Untangling Bitcoin and Blockchain

Bitcoin and the blockchain are joined at the hip – so much so that a lot of people don’t distinguish between the two. Cryptocurrency and blockchain have almost become synonymous. But in fact, they are two different things, and it’s important to understand the distinction.

The blockchain is a technology. Cryptocurrency is a medium of exchange or a store of value that operates on that technology. You can have a blockchain without cryptocurrency, but you can’t have cryptocurrency without a blockchain. In fact, there are a lot of other possible uses for the blockchain beyond serving as a platform for bitcoin.

As an article by John Skar published at the Lew Rockwell website points out, the confusion is understandable when you look at the origins of bitcoin.

The original bitcoin white paper by Satoshi Nakamoto described a digital currency produced on a unique-to-bitcoin blockchain platform.  They were as inseparable as Siamese twins and many bitcoin enthusiasts share exactly that view of the world.”

It’s important to untangle the two because while bitcoin or any given cryptocurrency may not have any long-term value, the blockchain undoubtedly does.

So, what exactly is the blockchain?

In simplest terms, it’s an extremely secure, digital record book where you can record information.

More technically speaking, the blockchain is a distributed database. Think of it as a ledger that is replicated and stored on thousands of different computers. The fact that it is distributed across multiple locations means it’s decentralized. The redundancy in the system makes it extremely secure. No one computer is necessary to make it work. That makes it nearly impossible to hack or shut down.

The secure, decentralized nature of the blockchain makes it perfect for recording transactions. And not just bitcoin transactions. It can securely document the transfer of virtually any asset: homes, boats, stocks, bonds, artwork, or even gold and silver. 

So, it’s important to remember the distinction between the thing – cryptocurrency – and the technology it operates on – the blockchain – when we’re discussing the merits of each. Skar put it this way:

Now, if we’re discussing how bitcoin has the potential to replace the USD as a medium of exchange, we should focus on bitcoin “the thing”, not the blockchain technology as the means to transmit and certify ownership of ‘the thing.’ Does bitcoin ‘the thing’ possess qualities like ‘stable standard of value’ that make it eligible to be called money?  After all, that same blockchain technology can be used to document and transfer ownership rights to any potential money, including gold and silver, which are other types of ‘things.’  I have not heard any convincing arguments as to why these digital tokens can compete with physical gold and silver as a stable standard of economic value. I am as enthusiastic as anyone about the promise of the blockchain technologies … Blockchain technology may well be transformative and we are only in the early days. Then the cryptocurrency (bitcoin) comes along and says, ‘No, wait, transfer me on the blockchain! I’m worth something because someone used scarce computing power and energy to solve a math problem and there’s a limited number of these solutions, so scarcity = value, right?’ The distributed ledger does not have an individual owner, but there certainly are owners of bitcoin.  What I am trying to highlight is how the conflation is so embedded that it is like water to a fish—we don’t even notice it.  Bitcoin is not like computing or running water.  It is a series of unique digital signatures that use blockchain computing to transfer ownership of these unique digital signatures from one owner to another.”

The point here is that even if your skeptical of bitcoin, or of cryptocurrency in general, it’s important not to throw the baby out with the bathwater. A secure, decentralized leger system that is nearly impossible to hack, alter or shut down has wide-ranging potential. I’ll close with Skar’s final point.

Whether bitcoin or other cryptocurrencies are better suited than gold as the ultimate store of value, i.e., as sound money, has nothing to do with the technological platform they reside on or are transferred on. The sooner we stop conflating ‘technology’ with ‘coin,’ the sooner we will have a better understanding of what is and is not sound money.”

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