The ‘Blockchain not Bitcoin’ Meme

29.07.2018

'I don't like Bitcoin, but I like the underlying blockchain technology'.

This is a meme that refuses to die, and reveals a lack of understanding of what blockchains are and what purpose they have. 'Blockchain technology' in action is just a slow, expensive distributed public database, where operations on the database (for example transactions) need to propagate to thousands of nodes all over the world. Imagine thousands of computers that all need to store the same large database, and that constantly need to synchronize with each other in order to store exact copies. It is highly inefficient when compared to just having a central authority maintaining a single database instead. This inefficiency is manifested clearly in the fact that Bitcoin can handle only 300 000 or so transactions per day, while Visa and Mastercard can handle that in a minute or two. In other words, anyone excited over 'blockchain technology' and not native blockchain tokens like Bitcoin could just skip it altogether and use the legacy systems - they are more efficient in most cases, cross-border payments being possibly the main exception.

No, the Bitcoin property of highest importance, and what makes all the slow, expensive inefficiencies of 'blockchain technology' worth it, is the fact that the network is decentralized and therefore anti-fragile. When no authority controls the database (also known as the ledger), no one can confiscate wealth, inflate at will, or freeze operations.

Decentralization of a protocol is never something that is fully obtained, but one thing that is absolutely needed to nourish this property is a native blockchain token like Bitcoin. Tokens (also called coins) are issued within every block that miners add to the blockchain. These blocks are also full of transactions that subsequently are publicly confirmed on the network. The issued coins in a block is a reward worth a great deal of money, and so multiple miners all around the world help maintain the network and confirm transactions just to be able to participate in the competition over the coins. Without the hard coded continuous rewards, these profit-seeking miners would drop off from the network immediately, leaving it in a weak, dysfunctional state ripe for attack.

So it all boils down to the following: If you like the blockchain technology but not the native tokens, who are you willing to trust to maintain the blockchain network for free? What if they abuse your trust just because they have the power to do so? If a blockchain is built on altruism, it will fail, just like certain national governance systems that comes to mind. Only by introducing a mechanism that decentralizes the 'clearing process' can a blockchain have long term value. We only have to trust the greed of miners, which is essentially trusting what we already know of human nature.