Blockchain, bitcoin, money, currency and token

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This post originally appeared on the ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

What is blockchain?

Blockchain is often broadly defined as a chain of data blocks timestamped by a secure network. Sometimes, depending on the context, the word “blockchain” refers to the system that is used to create such a chain of data blocks, rather than the chain itself.

The idea of time stamping a chain of data blocks existed even before the Bitcoin white paper and the subsequent release of Bitcoin Blockchain and the creation of the first block Genesis Block (October 31, 2008 and January 9, 2009, respectively). But the Bitcoin blockchain provided the first ever practical solution to the problem of double-spend of digital assets.

The biggest contribution made by the inventor of Bitcoin, Dr Craig S. Wright¹, however, is the invention of a particular kind of secure network that is able to achieve the prevention of double spend in peer-to-peer transactions without relying on a trusted third-party. The Bitcoin network has the following characteristics, all necessary for achieving the above important goal:

1. Competitive – The members of the network compete with each other using their technological and economic capabilities, and are generally more incentivized to build the chain as a whole than to create a particular interest in specific transactions.
2. Open – The network is open, meaning that anyone may join (or leave) the network anytime to create blocks, as long as the party has the capability to compete.
3. Transparent – The network is transparent, meaning that a member cannot hide its real identity and its activities related to block creation.
4. Self-sufficient – The network is economically self-sufficient, meaning that the blockchain itself can always provide sufficient economic incentives for the members to perform the work of building the chain.

My favorite description of blockchain is one given by Christian Kameir, managing partner of Sustany Capital:

Blockchain is a machine that can move the control of a set of bytes from a to b without creating a copy of it…” – Christian Kameir’s interview with Stobox, “What are the most disruptive applications of blockchain and DeFi?

You might feel this description is too simplistic because it does not explicitly refer to some of the most important features of blockchain, such as time-stamping, consensus and immutability. But what is great about the above description of blockchain is that it reaches the root of blockchain and is more fundamental and more abstract than the other definitions that are more comprehensive. This description encompasses the function of double-spend prevention but is broader. In the digital realm, a double spend is an example of impermissible duplication of a set of bytes. And bytes don’t care whether you call them bitcoin, US dollars or any other things, which are just user interface functions.

More people need to understand this because it goes to the root of many things and then ties a lot of things together.

Bitcoin

The chief product on the Bitcoin blockchain is bitcoin(s), a form of digital coins originated (issued) and transacted on the Bitcoin blockchain. Bitcoin represents value and has a limited supply.

Among the most important attributes of bitcoin is its being a digital bearer instrument. Delivery of a bearer instrument is not a promise to pay but the payment in itself. Being a bearer instrument, it has finality in settlement, and being digital means it brings in a whole new world of value transfer.

Being a bearer instrument in itself is nothing new, as we have had physical coins and central-bank notes (paper cash) working as bearer instruments. But bitcoin is the first reliable digital bearer instrument.

This has profound implications.

(1) Bitcoin as a digital bearer instrument solves payments with finality². Using bitcoin, the payment finality is a matter of choice made at the user interface of a wallet, not a result of an accounting and settlement process.

(2) Digital bearer instruments are a wholesale approach to displace, not to merely supplement, the traditional ways of value transfer, just like VoIP replaced traditional phones and SMTP replaced letterwriting.

(3) Bitcoin blockchain solves a much broader range of problems than just payment. Value transfer is the basis of everything. For example, money is the simplest form of value transfer. A specific transfer may have additional value on the top of the simplest value transfer, but any type of specifics that is more than the simplest value transfer is just an additional set of bytes (e.g., metadata) attached to that.

Blockchain and Bitcoin involve a lot of concepts that are not easy to grasp. Lots of education is needed on these subjects, not only for developers and investors, but also the public, legislators and government officials, or we will see wasteful and even destructive actions committed by all elements of the society. In fact, we already have, witnessing the ICOs, DeFi, and NFT frenzies on the one hand, and a lack of knowledge and leadership from the government on the other.

The following are examples of common misunderstanding about Bitcoin:

• “Bitcoin Blockchain cannot scale due to the trilemma.”
• “Bitcoin Blockchain does not have smart contract capabilities.”
• “Blockchain is not used for storing anything.”
• “Blockchain is a distributed ledger.”
• “Bitcoin is digital gold.”

All of the above are incorrect. For a detailed explanation, see The Bitcoin Trilemma is a fallacy, and Misunderstandings about blockchain & bitcoin.

Money and currency

It is important to make a distinction between “money” and “currency,” not for the sake of semantics but to have a clear way to conceptualize the whole matter. I used to think it was a trivial distinction, but started to more and more realize its importance.

Money: Money is an agreement between two parties for value exchange without direct bartering. Money is value agreement.

Currency: If we standardize these money agreements into an easily transmissible and countable form using a certain technology, we have a currency. Currency is technology.

If money were a thought, currency would be language (and language is a form of technology).

See “Money and Currency” for more detailed discussions on topics such as “Definitions of money and currency”; “The origin and qualities of money”; “The origin and qualities of currency”; and “Bitcoin’s path to become money”.

Tokens

“A token is just a standardized smart contract.” – Christian Kameir.

Fundamentally, a token should not be treated as a digital twin of a certain document or object. There is a very common misunderstanding about tokens in this regard. People’s idea is to tokenize a house (like having a digital photo of the house). The idea may be intuitive but is wrong and causes confusion.

The right thing to do is to tokenize a set of legal contracts related to the house and make them into standardized smart contracts.

The problem most people don’t realize is that there is a disconnection, or dissociation, between tokens and the real-world activities (especially economic activities). The disconnection has multiple causes.

First, the real-world business agreements and relationships cannot be simply transformed into smart contracts. This limitation is not due to limitation in the coding ability, but more fundamentally related to human reality.

Likewise, one cannot just digitize the real-world agreements, put them into a package, associate it with a token, and expect everything to just work. Doing that has little usefulness.

The real-world activities are not only about having some agreements or documents, but messaging between the parties. I use the term messaging broadly to include all requests, decisions, replies, and meta-data.

To solve the problem of the above-mentioned disconnection, the key is to place messaging on-chain.

And this requires a blockchain that functions as a distributed ledger and is also vastly scalable.

In addition, it also requires a software system that allows the incumbent businesses to conduct their regular business through the software system by messaging each other through the blockchain, and all this has to be done without too much disruption to their normal business workflow. One should not expect the incumbents to just disappear or quit. These are data silos, and they will fight tooth and nail to stay in business.

The above are not just some user interface features supported by a traditional database, which the technology was ready 20 years ago, but no one did much about it. The key to make that really work, like 10x better, is Single Source of Truth (SSoT) on blockchain and on-chain messaging.

On the Bitcoin blockchain, several teams such as Tokenized, STAS, Fabriik, RUN, Sensible Contract, SuperAsset have great visions on tokenization and great things will come out of those teams.

NOTES:

[1] See Why I Believe Craig Wright is Most Likely Satoshi; and Craig Wright’s Bitcoin Whitepaper Copyright Battle Continues.

[2] The legal nature of finality and the operational nature of finality of a financial transaction is a complex issue which is beyond the scope of this article. See, for example, Probabilistic Settlement Finality in Proof-of-Work Blockchains: Legal Considerations.

This article was lightly edited for clarity.

Watch: CoinGeek New York presentation, Secure & Compliant Document Workflow using Blockchain