07 JAN

Bitcoin and Blockchain, the unbreakable connection

People got to know about the Blockchain technology through the revelation of virtual currency, Bitcoin. And yet there’s been a lot of chatter around the community about the possibility of a Blockchain network without bitcoin. All of a sudden, people are starting to think that the Blockchain doesn’t need bitcoin to make its mark on the global ecosystem. Is it really possible? Well let’s clear out some facts before making any assumptions.

Bitcoin ‘minus’ Blockchain?

When IBM decided to scrap bitcoin and develop their own Blockchain network, people might have thought that bitcoin and Blockchain can indeed be separated. But the truth is, you can’t just have a Blockchain network without something like bitcoin. Most of the Blockchain enthusiasts learned about Blockchain by using bitcoin. There are lots of alternatives for bitcoin(though non is as good as until now), but a Blockchain technology without a corresponding virtual currency to be used as a medium of value exchange will not work. Here’s why:

1. Transfer of value

Blockchain is the most transparent public ledger ever created on a global scale which is based on a p2p (peer to peer) network. A decentralized network of computers, maintains this online ledger to eliminate the authority of any single entity. And there is no need for any trusted third party verification to process any transaction. These are the reasons why the Blockchain has become so popular among the users – a secured, third party management free network.

The Blockchain achieves its characteristics by recording the transaction in such way that anyone would be able to observe and determine the amount and other data of every transaction. For example, someone from UK wants to send $1000 worth of bitcoin to someone in Spain. Now the traditional system would involve sending the money using bank wire transfer which takes a lot of time to process and cost you a lot of money. The bank also make sure that the person sent the money was debited and the person received the money was credited.

This transaction would be a lot easier and cheaper in the Blockchain era, without the help of any intermediaries. Digital coins or tokens worth $1000 would be transferred from the sender’s digital wallet to the receiver’s digital wallet. The Blockchain “handles” this transaction and keeps a record so that anyone can observe the digital prove of the transaction.

But to establish a financial system that works without interference of third parties, we would need a coin or token to represent transfers of value in the global network. In the case of Blockchain, that token is bitcoin which also has a value in the open market making it an effective means to transfer value, just like a wire transfer for that matter. The sender can send bitcoin to the receiver and the receiver can exchange that bitcoin to the desired currency with the help of the different bitcoin brokers and exchanges available around the world. The Blockchain records the data of the transaction and the amount of bitcoins sent so both the sender and receiver can validate this data is real without the need of trusting each other or using an intermediary. So basically, it’s somehow similar to other currencies we know only much faster, efficient and transparent.

There are a number of alternative virtual currencies or “altcoins” out there but none of them have made any significant buzz as bitcoin did over the past years. The popularity of bitcoin is one of the key factor behind Blockchain’s glory. A digital coin is certainly necessary for any newly designed Blockchain, by a programmer or a company like IBM, but, it would be tough to compete with a partnership like bitcoin and Blockchain.

If IBM decides to create a centralized Blockchain, it will be very hard to keep the transparency of the network or its digital currency, among the users. It would be more like a closed system and people won’t trust the network. There would be limited participation in the network, and the participants would have to oblige to a central authority. The value of the currency and the transparency of the records would be determined by this central authority. Ultimately this centralized network with limited value would become useless.

2. Decentralized system

In this time of open internet, the characteristics of bitcoin are highly appreciated and these will only apply with a decentralized network in place. There’s no way of verifying the validity of a transaction on a closed network unless you have the admin access to it. With a centralized network there will always be a single point of failure making the network less secure. Centralized networks also tends to cost lots of money to maintain. With a decentralized network like the Blockchain, the system is self maintained so the costs of running it or transacting on this network are significantly lower.

Let’s suppose that a company established their own Blockchain network with the hopes of creating a decentralized authority. Now, to ensure the existence of a truly decentralized  and secured network, there should be mechanisms for compensation. These mechanisms will be based on tokens that represents a certain value or in short, Bitcoin. This compensation in a form of bitcoin, is given to “miners” based on a set of hard coded rules in the bitcoin protocol, which in exchange maintain and run the public ledger, Blockchain. These miners are the heart of the network and without them there won’t be a running network. That is where bitcoin comes in. Miners are rewarded for their effort in bitcoin which is collected from the generated blocks and the transaction fees. They create new bitcoins by allocating their computing power to the mining process and they are also the ones who confirms the validity of all transactions made over the Blockchain network. Anyone can become a miner, all you need is computing power, the more the better, and the right software

So in a decentralized network like Blockchain where anyone can transact, mine and validate transactions, it’s important to make the mining difficult. In practice, this difficulty would be the costs of electricity in order to run the computers that mine the bitcoins. so, when miners have to pay money to keep up their mining efforts, they also need to be paid as a reward for their efforts or else they won’t give these efforts to keep the network running and decentralized.

 

Blockchain needs bitcoin

Earlier this month, at a Web Summit in Dublin, Ireland, the Irish Times Journalist Pamela Newenham asked the Circle Co-Founder and President Sean Neville about this ongoing debate. He said

“There’s a sort of thing of, you know lately, blockchain tech versus Bitcoin, which is a little bit silly. I think someone has to value the commodity in order for transactions to be settled.”

Blockchain is already established and it has an established digital coin with a real market value, bitcoin. The community is getting bigger everyday with new people and investors getting interested by the efficiency, security and other advantages of this technology. For any centralized Blockchain based network, convincing the market about their own digital currency will be the most difficult task.

Again, if anyone comes up with an alternative Blockchain network, it will have to compete against the Blockchain of bitcoin; a network consist of thousands of miners and users working individually or in different pools to ensure the security of the network, a decentralized network model accessible to anyone. Not to mention, it will be up against bitcoin, the digital currency which stood against all the doubts of volatility and starting to make its mark on the global market. Therefore, it’s very hard to picture a Blockchain without bitcoin or bitcoin without a Blockchain.

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