Bitcoin’s Darknet phase was critical and will always be with us as a niche
To see how big the Darknet is, go to DeepDotWeb. The Darknet is a perfect early adopter market for bitcoin. The market may be a niche, but it is a big enough niche to prove the technology. There are plenty of people who do things that are illegal in some jurisdiction or another. They may live in a dictatorship or believe that what they want to do (such as use drugs) should be none of their government’s business. Crooks and good people co-exist in these markets.
Bitcoin needed Darknet users because they are motivated. Traditional payment methods don’t work for them, so they use bitcoin even if it takes a bit more effort.
Reality check in one chart – bitcoin is a tiny, tiny part of the world economy. That is why bitcoin needs to move to the Clearnet phase.
I am not suggesting that the Darknet will disappear. It will coexist with the Clearnet. The Darknet serves a real purpose.
Darknet users may move to Altcoins such as Z Cash and Monero that are more private. Or they may stay with Bitcoin and use mixers to obfuscate the transaction.
The mainstream market – what we call the Clearnet – wants something legal and is less concerned with privacy.
Why Bitcoin will move to Clearnet phase
Clearnet does not just mean retailers adding bitcoin as a payment option. We had lots of Press Releases about that and it is not much more significant than adding some obscure Fiat currency. If you think you will get a lot of visitors from Swaziland (close to Switzerland in the pick list but only about $6 billion GDP) you might offer to accept payments in Swaziland currency. If you think you will get a lot of visitors from bitcoin land you might offer to accept payments in bitcoin. The bitcoin market cap (not quite GDP but the closest parallel with easily verifiable data) is about 10x higher than Swaziland and 10x lower than Switzerland.
Two key points about this transaction:
- It does not move the needle for the retailer. They think “if it is totally simple, why not do it, but don’t expect much from it”. You know those signs where it says “Pay With Bitcoin” at a physical shop and the teller has no clue how to do it. It is easier in e-commerce sites, but it is still not a game-changer for them. Ask them what % of revenue comes through Bitcoin.
- Retailers will probably convert immediately to Fiat. They really don’t know much about bitcoin. That could depress bitcoin price leading to lower interest in bitcoin.
That is very different from Darknet, where bitcoin payment is critical to both buyer and seller.
The Clearnet phase will be when thousands or even millions of free agent knowledge workers charge for their digital products (code, writing, designs, movies, music, etc) primarily or entirely using bitcoin. These buyers and sellers care about bitcoin, but unlike the Darknet these are for legal transactions.
These Clearnet digital vendors will price in bitcoin (or in Satoshi, depending on the price point) and maybe offer conversion to Fiat and maybe an option to pay using legacy payment rails (maybe for an additional fee). This is the bitcoin-first option.
Then there is the more radical bitcoin-only pricing. You are invited to pay in bitcoin and those who do not already have a bitcoin wallet are given links to help them get into the bitcoin economy. That network effect will drive adoption.
This will happen first among free agent, knowledge workers who offer digital products/services cross border. Let me break that down:
- Free agent. This means an individual or micro business. This “gig economy” accounts for an increasingly large share of global GDP
- Knowledge workers. These are people with a lot to offer. They know a lot. However they are also free agents, not working for a big brand name company. They are high end gig economy workers.
- Digital products/services . The bitcoin Clearnet will happen first in digital products, because the no return irrevocability of bitcoin is easier in digital products where delivery and payment can be concurrent. I pay for an hour and get an hour. I pay for a report and get a report. That is very different from ordering Extra Virgin Olive Oil from a micro producer and getting it some days later depending on how much I pay for shipping.
- The price is high enough for Bitcoin as it works today with on-chain verification. For example, this would not work for a $10 product but works for a $400 product.
- Cross Border. If somebody in Swaziland wants to pay somebody in Sweden (very close in the country pick list), what currency do they choose and what payment rail? Bitcoin is simply the easiest option, particularly if you get a more complex transaction such as Swaziland Bob pays 1 bitcoin to Sweden Alice with 20% automatically going to Ted in Tokyo who then buys something from Carol in Copenhagen. Bitcoin is like cash but it is smart programmable cash.
Three reasons why this is starting to happen:
- Price move. The correlation of searches for “bitcoin” and a rising price are clear. When the price goes up, the mainstream notices.
- Increasing Respectability. This varies by country. Switzerland is one where you can buy bitcoin at any train station, pay your taxes and speeding fines and it is all totally legal and normal. Japan is another country where bitcoin is legal and increasingly mainstream.
- Real need. The highly educated knowledge worker gig economy is real. In Fintech that market is becoming bigger as managers leave incumbents (voluntarily or involuntarily) to set up shop as consultants. The bitcoin Clearnet means that highly educated knowledge workers don’t have to trade their expensive education for a “career” driving a car for Uber.
Bernard Lunn is a Fintech thought-leader and deal-maker.
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