Adam Ludwin, founder of Chain.com, pointed out in an a16z podcast that people who say blockchain can exist without bitcoin are both completely correct and totally wrong. ARK’s view is the debate between Bitcoin and blockchain is misunderstood and overplayed, mostly due to its nascent nature, overlapping concepts and poorly understood jargon. Understanding the Bitcoin and blockchain ecosystem, however, is imperative given the innovation within the financial services industry today.
Bitcoin was the first implementation of blockchain technology and continues to hold roughly 80% share of the value of assets stored on any public blockchain, as shown below. Bitcoin can be thought of as the mother of blockchain technology. That said, just as a mother can bear many children, the open source code underlying Bitcoin has been tweaked to bear many different blockchains designed for different use cases. In other words, blockchain technology has evolved to include implementations outside the realm of Bitcoin, and now should be considered as a general purpose technology.
Source: Coinmarketcap.com – as of March 24, 2016
What, then, is blockchain technology? Simply put, blockchain technology is an immutable and distributed digital ledger, enabling the secure transfer of information between often-unknown parties across insecure networks. Alternatives to Bitcoin, such as Ethereum and Goldman Sach’s SETLcoin, are separate blockchains designed to enable countless other use cases.
Importantly, Bitcoin has the majority of compute power dedicated to any single blockchain, which is essential for its security. What incentivizes the build out and maintenance of the compute power— or “mining network”— is the periodic release of the bitcoin cryptocurrency in the form of block rewards to the mining network. Bitcoin specifically cannot exist without bitcoin, the currency, because the currency provides the necessary incentives that propagate its blockchain. In effect, Bitcoin’s blockchain is the machine, and bitcoin the oil that keeps it running. As ARK discussed in a white paper titled “Securing the Network,” the incentive structure will transition from block rewards to transaction fees that increasingly will depend on the adoption, or transaction volume, of bitcoin.
In 2015, the interest in blockchain technology hit an inflection point in the financial services industry. For example, during the Inside Bitcoins Conference in April in New York City, many long time attendees remarked on the number of “suits” in the room. Compared to other conferences hosted in the Javits Center, the crowd was eclectic and the conference small, but it was clear that financial institutions were kicking the tires. Thus far in 2016, institutions like JPMorgan and Royal Bank of Canada have tested blockchain technologies, while 40 other major banks have been running blockchain experiments with startup, R3CEV, as well as tech heavyweights like Amazon, Microsoft, Intel, and IBM.
While many financial institutions are focused on blockchain technology as an innovation that might disrupt the industry, they seem to be shying away from Bitcoin and its “motherchain.” The aversion likely is associated with the controversy stirred by Mt. Gox and the Silk Road in the more regulated environment after the 2008-09 financial crisis. With time, we believe that these financial institutions will realize that Bitcoin and other blockchain implementations are likely to remain intimately entwined.
To understand the difference between Bitcoin and the other blockchains, like SETLcoin, that are being embraced by the financial industry, a good analogy is the difference between public clouds and private clouds. In the early days of cloud technology, companies shied away from public clouds because they didn’t want to lose control of their security and performance. Instead, they built private clouds, virtualizing on-premise servers. A decade later, companies understand that the public cloud offers greater economies of scale and, potentially, greater security. Increasingly, a hybrid cloud is the preferred solution, combining private clouds for specialized use cases and public clouds for “everything else.”
ARK’s hypothesis and rough analogy is that Bitcoin will serve as a public cloud of sorts—or, perhaps, the equivalent of Amazon Web Services (AWS)— while other blockchain technologies, such as SETLcoin, are private clouds that eventually will tie into Bitcoin. In blockchain and Bitcoin terminology, the equivalent of the public cloud is a “permission-less ledger” and the private cloud a “permissioned ledger.” Just as AWS faces Microsoft Azure and the Google Cloud Platform, it will be subject to “co-opetition,” but given its head start, we believe that Bitcoin should remain the largest. Perhaps more important, we think that most blockchains eventually will connect with each other for maximum utility.
ARK also believes that Bitcoin and other blockchains can learn from the interconnection of public and private clouds. Interconnection is the thinking behind Blockstream’s sidechain, with its first release coming soon via Liquid. Sidechains will be pegged to Bitcoin, which will freeze bitcoin, the currency, within its blockchain, enabling the transfer of value to smaller blockchain implementations, and then clearing and settling once again on Bitcoin’s blockchain.
SETLcoin is a good example. Goldman’s patent states that SETLcoin will be purchasable via bitcoin, and thus should not be thought of as a direct competitor. Perhaps one day SETLcoin will serve as a “private cloud blockchain” for immediate clearance and settlement, and then will imprint these transactions on Bitcoin’s “public cloud blockchain” for long term record keeping. Alternatively, SETLcoin could treat bitcoin as it would any other currency used to purchase securities.
Either way, Bitcoin and other blockchain implementations should continue to coexist. It is not so much a “Bitcoin vs. Blockchain” debate, as much as it is a “Bitcoin and Blockchain” conversation. As with the public and private cloud, ARK believes the two will work best together.
ARK’s statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. For a list of all purchases and sales made by ARK for client accounts during the past year that could be considered by the SEC as recommendations, click here. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. For full disclosures, click here.
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