Bitcoin and Blockchain

Bitcoin and the blockchain may not be separable in near future

The following comments were posted by Ryan Shea on Fred Wilson’s blog but they have far reaching implications and explain the whole bitcoin-blockchain issue in such an incredible manner that I had to take post them here. I think what is crucial here is that Ryan does such an incredible job at explaining his point of view and then explaining the broader context around it, so I hope the readers enjoy this.

  1. As William Mougayar pointed out Bitcoin and blockchains are not necessarily tied together. You can in fact have a blockchain without a unit of account, so long as you have a defined set of permissioned parties running the chain that trust each other in certain ways.

  2. As Fred alluded to in his post, permission-less blockchains and units of account ARE tied at the hip. This is because (a) you need a way to incentivize miners and (b) if you don’t have a unit of account, then you can’t have transaction fees, and so you can’t have a free market based spam control system.

  3. Permissioned blockchains are useful for certain things but they are limited in what they can do. Decentralized, permission-less, censorship-resistant applications CANNOT be built on them, which for many is a deal-breaker.

  4. It is extremely valuable to be building on the blockchain with the highest amount of security, aka the one with the highest cost of attack (COA). The Bitcoin blockchain is by far the most secure, with a cost of attack on the order of magnitude of $200M. No blockchain comes even close. In fact, I’d be surprised if there was another blockchain with a COA at even 1/10th of the COA of Bitcoin.

  5. If you agree with all of the above points, then it follows that practical blockchain use and Bitcoin are tied at the hip, at least for now.

  6. Many investors say they are interested in blockchain tech, but not Bitcoin. At first, you may think this is silly, if you take it at face value that Bitcoin and the blockchain are tied at the hip.

But I’d argue that this is not in fact silly. Consider this statement: “I’m interested in Internet tech, I’m just not interested in domains.” Domains are the fundamental unit of surfing the web, just as Bitcoins are the fundamental unit of the blockchain.

The internet cannot function effectively without domains, just like the Bitcoin blockchain cannot function effectively without Bitcoins.

So while people may recognize that Bitcoins are absolutely necessary for the blockchain to work well, they might just not get excited about them. And they may have the belief that most of the innovation on the blockchain won’t be tied to what is done with the currency itself, but rather the things that you can do on top of the blockchain, which does in fact need the currency.

Some other points:

  • It’s perfectly reasonable to say “yeah it would be great if the value of Bitcoin would go up, most importantly because that would increase the security / cost of attack of the Bitcoin blockchain, but I’m still seeing this as a high-risk endeavor and so I’m not going to put my money (or much of my money) into Bitcoin.”

  • It’s perfectly reasonable to imagine a world in which the value of the applications built on top of the Bitcoin blockchain and the non-financial assets on the Bitcoin blockchain (think OpenAssets assets, Counterparty tokens, Blockstore names) exceed the value of the bitcoins themselves. Keep in mind that the value of all domains is still dwarfed by the value of all of the properties that use those domains. That said, if this does happen, this could result in some problems with the security of the blockchain, since it would make the blockchain more desirable to attack. That still doesn’t preclude this reality from happening.