From humble beginnings in the 2009 whitepaper, bitcoin is slowly becoming a household name, but still creates equal amounts of hype and confusion whenever its mentioned. And no wonder, for non-technical people this innovation can seem completely inaccessible—hidden in a matrix of mind-boggling jargon.
Beyond the Buzzwords
Even in articles written by the pioneers of this new technological frontier, the terms blockchain and cryptocurrency are sometimes used interchangeably—but they actually refer to very different things:
- Cryptocurrency is a new type of asset. It is a digital currency that uses cryptographic techniques for regulation and verification of transactions. Most cryptocurrencies run on a blockchain.
- Blockchain is a distributed computing architecture where every network node executes and records the same transactions. This was devised in its current form by Satoshi Nakamoto, who drew together threads from cryptography, distributed ledgers, and cypherpunk economics to create something entirely new.
In short, cryptocurrency is a new type of asset, and blockchain is the platform needed for its operation. Which raises the question…
Can a Blockchain Exist Without a Cryptocurrency?
While the bitcoin blockchain powers bitcoin, not all blockchains have a digital asset. In fact, some blockchains do not use a cryptocurrency or token.
This depends if it is a public blockchain (AKA a permissionless blockchain) or a private blockchain (AKA a permissioned blockchain).
Bitcoin, Ethereum, XRP Ledger and Monero are examples of public blockchains—public because anyone is free to participate by sending transactions, and no permission is required to operate as a full node and start mining.
Without delving too deeply into crypto economics, the reason public blockchains need a cryptocurrency is because it acts as an incentive for people to put their computers to work at maintaining the network.
In the example of bitcoin, users pay a fee to the miners to send a transaction. This gives miners an incentive to perform the ‘Proof-of-Work’ consensus algorithm that verifies the transactions within each block are legitimate. In this way, the public blockchain forms its own self-contained economic system.
Technically, a blockchain can exist without a cryptocurrency, but there would be no motive for anyone to maintain the network. Blockchains without cryptocurrencies need to be maintained by a single company or institution, and so are not truly decentralized. These are known as…
Instead of needing a digital asset to incentivize nodes to reach consensus, private blockchains, like R3’s Corda, and IBM’s Hyperledger have a central authority that allocates responsibility for maintaining the network to certain individuals.
Because this model relies on a single, corruptible authority to control the network, it is a step away from the original vision of Bitcoin as a decentralized system that is invulnerable to manipulation by a single party, like a government or bank.
But while they don’t correspond to the purist’s vision, private blockchains have opened up new avenues for businesses to take advantage of the blockchain, while maintaining control over the whole system.
Blockchains for Business
To some companies, the blockchain technology is a lot more promising than the cryptocurrency it was designed for. These companies can use private blockchains, without cryptocurrency, because they have no need to incentivize network participation by the public.
By controlling the entirety of the network themselves, these companies can still reap some of the benefits of a blockchain system —like shared, tamper-proof, instant record-keeping—without being decentralized.
However, the way these private blockchains reach consensus relies on a different algorithm entirely.
The consensus in business blockchains is often achieved not through mining, but by “Selective Endorsement.” Unlike the bitcoin model, which uses the “Proof-of-Work” consensus mechanism, not every participant is needed to approve each transaction and only selected parties are chosen.
This means the business is able to control exactly who verifies transactions, just like a bank does—which is why the model has attracted so much criticism from blockchain purists.
However, this is also why the model has become popular with long-established institutions—like Goldman Sachs, JP Morgan, and the Bank of America—who are researching how blockchain can be best implemented into banking practices to increase their efficiency, even as they publicly scorn bitcoin.
But it’s not just banks that can take advantage of private blockchains. There are lots of industries that have no desire to delve into the world of cryptocurrencies, but can still benefit from blockchain—which aside from its use as a transactional medium can offer better efficiency and transparency in applications like; keeping records that are shared between multiple companies; benefit distribution; insurance settlement; anti-counterfeiting; supply chain, etc.
Defining the Blockchain
With so many different blockchains—private and public, with different consensus algorithms, and different degrees of decentralization, it is difficult to fit the innovation into a single inclusive definition.
This not only doesn’t help people trying to understand the technology, but also doesn’t help governments move towards passing blockchain-related legislation.
But as the technology develops, projects die off, and others become more developed, clearer definitions will become mainstream.