Why is Square banking on the Bitcoin Blockchain?
The announcement by Square CEO Jack Dorsey that the company is building a new business to support DeFi (decentralized finance) is not surprising. After all, Dorsey, who also founded Twitter, is a big believer and proponent of cryptocurrencies.
What was surprising is the choice to build on the Bitcoin blockchain.
“Square is creating a new business (joining Seller, Cash App, & Tidal) focused on building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services,” Dorsey tweeted on June 15. “Our primary focus is #Bitcoin. Its name is TBD.”
Let’s be honest: when people talk about Bitcoin, they don’t necessarily talk about its blockchain technology. They talk about the world’s first digital currency as a “store of value” such as a precious metal. It’s often referred to as “digital gold.” That’s what’s behind this year’s massive surge in Bitcoin’s price, which reached a new all-time high of more than $60,000 in April, only to plummet to less than half of that in May.
But if you’ve followed Bitcoin from its creation, you know that the digital currency’s original premise was to create a decentralized, open-source, and transparent means for people to send and receive funds. Eliminate the middle man (i.e. banks) and provide everyone, including those who do not have access to a banking account, the ability to control their funds. That’s what was proposed in the now-famous white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” written by the mysterious Satoshi Nakamoto.
While its original premise was lofty, the nascent digital technology has had its share of bumps along the road. In 2012, bad actors gave Bitcoin a bad reputation, as drugs and weapons were reportedly being bought and sold on the “Silk Road,” a digital black market. A later scandal in 2014, shocked the crypto world when Mt. Gox, a Tokyo exchange, announced more than 850,000 bitcoins had been stolen. Regulators quickly jumped in to crack down on illicit activities and to this day, they continue to try to build a framework in which all digital currencies can operate.
Despite the obstacles, true believers prevailed and Bitcoin maintained momentum, especially as an asset.
Its underlying blockchain technology, however, was overshadowed by the world’s second digital currency network, Ethereum. Its ability to efficiently execute “smart contracts,” which allow developers to build financial tools that are executed without a middleman, has made it the choice for DeFi.
The speed and efficiency of the Ethereum network have overshadowed the Bitcoin blockchain. On top of that, the move by Ethereum toward “proof of stake” versus “proof of work” makes the number two network more energy efficient. That’s an ongoing concern about Bitcoin mining, which is viewed as an energy guzzling technology.
So, against all of these headwinds, why is Square banking on the Bitcoin blockchain? It’s no secret that Square has a significant investment in Bitcoin, which ups the ante.
It could also be that the company is betting on the pending upgrade to the Bitcoin network, called Taproot, to help it zoom past Ethereum and other blockchains in terms of speed, efficiency and privacy.
Square’s announcement didn’t do much to move its stock price. But right now, the mainstream market has cooled in its earlier frenzy about digital currencies, so that’s not totally surprising. Plus, Dorsey isn’t a fickle follower. Whatever the reason behind the decision to go with Bitcoin, the next move for Square and TBD (which has its own Twitter account @TBD54566975) will be closely watched by the crypto community.
Joyce Pavia Hanson