Having recently read an article on the BBC website purporting to try and explain the importance of blockchain to the world’s economy, I was struck by the intellectual muddiness of these waters and how easy it is to confuse blockchain with Bitcoin, and Bitcoin with altcoins.
It really is no wonder that the “man on the street” doesn’t understand these things, and consequently these misconceptions have become a real barrier to mainstream adoption.
At the heart of blockchain, it really isn’t much more than a ledger or database (dependent on which descriptor you prefer). A blockchain database is unique, however, through its three pillars of being distributed (multiple copies of), being decentralised (no one copy has version control), and immutable (each transaction recorded is unchangeable).
Bitcoin was the first blockchain, and as such is frequently referred to when trying to explain or understand blockchain.
What the Bitcoin protocol (the underlying rules of the blockchain) solved technically was the double spend problem. This was key to creating a digital cash that was unforgeable. It’s easy to go too far down the rabbit hole on Bitcoin and start looking at the economic programming and proof-of-work (PoW) consensus mechanism that makes Bitcoin so attractive to investors, but this takes us away from understanding blockchain.
In order to offer a simple explanation of the difference between blockchain technology and cryptocurrency, it’s best to use the analogy of the internet and email. Email, it’s widely agreed, was the internet’s first killer app – so email is simply an application built on top of the internet, but the internet offers far more than just email. Similarly, Bitcoin was blockchain’s first killer app, and as such, all cryptocurrency is built on top of a blockchain – but blockchain can do so much more than just cryptocurrency.
With blockchain working as a shared ledger and acting as a trusted central source of truth, we can see organisations looking to solve such complex topics as digital identity (Sovrin), supply chain digital transformation (Tradelens), food provenance (IBM Food Trust), and efficiency in the transportation and logistic industry (BITA). Under the cloak of darkness, many companies are aiming to create proof of concepts that can deliver real-world results for their various industries. In time, the cloak will be lifted and we will see which ones have succeeded and, hopefully, which ones have failed and we can learn from.
The Bitcoin protocol is slow, but this is not the protocol that would be used in enterprise environments. The Bitcoin protocol is energy hungry (through PoW), but enterprise blockchains would not use PoW as its consensus mechanism. If you’re looking at having a digital form of money, it makes sense that there should be a cost to creating it in the form of energy consumption. If you’re aiming to clean up the luxury goods markets from fakes and rip-offs, a consortia of luxury goods manufacturers and retailers using proof of authority makes sense – it really is a case of horses for courses.
The article also discusses the value that many intermediaries have, and this isn’t wrong. There are plenty of middlemen that actually add value to our every day lives, including the basic function of banking to be the trusted custodian of our money. However, there are also plenty of things that commercial banks do that do not add value, and we should take back sovereignty over – international transfers of money for one. Centralised third-party middlemen are not the problem, the degree to which we can trust them to act on our behalf is.
The BBC article misunderstands a basic precept about Bitcoin regarding the speed of transactions by comparing it to Mastercard and Visa. A better comparison for Bitcoin is gold, where transaction in the metal takes a long time and costs a lot of money as it’s generally done as a settlement layer at central bank level.
One day in the future, I, and many others believe that Bitcoin will be able to be used as simply as Mastercard or Visa is today, but that requires a layer two solution (such as Lightning), and a much more significant market cap that would be in the trillions of dollars. We may be some way from that being a reality at the present time, but that is just a reason why we should make the effort to understand these issues today.
The article jumps to talking about problems with other blockchain based currencies, known as altcoins, but without creating a clear distinction from Bitcoin and creating the clarification that there is no “the blockchain”, but actually many different flavours of the same concept. Many of the altcoins, are based upon a token that drives actions on top of the matching blockchain.
For example, Ethereum was a new protocol that went live in 2015 and was intended to be a decentralised global computer with the ability to execute smart contracts. Ether was the token created both as a way to raise the initial funds to build the technology and is now the gas that powers it. Ethereum also paved the way for a glut of new tokens created by entrepreneurs (and scammers) on top of the Ethereum protocol, most of which only had a utility within the application built on top of it.
Many people have tried to create new cryptocurrencies, some through forks of pre-existing protocols and coins (such as Bitcoin), and some as entirely new protocols. For some of the entrepreneurs that went down this road, it was little more than a way of making themselves rich.
However the main problem with the altcoins when trying to be viewed as money, is that they tend to be overly centralised (meaning that the transactions and rules of the currency won’t have as much trust), and look to reduce energy consumption and speed up transaction throughput through different consensus mechanisms such as proof-of-stake (PoS) or delegated PoS, and tend to lack scarcity – if you understand economics, it’s fairly easy to see that without significant cost and scarcity, there can be no significant value created with respect to money. Again, look at the comparison to finding and excavating gold from the earth.
My belief is that in ten years’ time, Bitcoin will have either changed the world we live in or will have become virtually valueless. Conversely, I believe that blockchain is here to stay and will change the world but needs to fade into the background.
The reality is that blockchain is still mostly hype, as was the internet in 1994. The industry needs time to develop – just because it’s hype today, it doesn’t mean that there isn’t real world-changing tech there.
Jon Walsh, Associate Partner Blockchain Rookies