Cryptoasset Primer 3: What do they do?

This is the third post on the basics of Blockchain and Cyrptoassets. You can find the introduction here, and part 2 here

In our last post we outlined what a blockchain is and how it works. In this post we will briefly discuss how people are putting these to use.

One of the big misunderstandings around cryptoassets is the conflation of blockchain and Bitcoin, they are related but very distinct things. Blockchain is a form of database, it is a technology. Bitcoin was the first application of that technology, and is seen as a form of currency. Just as Oracle is one form of database and Facebook is another form, Bitcoin is just one way that we can use a blockchain, but there are many, many others.

(A quick side note. Bitcoin and blockchain get confused in people’s minds because they were both invented by the same ‘person’, the pseudonymous Satoshi Nakamoto. This ‘person’ unveiled both in ‘his’ now famous 2009 white paper.)

As of this writing, there are something like 15,000 publicly announced blockchain projects out there. People are banding together to build blockchain projects that cover every conceivable application and industry. There are blockchains for food and logistics, for money and computing, exchanges and gaming, identity and IoT. We will examine and classify these in future posts.

However, the truth is that today no one is really certain where blockchain is really best suited. While there are maximalists who will argue that Blockchain will ‘disrupt’ everything, the reality is that blockchain is not suited for many things, but is probably incredibly important for a few things.

At its heart, a blockchain is just a database, with very strong protections and a very powerful incentive system for coordinating activity. While it is possible to dismiss blockchain as just a niche database, one could also dismiss TCP/IP as just a niche communication protocol. Of course, TCP/IP made the whole Internet possible. So maybe Blockchain will open up some other useful possibilities.

By far, the best known blockchain application today is Bitcoin. Bitcoin is explicitly positioned as an alternative currency, a substitute for Dollars or Euros or Yuan. Blockchain turns out to be very well-suited for this. It was originally launched in the wake of the 2007 Financial Crisis when many lost faith in government backed financial institutions. So the appeal of a decentralized currency made a certain kind of sense. As our last post laid out, a blockchain is list of transactions with an incentive system built in to its protection mechanism. In the case of Bitcoin, the digital token is both the reward for mining and the whole point of the system. The Bitcoin blockchain is just a list of transactions, people sending their digital currency around as a medium of exchange.

Another potential application for a blockchain is found in the shipping and logistics industry. The shipping world consists of a huge number of individual companies – those with goods to ship, those with boats and trucks, and a whole array of intermediary brokers, agents and aggregators. By attaching a digital token to each shipment, a blockchain ledger can help keep track of a shipment, with ownership of the token passing through the digital network as the possession and responsibility for the physical goods pass through the real world.

Another important variant of blockchain is exemplified by the second best-known blockchain project, Ethereum. This project attaches a scripting, or computer programming, language to its blockchain. This lets participants apply conditions and logic to the transactions in the ledger. The simplest example of this is an escrow account. Two parties are exchanging Ethereum for some digital property. The contract would not disburse the funds (i.e. enter a transaction into the ledger) until it had received the digital goods. Two parties in engaged in such a transaction do not need to trust each other, they do not even need to know each other, but can still transact with a high degree of security. This security comes from a validation process very similar to that used in other blockchains with a compute-intensive consensus mechanism, incentivized of course in Ethereum. In our view, Ethereum is essentially a digital compute system built on top of a blockchain database.

We could go on. There is an immense amount of experimentation taking place in the cryptoasset world now. Not much is clear about what will work and what will fail. However, we are increasingly confident that this community will contribute some important advances.

One response to “Cryptoasset Primer 3: What do they do?

  1. Pingback: Cryptoasset Primer 4: Philosophy and the Case for Bitcoin Adoption | DIGITS to DOLLARS·

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