Bitcoin vs. the blockchain

The terms bitcoin and blockchain get used interchangeably way too often, which hampers understanding of the potential. So let’s clear up the difference.

Bitcoin, as you no doubt already know, is the name given to the decentralized virtual currency invented in 2008 by the mysterious Satoshi Nakamoto. A few iterations later, it has reached a market cap of almost $7bn and is used for purchasing, service payments, trading and for sending money around the world in a quick, secure and low-cost manner. The term bitcoin refers interchangeably to the system (usually capitalized, as in Bitcoin) and the currency itself (usually lower case, as in here are some bitcoins).

The blockchain is what makes Bitcoin secure and decentralized. It is a public ledger of all bitcoin transactions that have ever been executed. Transactions are grouped into blocks, which then pass through a verification process, part of which includes an identifier from the previous block. Once validated, the current block is added onto the previous block, forming a chain. Because each block contains encrypted information from the previous block, it is almost impossible to change the previous block without also altering the current block. It is even harder to change information from a few blocks ago, as that would involve also changing every subsequent block, and with the current encryption systems, that would take millions of years. (For more on how Bitcoin works, see here.)

Bitcoin can’t exist without the blockchain.

But can the blockchain exist without Bitcoin?

by Maya Karmon for Unsplash
by Maya Karmon for Unsplash

 

This is a subject of heated debate, with innovators creating blockchains without bitcoin, and with purists claiming that those aren’t technically blockchains. Let’s take a look at the two arguments:

A significant part of the Bitcoin mechanism involves the successful validation of transaction blocks. This takes time, specialized hardware and a lot of electricity, all of which incur costs. To compensate and incentivize the validators, known as “miners”, a bitcoin reward is automatically produced when a block is added onto the chain. Without this reward, there would be no-one able to do the work and the system would collapse. Even if a very wealthy volunteer decided to finance his or her mining/validating operation out of his or her own pocket, just because, he or she would have few if any collaborators, and the system would no longer be decentralized. So, technically, the blockchain can’t work without bitcoin.

Non-bitcoin blockchains do exist, but they tend to be centralized. Usually run by banks, corporations or as academic experiments, the incentive for the validators is strategic, not commercial. Their “reward” is operational efficiency, cost reduction or even just additional blockchain experience. Also, often in “private” blockchains the validation does not need to be restricted or difficult, so the costs incurred are much lower. In these cases, the bitcoin incentive is not needed. But the system is not decentralized, and is therefore vulnerable to manipulation and attacks. Purists insist that while they may be chains of blocks, they are not part of the blockchain.

De-centralized non-bitcoin blockchains also exist (such as Ethereum), but they use a different virtual currency instead of bitcoin (such as Ethereum’s currency ether). Same principle, different names.

Now, it is true that bitcoin is not the blockchain’s only potential application. Far from it. The public blockchain can be (and is being) used for recording information, transmitting documents and verifying ownership. But it still needs some element of bitcoin attached as a transaction fee.

We will no doubt see increasing activity in the blockchain space, both private and public, with broader use cases and deeper applications. The distance between private and public blockchains will continue to widen, as experimentation increases and as “permissioned distributed ledgers” become common corporate fare. For true decentralized, permissionless and secure distribution, however, the blockchain, the original one, will continue to develop and to grow, overcoming obstacles, volatility and confusing reporting. It will probably even outgrow the currency that it was created to support. To do so, however, it will continue to need a virtual currency such as bitcoin. Like all long-term relationships, the dynamics will adjust to experience and technology. But the relationship will last.

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