Shutterstock photo

The question of whether or not bitcoin the currency can be separated from the blockchain is not a new one; it has pretty much been around since the inception of the digital currency. It has gained increasing relevance over the last few months, as major financial institutions have begun to recognize the potential of a distributed ledger system, which is what the blockchain is.

Huge amounts of money are being thrown at the technology and at companies set up to exploit it, yet many of those financing the projects are, at best, skeptical when it comes to the currency. One of two things therefore has to happen; either these firms must find a way to separate the technology from the currency or they must embrace bitcoin itself. In the light of that, whether the former can be done or not becomes of enormous import.

Like most things related to Bitcoin, this question engenders passion from two opposing sides. The fervent supporters of the currency scoff and say that of course the blockchain can’t be separated from Bitcoin, while detractors are just as certain that it can be, and probably should be. As is often the case when disagreement is so stark, there is an element of truth to both positions.

The reality, it seems to me, is that while blockchain technology can be replicated without bitcoin specifically, there has to be some kind of token associated with the ledger in order for the system to work. If that is the case, then why separate out bitcoin, where the hard work of gaining recognition and establishing value has already been done? The whole point of a distributed ledger is that there are multiple (hopefully thousands of) computer systems verifying and recording each transaction. In the case of Bitcoin these are the miners, who are rewarded for maintaining the records by being given blocks of Bitcoin when they solve certain mathematical problems.

Back when bitcoin was worthless there were very few miners, and consequently the computing power that would have been needed to compromise the system and effectively steal or fake bitcoin was negligible. At that time, though, there would have been no point in attempting such a thing. Why steal or counterfeit something that is essentially worthless? As the value of bitcoin rose, though, the value of the blocks rewarded to miners increased along with it, leading to more miners and more computer power being deployed.

The beauty of the blockchain protocol is that it ensures that once a certain level of acceptance, and therefore value, has been achieved, altering the record for nefarious purposes would always demand more computer power (and therefore expense) than the rewards warranted. If blockchain technology were to be divorced from bitcoin or any other token, however, the new blockchain would be extremely vulnerable unless significant amounts of money were paid to those charged with the record keeping. Once again, the question then becomes “Why bother?” You may as well just enter transactions in a database kept in more than one place...in other words you are back to what we have now.

In fact, replicating the blockchain without bitcoin as the token of choice has been done many times already. Dogecoin, Litecoin or whatever other altcoin you care to name are all examples of just that. All of them are essentially based on Blockchain technology, but they all use a newly devised and essentially limited token. If you were to use something like the blockchain to challenge the existing global payments system, but use existing fiat currencies as the tokens, then you would face a problem.

Those currencies are based on an inflationary model, meaning that the supply of them can be increased infinitely, thus infinitely reducing their value over time. What incentive is there for a miner or similar to commit to a long term project with future reward when the ultimate value of that reward is guaranteed to be less after the time has elapsed? There really isn’t one.

Both sides in this debate look to have some logical and factual basis for their position. The blockchain obviously “can” be separated from Bitcoin; it has already been done. What the opponents of Bitcoin miss though is that doing so, while possible, would be far from practical. If you simply ask people to keep a ledger you are back to trusting them or some third party that checks on them, or you face an enormous expense to reach the number of record keepers where that isn’t needed. Either way you have negated the advantages that caused you to attempt the thing in the first place.

Probably like most people, when I first heard that Wall Street was investing in the technology, I assumed that they would find some way of using it that would not involve using bitcoin or some other altcoin. The deeper I have gone into the question of whether that is possible, though, the more convinced I have become that it isn't. The only practical solution would be to keep Bitcoin or something similar as the payment for maintaining a distributed ledger, and in the long run that bodes well for the value of the existing currency.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.