Most people following developments in Bitcoin are familiar with the often repeated mantra proclaiming the blockchain an innovative technological breakthrough, but Bitcoin an unnecessary and superfluous addition.
Blockchain vs. Bitcoin
Recent reports, for example, suggest IBM is exploring the use of Bitcoin-less blockchain technology. Separating Bitcoin from the blockchain, however, misses the fundamental, interdependent relationship between digital currency and its underlying blockchain technology.
In other words, you can’t have one without the other.
To be clear, when some speak of loving blockchain technology, they are referring to its use in areas beyond transferring monetary value, so called “Bitcoin 2.0” functions. For purposes of this article, I am not referring to these Bitcoin 2.0 possibilities. Rather, this article addresses whether blockchain technology can exist as a medium to exchanging financial value without bitcoin, or any native currency component.
The blockchain is a peer-to-peer public ledger maintained by a distributed network of computers. There is no central authority, and no need a trusted third party to process and verify transactions. Eliminating the need for third party intermediaries while maintaining a system that is completely secure, trusted, and verifiable is why the blockchain shines as a technologically innovative medium of exchange.
To accomplish this, the blockchain must record transactions in a manner that allows anyone to objectively determine how much value has transferred just by observation. Let’s say Sarah in the United States wants to send money—US$100 worth—to Adam in the Czech Republic. Doing this through traditional means—say a bank wire—requires intermediary banks to process and settle the transaction by making sure Sarah is debited, Adam is credited, and so forth.
To do this via blockchain technology without intermediaries, the transfer of value must be recorded in a way so that Sarah, Adam, and anyone else can look at the ledger and clearly determine that value has passed from Sarah to Adam. This occurs by recording the transfer of a digital coin—or token—from Sarah’s wallet to Adam’s wallet, demonstrating the transfer of value.
To be a truly decentralized exchange without intermediaries, this token cannot simply be a marker representing some other value, this token must speak for itself—it must have price. With the exchange of bitcoin, we know Sarah transferred value to Adam because she transferred something valuable to Adam. We know bitcoin is valuable because we can go to one of many exchanges around the world to buy and sell it at the prevailing market price.
In Sarah’s case, the transferred token should have a price equal to US$100 dollars, 2,500 Czech crowns, or whatever unit one wants to use to measure its price at the time of the transaction. Thus, the entry on the blockchain ledger records the circulation of a token with price to signify the exchange of value—which looks a lot like currency.
Any entity, whether it’s a solo programmer or IBM, is free to create its own blockchain with its own digital token, which would essentially be one of many “alt-coins” in existence. While little is known about IBM’s blockchain plans, if they—or any other entity—wants to utilize blockchain technology as a decentralized medium of exchange, it must involve the transfer of a valuable digital token—and something does not become valuable just by saying so. This is determined by the market.
If IBM’s plan involves some form of a centralized blockchain, then the participants could define the value of its token within the closed system. This system would not be open and trustless. Participation in this blockchain would be limited, the participants would have to agree upon the value of the token, and a central authority would have to hold the parties to this value. Outside these participants, a centralized blockchain would be useless and its tokens would be of limited value.
Bitcoin’s price is supported in large part by speculators who are attracted by its potential to increase in value due to its scarcity, secure network, and first-mover advantage. Any would-be decentralized blockchain would have to convince the market its digital token is valuable, which is no small feat.
Alternative blockchains would be in competition with Bitcoin’s blockchain, which already has a vast pool of miners and participants working to secure the network to earn bitcoin; its structure would be in competition with Bitcoin’s decentralized model open to all participants; and its tokens would be in competition with bitcoin, which, while volatile, has thus far stood the test of time and has gained price worldwide.
By Waseem Karim
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- The Revolutionary Roots of Bitcoin (OP-ED)
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- Beyond Currency: Bitcoin as a Disruptive Technology