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The Future of Bitcoin: Money or Technology?

By: Franco Daniel Amati - @franamati - Apr 15, 2015, 8:08 am

EspañolLately, financial analysts have taken to repeating the same phrase when it comes to bitcoin: “The technology is interesting, but not so much the currency or its utility as a store of value.”

To understand what they mean, let’s break bitcoin up into two parts:

First, bitcoin as currency is the digital unit that users transfer to each other. It can be used for payments or savings, and the price is determined by supply and demand. These days, one bitcoin trades for around US$235. The digital currency is characterized by its decentralized nature, independent of government and corporations, but also highly volatile compared to traditional currency.

Bitcoin as technology is the blockchain. It is a transparent distributed database, or ledger, initially designed to keep track of bitcoins moving across accounts. However, it has a great potential for other purposes, such as a registrar for tangible goods (e.g. real estate, cars), multi-party contracts, patents, timestamps, and proof of content. Thanks to its decentralized nature, no trust is required from those who update and maintain the blockchain; it’s easy to verify, and difficult to falsify.

La tecnología de cadenas de bloques de bitcoin sirve para múltiples aplicaciones similares a la moneda
Bitcoin’s blockchain technology has many applications beyond a decentralized currency. (Pixabay)

This dichotomy may appear valid and reasonable at first glance, but there’s a problem with viewing bitcoin this way. As it turns out, maintaining the database comes at a cost, not only to keep it online and accessible but to audit and prevent falsification. And that requires considerable computing power.

In order for the blockchain to function and process changes, there’s an incentive scheme in place whereby people who contribute processing power — the “miners” — receive bitcoins. Therefore, both sides, money and technology, are intimately connected and rely on each other.

If the miners were incentivized or paid with something other than bitcoin, the system would cease to be truly decentralized. Bitcoin would no longer be self-sustainable, and its operation would hinge on external factors, such as national jurisdictions, special permits, traditional currencies, government regulation, etc. Privacy and easy entry into the market would be jeopardized, and censorship would become a very real possibility.

Alternative Ledgers Can Work

While the bitcoin as a currency cannot be separated from its blockchain without losing its unique features, that does not mean more limited, less decentralized alternative ledgers cannot exist.

Banks, for example, could create a simpler version of the blockchain, without a currency to replace their clearing system or the Swift network. In fact, existing solutions like Ripple and Stellar are headed in that direction.

In the future, we may end up with an array of alternatives, with varying functions and limitations. On the other hand, perhaps we’ll find it is enough to have a single decentralized solution like bitcoin, which anyone can access, be they Pakistani farmers or multinational banks.

We can’t know for sure, but it’s very likely that the technology bitcoin inaugurated is here to stay.

Translated by Daniel Duarte. Edited by Guillermo Jimenez.

Franco Daniel Amati Franco Daniel Amati

Based in Buenos Aires, Franco Amati is an IT consultant who specializes in digital currencies, blockchain solutions, and cryptography as means for greater decentralization, individual freedom, and privacy. He's the co-founder of Bitcoin Argentina and Espacio Bitcoin. Follow @franamati.