What happens if Bitcoin itself is obsoleted by another digital currency?

Question

Unless Bitcoin is replaced with a Bitcoin-compatible currency, I believe that all holders of Bitcoin will be out of luck when the day comes that it is obsoleted by a superior system, as inevitably happens in almost everything electronic.

Normally if a new commodity type is introduced into the market (such as the discovery of petroleum), the market will naturally find a new equilibrium, and this is not a problem. Normally when a new fiat currency is created, there is usually an exchange policy in which holders of the old currency are issued units of the new currency, but I don't see how this is possible in systems like Bitcoin. Nobody is going to want to trade units of the superior new system for units of the inferior system if they know that everyone in the world is going to stop accepting the old system soon, so everyone holding Bitcoin at that time will find that their savings are suddenly worthless if they cannot somehow be "brought in" to the new system.

As we know, the entire Bitcoin infrastructure is limited in currency units, which is normally an advantage because it prevents "money printing". Because of this, the only ways I can think of to solve this potential problem is if the new currency system has more units than the old, and when the old system is to be replaced, the developers of both systems coordinate to release a new version of their systems in which the new system is made to be downward compatible with the Bitcoin network, and somehow one unit in the new system is marked as unmineable and is instead replaced with the already mined units from the old currency system, which will probably result in forking both currency systems.

The consequence of NOT replacing one digital currency system with another is that either every new system or fork which gets popular will "print money" due to their creation increasing supply without proportionally increasing, or that innovation in digital currencies must be limited to things which are reasonably compatible with the existing systems. So if this problem cannot be resolved, it either means a slowing of the progress of humanity, or an occasional massive loss of purchasing power punishing whoever is unlucky enough to be a large holder of the old currency at the time that it becomes discontinued.

Is someone working on this problem, or are all the developers of digital currencies like Ripple, Bitcoin, Litecoin, and others simply betting that their system will be the victor for all time?

Answer 1

I certainly disagree that a newer digital currency could be compatible enough that the units would replace bitcoins in some ordered fashion. – In that case bitcoin would be close enough to evolve by update into that system. If one thinks about it that way, this has happened before: The Bitcoin protocol has already gone through some update induced hard forks. – Had at that point a significant portion of the community decided not to upgrade they would essentially have had their own separate version of bitcoin.

So, should a sufficiently superior contender arrive, it would have to compete for the same market and the losing system's units would lose value until an equilibrium were reached or one ceased to exist. However, due to the opensource nature of these projects discoveries made for one system are quickly adopted to others as well, or in other cases the rivalry is not as close as one might think. One must also consider that substantial investments made into existing systems would drive effort for preservation.

For example Bitcoin and it's offsprings such as Litecoin are close enough that they compete for the same market, but also close enough that their innovations transfer quickly, on the other hand Ripple and Bitcoin are somewhat dissimilar in their endeavours: One wishes to enable fluid exchange and to facilitate payments beyond currency barriers, while the other supersedes in privacy and wealth storage.

Answer 2

If (when) there is a useful innovation with an alternative to bitcoin, it is possible that innovation will be wanted in Bitcoin as well. There is a hard fork wishlist already with certain improvements that could some day be added to Bitcoin.

For instance, let's say an alt that has support for Zerocoin (a feature that provides anonymity) is proven to be functional and useful, that will increase the likelihood that it gets added to Bitcoin at some point as well.

But Bitcoin exists because of its ability to be resistant to censorship. This means that xternal parties (crooks, governemnts, etc.) cannot alter the Bitcoin transaction ledger. This property exists solely due to the proof of work function performed by the miners which prevents a 51% attack. Since the level of hashing needed to protect from a 51% is not some hard number, essentially the more greater level of hashing means a greater level of resistance. At some point the level will be sufficient but since that's not known, alternatives using proof-of-work will have a hard time garnering enough hashing capacity to prevent the 51% attack.

So the risk of bitcoin losing share to a competitor should be weighed against the difficulty that an alternative would achieve a sufficient level of hashing capacity to be protected from a 51% attack (presuming it is a proof-of-work based alternative currency.)

Its very possible a digital voucher system such as that offered through an Open Transactions server, or Ripple, etc. could grow to total a very large monetary value. That would likely grow the size of the pie and benefit bitcoin versus being a substitute.

What is also possible is that regulators will relax or abandon the AML/KYC requirements -- and thus the ability for Bitcoin to be used anonymously gets sufficient competition from centralized alternatives, which would be able to compete as being less-expensive to operate as well as likely being a brand with corporate backing sufficient to cause growth from paid promotion, for example.

In the meantime there are likely years or possibly decades even before Bitcoin gets supplanted by a competitor. There could be hundreds of billions in value (or more) coming Bitcoin's way before any competitive challenge appears on the scene.

And even then -- just as fiat's value doesn't disappear overnight due to the realization that digital currencies are superior, Bitcoin's value won't disappear overnight either. The progress of alternatives will be measured and evaluated and should rapid growth of any of them arise, selling pressure on Bitcoin will occur. While losses might be the result, those watching the scene will ease up on the size of their Bitcoin position as more information about its long term prospects are known.