skin in the game. not nodes.

if it cost $6.5k and the market was $7k. miners are making profit and continue mining. when the price levels out to $6.5k they can mine AND buy and have the same costs but grab coins faster instead of waiting to solve blocks to get coin. thus they help push up the price. they also refuse to sell when its not making profit.

the amount of user nodes has no correlation. but the hashrate has more correlation to the baseline value
so thinking that just running a node stabilises the price is a foolish notion. true ski in the game is where its costing you something to be part of it. and the biggest cost is mining
sr. member
Activity: 378
Merit: 250
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My answer would be: Bitcoin provides a service. It allows individuals to store money or send money without using a bank, business, or government fiat currency. Not all things of value are tangible. For example, PayPal doesn’t actually make any physical product and yet it has value because it provides a service.
sr. member
Activity: 1015
Merit: 289
Hey Robert,

I noticed that you are reposting a post from your blog, right?

http://roberto.info/2019/08/05/bitcoin-value-skin-in-the-game

It would be safer for you to add the reference in your article. You may be banned by that plagiarism bot. I know you are not plagiarizing anything, just posting your article in two different places. But try to explain that to a bot...

Nice article btw.

There is a little coded reference to my blog post which is my signarure RQ, but you are right, thanks for the warning. In fact it's not really a repost, but a parallel post since it happened almost at the same time in two totally different environments.

Very good article. However, you should have defined up front what sort of "value" you're talking about because you are making an argument for purely a financial value. It used to be this space was about much more than financial. The "value" of bitcoin and others were in some core ideals of things like decentralization, "anonymity", being an actual currency etc. But things have drifted far from that over the years as people realized they could become rich. Now everything in this space is purely about money. KYC? Regulations? In bed with bankers, corporations? On and on this space has drifted farther and farther from the core and now, and as each day passes, is nothing more than an extension of the global financial/governmental institutions it was intended to set itself apart from. I'm still hopeful that one day some coin will come along and be my "holy grail" that I would seriously want to put some real skin into as opposed to just use it for financial gain. But until then, no coin has any "real" value to me beyond what financial gain I can get from it.

Yes, I should have specified "monetary value" to be more precise.
legendary
Activity: 2212
Merit: 5622
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Hey Robert,

I noticed that you are reposting a post from your blog, right?

http://roberto.info/2019/08/05/bitcoin-value-skin-in-the-game

It would be safer for you to add the reference in your article. You may be banned by that plagiarism bot. I know you are not plagiarizing anything, just posting your article in two different places. But try to explain that to a bot...

Nice article btw.
sr. member
Activity: 686
Merit: 320
Very good article. However, you should have defined up front what sort of "value" you're talking about because you are making an argument for purely a financial value. It used to be this space was about much more than financial. The "value" of bitcoin and others were in some core ideals of things like decentralization, "anonymity", being an actual currency etc. But things have drifted far from that over the years as people realized they could become rich. Now everything in this space is purely about money. KYC? Regulations? In bed with bankers, corporations? On and on this space has drifted farther and farther from the core and now, and as each day passes, is nothing more than an extension of the global financial/governmental institutions it was intended to set itself apart from. I'm still hopeful that one day some coin will come along and be my "holy grail" that I would seriously want to put some real skin into as opposed to just use it for financial gain. But until then, no coin has any "real" value to me beyond what financial gain I can get from it.
sr. member
Activity: 1015
Merit: 289
I disagree that this is overlooked, at least not entirely.

There's been more than enough times that we've speculated if those who have had more vested interest in the network are the same ones who do the most to actively influence Bitcoin's value (and you're talking about price here aren't you, since there's no few objective way to quantify this value?).

Most obvious to mind are miners. They got to keep making profit, they got to keep price at profitable levels. We've had events where miners attempted to have their say in the direction of Bitcoin. We've even seen miners voluntary prevent themselves from growing too big (ghash in 2014) so as not to unintentionally 51% the network and potentially damage its still young reputation then.

That's all skin in the game in action, just not necessarily by the same name.

For sure I'm not the first one to sense this class of causes. But I'm here trying to put it down in an easy-to-share linguistic packaging, thus insisting so much in the "skin in the game" expression, since knowledge becomes really useful once is properly packaged and can be transmitted easily from person to person. Once the role of the skin in the game in providing resilience of value in crypto becomes a widespread concept, more people can think at ways to optimize this aspect in Bitcoin and in other projects.
legendary
Activity: 2758
Merit: 3408
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I disagree that this is overlooked, at least not entirely.

There's been more than enough times that we've speculated if those who have had more vested interest in the network are the same ones who do the most to actively influence Bitcoin's value (and you're talking about price here aren't you, since there's no few objective way to quantify this value?).

Most obvious to mind are miners. They got to keep making profit, they got to keep price at profitable levels. We've had events where miners attempted to have their say in the direction of Bitcoin. We've even seen miners voluntary prevent themselves from growing too big (ghash in 2014) so as not to unintentionally 51% the network and potentially damage its still young reputation then.

That's all skin in the game in action, just not necessarily by the same name.
full member
Activity: 298
Merit: 106
I guess the reason why nobody before had pointed to skin in the game as THE main factor for any cryptocurrency with limited supply to raise in value and keep it is that the crypto world is made most by nerds who see the world according to their nerdcentric view - ie they look at algos, numbers, math, equations but they totally miss stuff like psychology, sociology, game theory etc., which are probably more effective in causing consequences in the real world.
On a side note I must point out how neither this OP post, nor the original post by Peter about Metcalfe's law seem to have raised much attention in this forum - in 2 weeks this OP has so far reached just 66 views or so - and both this OP and Peter's post basically have not been even merited or so, which is raising a few questions also on the mechanisms and values of this very forum. If such sort of milestone posts don't deserve any reads and merits, and people are not interested in "ivory tower" discussions, then what are we talking about exactly here?
legendary
Activity: 1876
Merit: 1157
If we are talking about Bitcoin solving cryptographic problems, Lets talk about the real world effects that solving any of those problem are having on "Bitcoin Inc", like Jet Cash said.

When Bitcoin solved the Byzantine General's problem, it paved way for currency. That is what it has remained.

Next was privacy problems and this gave rise to currencies like Dash, Monero

Next was the smart-contract thing but they couldn't be implemented here as per consensus which lead to the whole Ethereum and ERC-20 craze.

A lot of early adherents wanted both of this functions to come to Bitcoin core code. These are slowly coming into picture now with Schnorr Sigs, Rootstock and Simplicity. I wonder why RSK and Simplicity aren't talked more about on the forum.
sr. member
Activity: 1015
Merit: 289
Bitcoin is backed by an increasing repository of solutions to cryptographic problems. The increase in "skin in the game" is the result of an increasing number of people who realise that virtual assets can have a real value in monetary terms. Of course the network increase, and the willingness to invest will affect the price and the perceived value of the underlying asset, but they are not in themselves the asset base of Bitcoin. However, they do contribute to the asset value of " Bitcoin Inc. ".

I obviously agree on this and other known fundamentals of Bitcoin. There ARE good tech reasons for putting your "skin in the game" in Bitcoin. But the point what I am trying to make is that in the end what's producing and even more what's PROTECTING the monetary value of Bitcoin is the skin in the game, and most of the people entering Bitcoin with skin in the game today are no nerds with little or no understanding of cryptography. Nerds can see only the code, but every altcoin has code. Skin in the game is the game changer. That's one crucial aspect which had not been really pointed out before.
legendary
Activity: 1876
Merit: 1157
Therefore PoS and DPoS networks will likely need more time for growing and keeping their value just because they need more time for piling up true skin in the game. This doesn’t mean they may not be the long term winners in the crypto ecosystem Darwinian selection — we simply don’t know the future. But for sure, their architectures seems ATM to be less efficient and slower in the necessary task of adding skin in the game.
The problem with systems based on PoS or DPoS that are trying to build on the Dapp ecosystem and Smart-contracts is that there doesn't seem to be enough demand for the "benefits" that these systems offer over traditional systems. Whether the crypto ecosystem will evolve enough in the long term for them to gain visibility and importance, is in doubt. Several major companies have explored "blockchain-based" solutions but nothing seems to be coming out of it despite the frenzy of past 2-3 years.

Although such use-cases with bitcoin too are proposed and under development, Bitcoin, first and foremost, has firmly been the latest type of money. Its need is almost universal which has caused the network effect.
legendary
Activity: 2674
Merit: 2432
https://JetCash.com
Bitcoin is backed by an increasing repository of solutions to cryptographic problems. The increase in "skin in the game" is the result of an increasing number of people who realise that virtual assets can have a real value in monetary terms. Of course the network increase, and the willingness to invest will affect the price and the perceived value of the underlying asset, but they are not in themselves the asset base of Bitcoin. However, they do contribute to the asset value of " Bitcoin Inc. ".
sr. member
Activity: 1015
Merit: 289
When asked what is giving Bitcoin (or any other cryptocurrency) its value, most of the bright people would answer just something like: “Shared consensus.”. Some would add a particular techno-mantra involving terms like “distributed ledger”, “limited supply”, “permissionless”, etc. But the core of the answer would anyway be “shared consensus” — ultimately money has a value only if there is a shared consensus over the fact that it has a value.
However, at a closer look this is telling us nothing about the reasons which are giving value to Bitcoin. “Shared consensus” is not a cause. “Shared consensus” is a consequence. And also all that fancy techno jargon mantra with concepts like “ distributed ledger”, “limited supply”, “permissionless” — is in fact telling us very little about the reasons which are causing the value. After all, there are by now literally thousands of new cryptocurrencies, all boasting about their “distributed ledger”, “limited supply”, “permissionless” nature — and yet none of them manages to achieve more than a minimal fraction of Bitcoin’s value.

In April 2014, Bitcointalk user “Peter R” has written a post in which he observes how Bitcoin’s value seems to be rising according to Metcalfe’s law about networks. “The effect (value) of a network is proportional to the square of the number of connected users (nodes) of the system.” Since Bitcoin is clearly a network, it seems totally legit that its value would rise the more users it would have. And it would do so in accordance to Metcalfe’s law ( https://bitcointalksearch.org/topic/empiricalmathematical-method-to-choose-which-cryptocurrency-community-to-join-572106 )

This insight has sparkled a new fashion throughout the whole crypto-space: everyone and their dog would suddenly create a new cryptocurrency to be “airdropped” for free to as many people as possible — this way each time a huge network would rise and according to Metcalfe’s law it would magically acquire tons of value. Herds of people rushed to grab some of this new free money, but… guess what? In most cases the trick didn’t really work out so well. Not much value was created. Did Metcalfe’s law suddenly stop to work? Or instead there was an even more important law — or principle — which had been overriding it?

There is in fact an overriding principle which is the requirement of people who take part in a monetary network to have “skin in the game” — in other words to share the risk of the network. The bigger their investment, the more they’d have to lose should it ever fail, the more they would have a motivation to stay proactive in securing the network against failure.

The importance of players of any game to have “skin in the game” cannot be understated. This concept has been brought to public attention recently by the irreplaceable Nassim Nicholas Taleb, who is the author of a great book on this theme. One of the major problems of modern society is that too many players don’t have any skin in the game any more, the leading players of society usually do not have to pay any price for their failures — just look at Western politicians: causing disasters they never have to pay personally the price of. How can someone who has not to pay a price for committing mistakes grow any sense of responsibility? There’s no bright future in a society where the principle of having skin in the came has been dismissed.

The main reason for Bitcoin’s impressive resilience and rising value is that most of the players have a lot of skin in the game. The miners have invested gazillions of dollars in their mining equipments, which they would lose should Bitcoin’s value drop too much. And they have to keep investing money every single moment to pay for the electricity which is necessary to mine Bitcoins. It’s true that this procedure, the so-called Proof of Work, is not very ecological (not at all, but we won’t enter in the ethical implications here), but it plays a crucial role in forcing the players to have skin in the game. Moreover, infrastructures are now being built all over the world on top of Bitcoin’s network, to make a wider adoption possible. Big players are investing big money on this. That’s all new skin in the game.

The main reason altcoins are valued so much less than Bitcoin is because there is so much less skin in thre game there. Many altcoins have opted for Proof of Stake (PoS or DPoS) as their method for securing the network, which undoubtedly is more ecological, generally faster and technically more scalable and probably in the whole more efficient, but which has one main downside: once you have enough coins to stake, that’s all the skin in the game you will ever need. You don’t have to add skin in the game every single moment, as miners must do. Miners have to sell Bitcoins to pay for their huge electricity expenses, and this in itself is already setting and keeping an economy in motion. On the contrary, people who stake coins are not obliged to sell coins continuously. The system is less dynamic.

Therefore PoS and DPoS networks will likely need more time for growing and keeping their value just because they need more time for piling up true skin in the game. This doesn’t mean they may not be the long term winners in the crypto ecosystem Darwinian selection — we simply don’t know the future. But for sure, their architectures seems ATM to be less efficient and slower in the necessary task of adding skin in the game.

I should also spend a few words for the case of networks which are born by the way of an airdrop, distributing the coins for free to as many people as possible, relying of Metcalfe’s law to acquire value. Bad and/or copy-cut projects have obviously no hope to acquire any lasting value just by “creating nodes”. A node without some skin in the game is not a real node. If those networks do acquire any value for a while it is because of people playing the musical chair: everybody in the network is just only pretending to believe in their new shitcoin destined to be “mooning” any time soon, while in reality they are all just hiddenly waiting for the best moment (typically a pump) to dump their useless coins on some unlucky bagholder.

But there are also some cases of potentially innovative and anyway technically original new coins which get distributed by the way of an airdrop, like for example it has happened with Obyte. Obyte has a very original and interesting DAG tech and it has been almost entirely distributed through an airdrop. Not unsurprisingly, after a huge initial pump & dump, it’s value has been declining ever since. Most of the coins in the network belonging to “fake nodes” — ie people with no skin in the game, who got them for free — there is nothing to lose for most players for dumping their bags at any price. But if a coin distributed through an airdrop is really good and it really is able to solve some problem better than other projects, long term it will eventually acquire its due value. However this could happen only after all those useless first generation holders without any skin in the game and no interest in the project have handed all their coins to other people, second generation holders, people who are trusting the project, who are choosing to pay for the coins and thus are putting their skin in the game. It is their skin in the game which will ultimately give to the network its value. Thus airdropping a coin is probably the less effective and slowest way to add skin in the game to a project, since you’ll need to wait for the second generation holders to become the “real” nodes which will enable Metcalfe’s law. Even in a good quality monetary network it takes time to clear the background noise of all the useless nodes with zero skin in the game.

So as we can observe, skin in the game is the number one cause of value in the world of crypto.


You Heard It Here First.

Once upon a time FIAT money was all about having skin in the game, being money originally the product of labor. But in time this bond has dissolved, up to the recent exponentially skyrocketing debasement of FIAT currencies which has annihilated all its fundamentals. What’s left by now is only a huge collective delusion in place, which sooner or later is destined to blow. Even though at the lowest level of the food chain common people have still skin in the game of FIAT money, because they have to work to get it, higher up in the food chain reality is very different. In the headquarters of FIAT money the biggest banks are literally playing God by creating limitless money as they please and for their own reasons and purposes with no skin in the game whatsoever. It is true that also BTC whales like to play God sometimes, and if they’ve got their coins in the early days of Bitcoin they too may have no skin in the game, but at least they are bound by limits, algorithmically determined. All that pile of QE money and derivatives shit which is being created by the financial Masters of the Universe at a rising pace has a zero skin in the game value and therefore its doomed to disappear. Since the only real backing of any asset is ultimately skin in the game, having removed that from the FIAT money game is the worst kind of debasement.

Finally, while there is a rising quest for regulating the crypto space, and there may be some rational for that, let’s not forget that it’s bad regulations what ultimately is likely to end up removing all skin from the game. It has happened before, it can happen again.

One of the most abused common places of mainstream commentators is that Bitcoin should not have any value because it is not backed by anything. They are completely wrong. In fact, they couldn’t be more wrong. Bitcoin is backed by pure skin in the game. Something you really cannot say for FIAT money any more. Not at all.

Anyone can draw their own conclusions.

RQ alias Cryptorobert
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