It is no mystery that I like Bitcoin and the blockchain technology. It is also no mystery that I am very keen to get to know entrepreneurs running companies based in that space to invest in them (if you happen to be one of them mail me: [email protected]). In the process of looking for such companies and assessing them I met many VCs, angels and I often heard the very same sentence:

“Well you know I don´t quite like Bitcoin, I don´t think it has a future but man, I would totally invest in the blockchain technology”

OK…I think that a least a good portion of them just got carried away by reading some blog posts or tweets and generally it is easy to hide behind what it is a very fashionable and somehow lazy answer.

FYI there is a nice discussion under the tweet above, I suggest you have a look at it and also you might want to read this. Now, I am sure that many of the people I talked to and that have a similar opinion have also thought through how the blockchain is interconnected with Bitcoin. In the following I would like to share with you my answers and thoughts to the question that I asked myself:

“can we really have the blockchain technology and therefore its applications working without Bitcoin itself ?“

Let us start with a simple definition that can probably sum up the essence of this blog post: The blockchain is Bitcoin’s public ledger.

To try to answer my original question I armed myself with resilience and tried to get a deeper understanding on how the blockchain actually works and what it really is. I will not try to present the theory behind it nor I will try to use a nice metaphor to simplify stuff. Rather let me try to show to you how the blockchain works hands-on. Even if you have a basic understanding of the blockchain technology, chances are you have never actually seen it. (yes! you can see it!! try it for yourself here) I was really amazed first time I saw the blockchain at work and I got a much better understanding of it once I did. This is how it looks like:

This is the blockchain. But what are you looking at? Every line is a block. Each block is positioned in a chain at a different height (1st column), each block is confirmed and inserted in the chain at a date called timestamp (2nd column), each block contains a number of Bitcoin transactions (3rd column). Here the miner will appear in the 4th column. Let us now open up one block and see what it contains inside (yes! you can see it!! try it for yourself here).

A block contains all the transactions that made up the block. Everyone can have a look at it and can see the transactional values. But again what are you looking at exactly? Bitcoins are moving from left to right, someone used an input of 0.90005064 BTC, spent 0.87965064 BTC and has a reminder from the transaction of 0.02 BTC. Note the (S) that means “spent” and the (U) that means “unspent”. Summing up the two values on right side, namely the (S) and (U), and the fee of 0.0004 BTC you will come to the value on the left side. Let us check together: 0.87965064 + 0.02 + 0.0004 = 0.90005064. It works! This transaction has been checked by a miner by going through all the transactions the sender ever made to check that those 0.90005064 are truly unspent. A notable number of individuals (usually a network of computers) are checking the blockchain and each transaction is checked multiple times, this one for example has been checked and confirmed 8 times. A miner will confirm transactions, bundle them together and try to solve a difficult math problem designed just to burn CPU. Once a miner solved it he/she will obtain a “proof of work” which is truly a proof that states the work has been done (solving the CPU burning math problem). Having obtained the proof of work, the miner will brodacast the block to the Bitcoin network that in turn will be able to see the proof of work done and will start building on this new block. The miner that broadcasts the solved block first will get as a reward the fees of the transactions and newly minted bitcoins. As of today the reward per solved block ist 25 BTC roughly USD 6k.

In case you are a little lost at this point let me sum up for you what we have learned so far:

a huge network is checking every single Bitcoin transaction in the hope of getting money as a reward. The reward is newly created bitcoins and bitcoin fees.

Coming back to the original question, as of today, should the BTC price go to USD 0 or should we be unable to exchange BTC for fiat currencies and/ or should no merchant accept BTC payments the blockchain would chase to exist. This is under the assumption that people will stop spend time and CPU to check a complex system of payments without a reward (I believe this is a pretty safe assumption). Another opinion that I heard is that in future BTC will be substituted by another kind of token to reward miners. OK, intuitively it sounds feasible but the question is then what kind of token? Money? But who would then pay it? A central authority ? Which one? And how would this central authority make money? And most importantly with what currency is the token given? The beauty of the BTC mining is that nobody is actually financing miners directly, rather the system rewards them with automatically newly minted tokens. To come at conclusion, at the moment and with the knowledge at my disposal I don´t see a viable alternative solution to a BTC reward for keeping the blockchain up and running. If you see one let me know (and explain me why).