Harvey's Blockchain Sessions - Post 4

Chapter 2: Bitcoin & Blockchain: What’s the difference?

Bitcoins! Who hasn’t heard of them? These days, if you are flipping channels on your TV at any given point in time, there is a good chance that atleast one of them is talking about bitcoins.

The narrative around Bitcoins might be that of positivity, cautiousness or foretelling of anarchy, but there is no denying that Bitcoins are the talk of the town everywhere now. Bitcoin and its world of cryptocurrencies have given rise to newer jargons in everyday geekspeak, like mining, forking, Proof of work, altcoins etc. Trading exchanges have come up all over the world allowing people to invest and/or trade in Bitcoins and similar cryptocurrencies.

There are many who use the words Bitcoin and Blockchain in the same breath as if they meant the same. So are they same? Nah! Of course not!

In our last posts, we discussed about Blockchain and how it be used to do secured peer to peer transactions digitally. The first use case for which Blockchain was designed was to send ‘digital’ money from one person to another without engaging any intermediary in between. The currency used to represent this digital money was bitcoin.

So, while Blockchain is the technology that powers secured peer to peer digital transactions, bitcoin is its first and the most glamorous use case.

“Bitcoin: A Peer-to-Peer Electronic Cash System” - That’s the white paper that first introduced the concept of Bitcoins to the world.

There might be some questions bubbling in your head now. Let me answer these in short first before we expand on some of the aspects of Bitcoins.

• Who wrote this White Paper ? Satoshi Nakamoto
• When was this White Paper Published? October 2008
• So who is this Satoshi Nakamoto? No one knows.
• Really? How come no one knows? Well, credit it to the digital world and how it works. Satoshi Nakamoto never revealed his identity. No one knows who Satoshi Nakamoto is. While Satoshi is generally referred to as a man (and we will stick to that in our narrative in this series), Satoshi can be a woman too or for all you know, Satoshi might just be a name for a group of people! The short answer is what gave above. No one knows who Satoshi Nakamoto is.
• Did bitcoin come first or did Blockchain come first? Well, Satoshi wrote his paper to introduce a new peer to peer digital currency called Bitcoin. He also explained how the underlying technology to enable bitcoin would work. Therefore, bitcoin and blockchain did come together in that sense. The objective of Satoshi Nakamoto was to usher in a new world of digital currency - Bitcoin. However, people have since then separated the underlying technology called Blockchain and have started exploring, improving and deploying this to address other use cases as well.
• Why did Satoshi Nakamoto come up with the concept of Bitcoins? We anyway use other currencies like US Dollar, Japanese Yen, Indian Rupees.

 The last question requires a slightly more detailed answer. So, let us answer that by asking some follow up questions :       

A.           Do government-issued currencies like USD have any intrinsic value?

The answer might surprise some people. The US used to link its currency’s value to that of Gold earlier. It abandoned the gold standard in 1933 and then in 1971, US President Nixon completely ended any linkage between US Dollar and Gold in 1971. Countries world over don’t follow Gold Standard anymore. So government-issued currencies, also called ‘Fiat Currencies’ derive their value from the fact that public and enterprises at large in the economy have accepted these currencies as the mode of payment against goods & services. They don’t have any other intrinsic value.

    B. Aren’t Fiat Currencies physical in nature and so more reliable?

It might come as surprise to some of you that only about 10% of the Government issued Fiat Currencies are physical in nature. Rest of the money is in digital form which means they are record entries in software which capture their respective ownership.

C. So, if Fiat currencies don’t have intrinsic value and are also mostly digital in nature like bitcoin, what is the difference between the two?

Well, the answer lies in the concept of intermediaries that we discussed in the first post and their roles in the money supply. In case of Fiat currencies, their supply and usage are governed by policies of Government & Government bodies like Central banks. Intermediaries like Banks hold the records of who owns how much fiat currency with them and need to work with other intermediaries to transfer money from one account holder to another person. We discussed above in our earlier post that the involvement of intermediaries decreases efficiency and increases costs in the transactions.

Bitcoin is also a digital form, like 90% of the fiat currencies. However, bitcoin is perfect for peer to peer transactions as it doesn’t need intermediaries to be either holder of records or validators of transactions. Like fiat currency, Bitcoin also derives its value from increasing acceptance by people & enterprises at large as payment for goods and services.

While in case of Fiat currencies, Central banks can decide to print additional money in line with Government’s fiscal deficit for example. This decreases the value of the existing money in supply and increases inflation. In case of bitcoin, the total eventual supply is limited to 21 Million bitcoins at a pre-decided rate of supply in the system.

Satoshi Nakamoto, therefore came out with his proposal for bitcoins in Oct 2008 in order to enable secured and anonymous peer to peer digital transactions which would be outside the ambit of Government intervention. 

The technology that he put together to enable Bitcoins is “ Blockchain”.

I hope you got a good understanding of Bitcoin and its relevance as well as its difference with Blockchain.

For those who want to go deeper and study Satoshi Nakamoto’s Original paper , you can refer to it at https://bitcoin.org/bitcoin.pdf

 P.S. - You can also see the following posts in this series of Blockchain Sessions

1. Blockchain Overview
2. Harvey's Blockchain Sessions - Post 1
3. Harvey's Blockchain Sessions - Post 2
4. Harvey's Blockchain Sessions - Post 3?

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