This article is the first part of a series called “Lightning improvement proposals” that I will publish over the course of the next few months. The series focuses on ideas to improve the usability of Lightning as we’re moving towards towards broader adoption.

Unit bias and the need for a different base unit for Bitcoin

Humans are interesting creatures: Even the ones believing they’re absolutely rational thinkers are subject to a ton of biases. Wikipedia alone lists over 190 different types of cognitive biases. One of them, which is usually scientifically associated with “what portion sizes have to do with how much food you eat“, is called unit bias.

We can observe the exactly same phenomenon in cryptocurrencies, such as Bitcoin. In this context, unit bias refers to the concept that buyers are more enticed to buy a whole unit of a given currency instead of a fractional quantity. This has become a quite controversial discussion point in recent years, especially when it comes to altcoins with a large total supply. Ripple (XRP) is one of these coins. What might look like a steal at first sight (at the time of writing this article you can get one full XRP for only 0.3$, while you have to pay 3600$ to get one BTC), quickly falls apart as soon as circulating supply or total supply is considered.

In above table I have compared the current valuations (16.02.2019) of three cryptocurrencies. As you can see, Ethereum currently has 6x the circulating supply of Bitcoin, while Ripple comes in at a whopping 2350x. In other words: If Ripple had a supply similar to Bitcoin, one XRP would need to be priced at 704$. Doesn’t look as cheap as 0.3$, doesn’t it? Other smaller altcoins at times come in at even higher price/supply ratios, successfully taking advantage of human psychology. Still not convinced that this phenomenon is real? Look no futher than the following Reddit post.

To conclude: For most people it just “feels” a whole lot better to be a Dogecoin millionaire, rather than being the owner of a “mere” 0.51 Bitcoin.

You can buy a fraction of a Bitcoin. Can you?

But the dilemma doesn’t end here. While most Bitcoiners of the early days know that one can buy a fraction of a Bitcoin (e.g. 0.0050347 BTC), a lot of new investors in the space are not aware of this fact. Many of them have the wrong belief that the current base unit (1 BTC) is not divisible, similar to stocks that you can buy from your broker. Future upcoming Bitcoin ETFs certainly won’t be helpful in that respect and will likely further solidify this wrong notion in the minds of many unexperienced retail investors (you cannot split the units purchased as part of an ETF).

And while “You can buy a fraction of a Bitcoin” has become a meme in recent years, I just don’t see how education alone will help to clear this up. After all, where should this kind of education for absolute newcomers in the space be coming from? Mainstream media? Exchanges like Coinbase? Word of mouth at the annual Christmas dinner with the family? Call me pessimistic, but I expect that in the next Bitcoin bullrun things will just get worse and Bitcoin, ultimately reaching far beyond 100k USD per current base unit, will feel even more unobtainable for the majority of people.

Humans are just not good with decimals

Last but not least humans are a whole lot better at adding, subtracting and memorizing integers such as “12” or “1430”, as compared to rational numbers like “0.00000012” or “0.00001430”. Try it out yourself. You’ll be surprised how much slower you are in adding and subtracting rational numbers and how significantly the error rate increases, if you try memorizing them.

One could argue that it’s just a matter of getting used to it. But then again, why should we make the transition to Bitcoin unnecessarily hard? Especially, since many existing currencies use subunits precisely for the same reason (0.1 USD = 10 cent, 0.1 EUR = 10 cent, 0.1 GBP = 10 pence).

Why should we choose Satoshis (sat) as the most commonly used Bitcoin denomination?

As many of my readers probably know, there are several official denominations for Bitcoin, such as the “Millibitcoin” or the “Bit”. Recently, with the widerspread adoption of the Lightning Network, we’re witnessing the introduction of even more denominations, such as the “Millisatoshi” (1/1000th of a Satoshi).

Why should we go for Satoshis (sat) and not any other smaller denominatoin, such as the “Microbitcoin” (µBTC)? I would argue for futureproofing, as it is quite hard to change a base unit in peoples minds, once they’re used to it. As of today, many people don’t even know what a Bitcoin, let alone a Satoshi, is. Therefore the opportunity cost to move the market to a smaller base unit is still somewhat small. Imagine you’d attempt such a transition, once half of the world is using Bitcoin: You’d certainly have a more daunting task at hand.

We should therefore clearly aim for a unit/denomination today, that works for Bitcoin as widespread “world money”, while avoiding all of the pitfalls highlighted earlier in the blog post. We should straight out choose a base unit, which we possibly never have to change again for decades or centuries to come. And this is where the Satoshi (sat) really shines: As Jason A. Williams rightfully points out on Twitter, one Satoshi would be worth one cent, if one Bitcoin becomes worth a million US Dollars.

If Bitcoin ever reaches such high valuation in US Dollars, we can clearly consider it world money. Mission fulfilled.

The Lightning network as accellerator. Or: What businesses in the Bitcoin eco system should do today

With the Lightning network growing at tremendous speed, we’re witnessing the re-emergence of micro payments with Bitcoin which had become unsustainable on the main chain in recent years. And with it, the need for a smaller base unit has dramatically increased. This is, where the ecosystem should use the occasion to make a push for Satoshis (sat) as smaller base unit:

Lightning Wallet Providers and Merchants: Use Satoshis as new base unit straight away and display Bitcoin only as alternative unit in the user interfaces.

Bitcoin Wallet Providers and Exchanges: Show wallet balances not just in Bitcoin, but alternatively display them in Satoshis. This is to get current Bitcoin users accustomed to the new base unit. At a later stage, perhaps in a few years, Bitcoin and Satoshis can also switch place in your products.

Let’s prepare Bitcoin for mass adoption as “world money” with a new base unit that is intuitive and easy to use. Let’s start “counting in sats” today!