Bitcoin or blockchain?

Tuesday 16 June 2015

Blockchain is a given, but bitcoin isn’t going anywhere just yet.

Whilst venture capital money has been pouring into bitcoin-related businesses, the financial sector has been more wary of bitcoin, treating it as something between a threat and an untested technology. However, there have recently been a slew of reports that big financial organisations - such as the US stock exchange Nasdaq and the Euro Banking Association - have started to explore the benefits of the blockchain, or the technology that underpins bitcoin. This indicates that they see promise in the idea, without endorsing bitcoin in its current form. What does this mean for the future of bitcoin the currency?

Blockchain

Bitcoin is blockchain, but blockchain is not bitcoin

Protocol vs currency

Bitcoin is a protocol as well as a currency. It’s worth distinguishing these two things, because seeing it as a currency alone is terribly reductive of the power inherent in the idea of the blockchain. The blockchain, or bitcoin the protocol, enables peer-to-peer transfers of information (which is really what bitcoin the currency is) between users. It’s the difference between a platform or an overall technology and the specific application. For example:

Technology Application
Social networking MySpace, Facebook  
TCP/IP Internet
Internal combustion engine    Lambo
Fermentation Beer
Blockchain Bitcoin, Litecoin…

You get the idea.

What does this mean for bitcoin?

The interest in the platform - blockchain - over the currency - bitcoin - is understandable. Bitcoin the currency has huge benefits, but it has flaws too. Blockchain the technology has clear application. Back in 1999, you might have realised that e-commerce was going to be a big deal, but do you buy shares in Pets.com or Amazon.com? The banks are looking at e-commerce in general rather than trying to pick a winning stock.

Does this mean that bitcoin the currency is doomed, as some blockchain advocates have suggested

In the medium-term, absolutely not. The idea of cryptocurrency, crypto-stocks and a whole load of other applications built on the blockchain are here to stay. There are just too many benefits and too much research and activity to suggest otherwise. Bitcoin itself is experiencing a huge amount of VC interest, and with regulatory approval it looks like 2015 is going to be a coming-of-age year for bitcoin - the year when it finally puts off its murky reputation as currency of choice for speculators and darkmarkets and makes inroads into the mainstream with a series of high-profile business ventures.

Long-term, who can tell? Bitcoin has flaws: its limited capacity, its 10-minute blocktimes, the centralisation of its mining infrastructure and its slow pace of development, to name a few. None of these are insurmountable. All can be solved. Will all be solved? That’s another question, and one that comes down to bitcoin politics more than technology.

Right now, there are no contenders for the throne. Bitcoin’s network effect appears unassailable, its transaction volumes streets ahead of those of its closest competitor. It will surely stay that way for some time to come. But forever? Well, that’s the 21 million BTC question.


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