When a new technology hits the market, misperceptions and myths often pop up right alongside of it. This is certainly the case with bitcoin and other cryptocurrencies that have emerged over the last several years. As policymakers and regulators start to focus more attention on these currencies, now is a perfect time to examine the myths that have sprung up around them.
The first myth is wrapped in confusion and misunderstanding. Simply put, Bitcoin is not blockchain. And yet, the misunderstanding persists; the words “Bitcoin” and “blockchain” are so often used together that the words have become practically interchangeable.
The only connection between bitcoin (and other cryptocurrencies) and blockchain is simply this: blockchain is just one of several technological components and constructs used to manage cryptocurrencies like Bitcoin.
Blockchain is a decentralized ledger that is securely viewed by all parties with permission to join the chain. When a new transaction is added to a blockchain, the “chain” grows by one; each transaction typically includes a new sequence number and date, identification of the owner, and the associated value or set of other parameters defined specifically for the transaction. Importantly, blockchains can be permissionless (public), or permission-based (private), depending on how participants decide to set up the technology.
Bitcoin works because it leverages blockchain to manage values and transactions. Blockchain is the underlying technology—but it has many other potential uses across all enterprise activities, including finance, supply chains, and human resources.
While blockchains can (and are) being used to manage financial transactions, that’s just one of many applications of the technology. A blockchain can track any type of transaction—from the movement of goods through a supply chain, to the completion of courses a student needs to earn a degree. My colleague, David Haimes, recently wrote about potential use cases for blockchain technology, and there are many more under consideration by various organizations.
The remarkable value of blockchain technology is its potential to streamline transactions while increasing insight into transactional activity. Without blockchain, transactions of all types—whether they are financial or supply chain-related—require data flows in and out of central information systems. With blockchain, ownership is easier to follow and any associated party can confirm event activity. Transaction transparency, trust and tracking is comprehensive and very efficient.
My favorite blockchain myth highlights the electrical power consumption required to power blockchains. The myth has variations, but it basically follows this proposition: in the future, more and more blockchains will consume electricity comparable to that of small nations around the world.
This construct started about two years ago with a simple spreadsheet analysis from a consulting firm. This spreadsheet estimated the Bitcoin network was currently consuming as much electricity in one year as Denmark’s annual national power consumption. More recent studies have increased this estimate to the electrical consumption of larger countries like Austria or Ireland.
While this might be true for Bitcoin’s network, remember that Bitcoin and blockchain are not synonymous. Cryptocurrencies use blockchain technology; blockchain technology is not exclusive to cryptocurrencies.
As mentioned earlier, most blockchains fall into two categories: permissionless and permissioned. A blockchain may be accessed by anyone, or only by certain participants.
Permissionless (public) blockchain: Access open to everyone.
Bitcoin’s blockchain is an example of a permissionless network; it is open source and anyone may participate in it. While this type of network has its advantages (i.e. no one entity controls it, and anyone can audit it), it does have drawbacks. Permissionless blockchains such as bitcoin consume enormous amounts of computing power because of “mining”; this is what drives comparative estimates of electrical consumption equivalent to one or more countries.
With a permissionless blockchain network, mining is deployed to ensure trust and helps the network be practically tamper resistant. Mining involves extensive mathematical calculations that must be completed through networked computers to process lengthy and complex algorithms. When a correct answer is reached, those running the calculations—the “miners”—receive a new bitcoin of a predetermined value.
This process utilizes millions of computations per second using servers located around the world. Because of the lengthy computational requirements, this mining process is very energy intensive.
Permissioned (private) blockchain: Access restricted.
With permissioned blockchains, participants seeking to join the network are vetted and must be granted permission into the network. The process of mining is not necessary since the governing body or trusted participants of the network validate information across the chain. With no data mining required, energy consumption for a permissioned blockchain becomes a non-issue.
These myths and misperceptions highlight why it is always important to not only understand the foundation and application of any new technology, but also the implications and impacts. Underlying assumptions, sometimes simplistically extrapolated from guestimates in spreadsheets, can lead to overzealous and ungrounded predictions that can discourage early adopters from exploring a promising technology.
Most importantly, these fears and extrapolations typically divert attention from serious conversations involving important new technologies and their potential uses in business applications for enterprise environments. This is why it’s important to examine the facts closely, and not let myths overcome reality. When building the business of tomorrow, it’s crucial that you give your team every opportunity to leverage emerging technologies for business benefits and competitive advantage, today.