TWO MAIN TYPES
Not all blockchains are created equal. Some empower individuals, others profit corporations. This article takes a look at who benefits and why. Of course, the world isn’t neatly divided into two categories: people and corporations. Companies are composed of individuals after all. However, the interests of people, in contrast to corporate motivations, may be a useful framework for understanding two primary types of blockchains: “public” and “private”—or perhaps, “public” and “corporate”, is a more apt depiction. Let’s first cover some basic terminology to better make sense of blockchains and how they are used in real-world applications.
A blockchain is simply a special type of database—one that is usually replicated and distributed amongst numerous interested parties. The structure of a blockchain can be imagined as an ever-growing string of blocks, each block containing a set of records, and each block linked to the previous block. Because of some clever cryptographic tricks, blockchains are extremely secure and basically tamper-proof, making them ideal for financial record-keeping. Banks and other financial institutions frequently refer to blockchains as DLT, or Distributed Ledger Technology. A quick look at the history of these terms, and how they came into use, is illuminating.
Bitcoin is the first real-world example of a blockchain . Let’s face it, whatever the technical virtues, Bitcoin  struggles with a somewhat tainted public image for a number of reasons. Bitcoin’s association with black markets and the ability to function as a digital currency without the blessing of a sovereign state, can make it seem like a shady alternative to the dollar, euro, yuan, or any other bona fide national currency. Despite the negativity, Bitcoin embodies the most prominent example of a blockchain—and was designed with peer-to-peer (P2P) electronic cash transactions in mind. What exactly does P2P imply? Well, at the most basic level, P2P is a value exchange of digital cash, denominated in bitcoin, between two individuals connected to the Internet.
Not long after Bitcoin came to prominence in 2013, banks and other established financial businesses began to promote the idea of blockchain as a separate innovation from Bitcoin—but what was their motivation for this? Well, for one, banks are beholden to the established regime of sovereign currencies, and don’t want to be associated with a renegade digital currency like bitcoin. Yet, upon close inspection, there appears to be something undeniably useful about a blockchain—or distributed ledger—if only that dubious currency, bitcoin, could be extricated from the equation. Banks and financial institutions began to refer to blockchain as a distinct part of Bitcoin, a technology that could be segregated, captured, and used independently, for improving corporate efficiencies . More recently, some businesses have further distanced themselves from Bitcoin by ratifying the generic term, DLT, and renouncing the word, blockchain, altogether.
Perhaps there is another way to view what’s going on here? Bitcoin was created as a new form of electronic cash, enabling individuals to transmit value online to one another via the Internet. Imagine being able to send digital cash directly to anyone, anywhere in the world, reachable by email. Bitcoin makes this possible. It was purposefully designed for peer-to-peer, i.e., person-to-person, online payments. Although the US Supreme Court has granted a kind of personhood to corporations, Bitcoin was not conceived as a means for banks or other business entities to transact with each other. Of course, the Bitcoin protocol does not discriminate who or what can act as a peer on the network, so corporations are not prohibited in principle. Therefore, it only makes sense that Bitcoin, as designed for individuals, is not particularly useful to corporations—and because mainstream news is largely controlled by corporate interests, it’s not surprising that Bitcoin is frequently vilified and mischaracterized. However, people need to understand that Bitcoin was created on their behalf, as a means to enable person-to-person electronic cash transactions. In a day and age where the Internet is evermore pervasive, paper money needed a major upgrade.
Corporate entities may desire the utility of a distributed ledger, like the Bitcoin blockchain, but they necessarily want to limit the universe of users to those authorized and aligned to their business interests. Financial institutions that embrace blockchains are endorsing what they call “permissioned” or private distributed ledger technology, whereas, Bitcoin is a “permissionless” or public blockchain . For this reason, it may be useful to think of two broad categories of blockchains: those designed for the benefit of individuals, and those being developed for corporate use.
Of course, nothing is black and white in this world. Corporations have their rightful place, and make both positive and negative contributions to society, as do individuals. But, let’s not forget, corporations are fundamentally designed to be profit-centers for shareholders. Perhaps “DLT” should be a label designating permissioned blockchains, used by banks and corporations, and the word, “blockchain”, reserved to distinguish technologies like Bitcoin, which are designed to serve individuals and the public good, and do not censor or restrict who gets to participate.
Make no mistake, distributed ledger technology—although inspired by Bitcoin—is being repurposed by corporate interests. Through DLT, businesses may succeed in coopting some of the benefits of blockchain. The good news is, this should eventually result in greater operating efficiencies as distributed ledgers are successfully developed and deployed. At the very least, consumers can expect more flexible payment systems and faster settlement times for all types of financial transactions. Some of the cost savings should eventually trickle down to customers.
Both DLT and blockchains are in the very early stages of development, and the full benefits they will ultimately manifest are many years from being realized. In the meantime, as an individual, take a closer look, no matter what you’ve heard or been told. Bitcoin is the mother of all blockchains and was created for the sake of public empowerment. Educate yourself and learn how Bitcoin benefits everyone—a full discussion is beyond the scope of this article. Future blog posts will discuss these benefits in more detail:
- hedge against debased and unstable fiat currencies
- secure, pseudonymous, P2P payments
- open source, permissionless network, with a continuously improving ecosystem
- long-term investment, uncorrelated with traditional assets, such as stocks and bonds
Returning to the question at hand, do blockchains empower individuals or corporations? The short answer is both. Bitcoin, the original blockchain, was created explicitly to benefit the global community of cyberspace—to provide an electronic form of cash. By investing in DLT, banks and corporate interests are attempting to accrue some of the advantages of blockchains, but alas, they will be coerced by market forces to share their returns with consumers. While we wait for DLT and blockchains to fully evolve, everyone should learn about Bitcoin and proactively spread the good news: Bitcoin is a freely available public resource, and designed specifically to empower individuals .
- Note that Satoshi Nakamoto’s original 2008 white paper describing the concept of Bitcoin, used two words: “block” and “chain”. However, the single compound word, “blockchain”, has been widely adopted.
- The “Bitcoin” network is generally designated with a capital “B”, whereas the currency itself is spelled “bitcoin” with a small “b”.
- The technical complexities of replicating—or not—the blockchain piece of the Bitcoin innovation are beyond the scope of this article, and are purposely left out to focus the discussion at a higher conceptual level.
- Although Bitcoin is the first, and currently most important, public blockchain, other censorship-resistant networks that enable P2P interactions are also under development. Ethereum is one such prominent example.
- Nothing in this article should be construed as investment advice.