Why there is no Blockchain without Bitcoin (in 750 words)
Whether you are new or a veteran to digital currencies you’ve probably heard Bitcoin referred to as “internet cash”.
That is true, Bitcoin behaves like cash except for one big difference. If I hand you a $20 bill, it becomes yours the moment it leaves my hand. It is now in your possession. In other words, we need to physically be in the same place.
With Bitcoin, this transaction can still happen but instead of being in front of each other we just need to be online. You heard that right… you could be anywhere in the world and receive my $20. In a world with $4 smartphones, chances are high that we are connected all the time.
This is no easy task however. If those $20 are in the form of a file or email attachment, who’s to say I haven’t already spent them? Or copied the file 5 times to create $100?
In order to solve this problem, some smart geeks created a list of transactions that record who sent/received every bitcoin since the technology was created. Meet the blockchain.
The blockchain guarantees that if I want to send you $20 it must first be in my possession. Just like in the real world, I can’t give you more than $20 if that is all I have.
In order to keep this list updated these smart geeks created a competition where computers race to solve complex math problems. These computers can be purchased by anyone, including you and me.
“Now why would we do this?” you may ask. Well, whoever solves these problems first will receive a financial incentive in the form of this internet cash.
The first computer to solve this problem broadcasts the answer to all others racing against it. Think of it a bit like bragging rights that they got there first. All other computers will then plug in the correct answer and after seeing that the prize has already been collected, they unanimously agree to move on to the next (slightly more difficult) math problem. This goes on 24/7/365 and is what determines the supply of new bitcoins in the market.
Additionally, when these difficult math problems are solved and agreed by all, they also include the information of all the transactions made up to that point. A chain of transactions, if you will. That includes the $20 I sent you. Now everyone knows I’m short of $20, which belongs to you.
So what’s the big deal?
Online payments haven’t changed much since the introduction of the internet so this technology has mindblown a few people. So much that the inventor of Bitcoin was even nominated for the 2016 Nobel Prize in Economics.
A lot of people really love the Blockchain. They think it will revolutionize a lot things. However, for a few of them, Bitcoin is slightly less sexy. It comes with it a lot of baggage.
So “experts” at IBM, Microsoft, and at least 42 other banks have joined forces to create their own Blockchains. Without Bitcoin, a very important question goes unanswered.
If you recall those individuals who spent their hard-earned money on our problem solving computers, they did so for an obvious reason… they were competing for a financial incentive in the form of newly created bitcoins. Without this financial incentive, it would be the equivalent of paying your internet bill every month but leaving it open and password-free for every neighbor to use.
A world with free wi-fi sure sounds nice unless you are the one paying the bill at the end of the day. And when we consider the cost of a warehouse full of these computers, you can imagine it may become unsustainable.
So in order for digital money to work without bitcoin both the supply of new internet money and the verification process of confirming our transactions can only exist when there is a middleman involved.
In other words, I don’t hand you the $20 anymore. I hand it to them, and they pass it to you. All of the sudden we are back at same world of online payments that hasn’t changed for decades.