Blockchain vs Bitcoin

The blockchain vs bitcoin. Bitcoin is a fascinating and profound innovation, however, I think that the underlying blockchain technology that powers bitcoin is actually more interesting, and wider reaching, than bitcoin itself.

Let me explain.

Blockchain vs bitcoin

What is the blockchain?

The blockchain is difficult to explain and it is quite often described using very extremely technical language which doesn’t really help it’s cause. I think this is because the blockchain is essentially a software algorithm that is the solution to a computer science problem about trust in communication (see below) and therefore people start explaining it in detailed software or mathematical terms. It was also created as part of a crypto-currency (e.g. bitcoin) and therefore needs lots of complicated descriptions!

Often the blockchain is mistaken, or confused, with bitcoin. The blockchain was created as part of bitcoin but it is also subtly separate.

This re/code article does a excellent job of explaining the concept & principles of the blockchain. An excerpt is below.

“Imagine that you’re walking down a crowded city street and a piano falls from the sky. As dozens of people turn to watch, the piano crashes down right in the middle of the street. Then, without a second to lose, every person who witnessed the event is strapped to a lie detector and recounts exactly what they saw. They all tell precisely the same story, down to the letter.

Is there any doubt that the piano fell from the sky?

This is the principle behind the blockchain.”

 

Wikipedia also a pretty good job in it’s article on the blockchain, Block chain (database), albeit using a little more technical language, plus gives a little more context about how the blockchain works. An excerpt from Wikipedia is below.

“The block chain consists of blocks that hold timestamped batches of recent valid transactions. Each block includes the hash of the prior block, linking the blocks together. The linked blocks form a chain, with each additional block reinforcing those before it, thus giving the database type its name. The original definition was written by Satoshi Nakamoto and found in the original source code of bitcoin.

 

So you might still ask the question… what is the blockchain? Hopefully the description below isn’t too technical.

  • The blockchain is a ledger of digital events.
  • The ledger is distributed across a group of participating nodes.
  • The ledger can only be updated when there a consensus of a majority of the participating nodes about an event.
  • Events are recorded into the digital ledger in batches (or blocks).
  • A block of the ledger is linked to the previous block by including a hashed reference to the previous blocks’ contents, thus creating a chain of linked blocks.
  • Trying to alter the events of a previous block would change the contents of each subsequent block (via it’s hashed reference) and mean the references become invalid.
  • Hence the name, the block chain, or blockchain.

In my language, Bitcoin is an implementation (or application) on top of the blockchain and uses the blockchain as the distributed storage mechanism for it’s events or transactions.

 

5 reasons the blockchain is more interesting than bitcoin

Now that I have described a little about what the blockchain is, let me explain why I think the blockchain is more interesting than bitcoin.

1. Byzantine Generals Problem

The blockchain is the first real solution to a communication theory or computer science problem called the Byzantine Generals Problem. You might hear this referenced as people talk about the blockchain.

From the research paper that explains the BGP

“This situation can be expressed abstractly in terms of a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement. It is shown that, using only oral messages, this problem is solvable if and only if more than two-thirds of the generals are loyal; so a single traitor can confound two loyal generals.”

The blockchain allows trust to be created between unknown parties over an inherently untrustworthy connection e.g. the Internet, in an automated or scalable way. The blockchain ledger can only be updated with an event if the majority of nodes agree that it can be verified as an event.

This is a profound innovation and means that the blockchain has a lot of uses beyond bitcoin.

If you’re interested in reading more about the Byzantine Generals Problem, it’s worth looking that the Two General’s Problem on Wikipedia. https://en.wikipedia.org/wiki/Two_Generals%27_Problem

2. The Internet of Trust

The Internet is an inherently unreliable (and untrustworthy) communication mechanism.

The TCP/IP communication protocol, which is the protocol behind the Internet, is based on the assumption that packets of data will be lost in transmission due to network congestion, routing issues, traffic load balancing, and/or simply unpredictable network behaviour. The Internet (TCP/IP) overcomes these reliability issues by using an acknowledgement and retransmission of data sequence so that the packets can be received and then reconstructed in the right order.

The blockchain allows for trust to be included on top of the Internet by including a mechanism to agree communication amongst the majority of participating nodes, like in the Byzantine General’s Problem, and creates a distributed ledger. The ongoing hashed reference to the previous block in the chain means that tampering with previous events is improbably unrealistic. This facilitates trust and verification to be established in what are untrustworthy (or at best unknown) situations.

I like to think of the blockchain as the Internet of Trust and opine that we will look back in 10 years and muse about how we ever used to do digital commerce / transactions without a blockchain being in place. Similar to how people now find it difficult to imagine a world without the Internet.

 

3. Opening up secondary markets

The blockchain is capable of reducing friction in the transfer of digital property and also provides digital rights holders more control over how & where their digital rights are used. This will mean that secondary markets, that were previously too difficult to access, manage or control, could become viable as the blockchain becomes more prevalent.

I like seeing models that were part of our community and civilisation for many years, re-appear somehow by finding their digital equivalent. (It’s like seeing the world repeat itself but just in a more efficient way.)

Some examples of secondary markets that I think could be very likely:

  • Public libraries for digital books
  • Secondhand markets (e.g. flea markets) for digital books
  • Digital movie rentals or sharing
  • Secondhard music stores e.g. record stores.
  • I’m sure there are lots more!

 

4. Digital currency is just the start…

Finally, similar to how we understand the Internet (TCP/IP) facilitates reliable communication across unreliable networks, I think we will end up seeing the blockchain as establishing trust across untrustrworthy (or unknown) networks.

Therefore currency (or bitcoin) could be just the start. I think this is particularly interesting as the fluctuation and controversy of bitcoin mining, storage & markets is distracting from the underlying framework and protocol of the blockchain.

Just as the Internet (TCP/IP) protocol has allowed communication for applications such as email, web, Facebook, Netflix, Instagram, and the list goes on; we will probably think of the blockchain as providing trust for currency, contracts, identity, eCommerce, etc.

The next few years will be fascinating to watch for how new applications, or new blockchains, will appear.

 

5. Winner takes most?

The blockchain is a distributed, or a peer to peer system, which removes the need for an intermediary or central broker within a system. This will reduce the barriers to entry and as barriers to entry reduce or come out of systems, the network effects of those systems become much harder to create or maintain.

Fred Wilson talks about this in his post about Winner takes most.

What these changes might mean is still relatively unknown, particularly as any transition would take quite some time. However, similar to the way that efficiency in information distribution with the Internet has caused significant digital disruption, I think we could see a similar effect from the efficiency of the blockchain.

 

Summary

I hope I’ve given you food for thought as to why I think the blockchain is more interesting than bitcoin. I’m not saying that bitcoin isn’t interesting (because it is interesting) but my view is that the blockchain will likely have a wider, horizontal impact across many applications. Similar to how the Internet (TCP/IP) has evolved from email and web, I think we will see the blockchain evolve from bitcoin.

I’m sure there is a long way, plus a few twists, to go in developing this technology. I’m looking forward to seeing how the blockchain adapts and evolves.

Further reading

If you’re interested in reading more about the blockchain and bitcoin… here are some great references.

Leave a Reply