Blockchain, not Bitcoin?

Mar 2, 2020

In late 2017, cryptocurrencies experienced their euphoria phase with the total market capitalization reaching almost $1 trillion. The underlying blockchain technology also became a hyped buzzword that was able to quickly attract capital. One example would be the case of “Long Island Iced Tea Corp.”, a beverage producer in the U.S. that rebranded itself to “Long Blockchain Corp.” in December 2017 – a move after which its stock price tripled within a day (and later led to a subpoena by the SEC).
More than two years later, blockchain usage in companies continues to pick up, although it largely remains under the radar. A recent study by Forrester and EY showed that companies still mostly use private blockchains, but public blockchains are on the rise.

Illustration 1: In a recent survey on “What are your organization’s plans when it comes to blockchain?”, one third of companies indicated that they are planning to implement public blockchains in their businesses over the next two years.
Source: Forrester,, Bitcoin Suisse Research.

In the Bitcoin Suisse Crypto Outlook 2020, Marco Schurtenberger from the Tezos Foundation gave detailed insights into the opportunities and challenges that come with private and public blockchains. Companies looking to implement blockchain in their daily business typically have two concerns: privacy and regulatory uncertainty.

Both concerns are increasingly being addressed. On the privacy side, advances in zero-knowledge proof technology make it possible to treat transaction data confidentially while still recording it on a public blockchain. On the regulatory side, legal frameworks keep improving through the pioneering work of countries like Switzerland and Liechtenstein. For example, the Federal Council of Switzerland submitted a series of blockchain/DLT related amendments to existing legislation in March 2019 and Liechtenstein developed the “Token Container Model” for the tokenization of assets. These steps will help to alleviate regulatory uncertainty.

The main reasons to use public blockchains instead of private ones will come from economic considerations. Public blockchains can save costs compared to private ones, as the infrastructure is already built and accessible in a permissionless way. The only requirement to use a public blockchain is a certain amount of the blockchain’s native cryptocurrency to pay for transactions being recorded in blocks. Interoperability with other network participants that use the same public blockchain is automatically given.

Also, the open source nature of public blockchains allows anyone to innovate. Ultimately, it was this permissionless way of finding solutions with bright minds all over the world that brought the Internet to where it is today – even more powerful than many of its advocates would have thought possible only 25 years ago.

Connecting the Dots: Cryptocurrencies
The biggest advantages of blockchain technology are reaped when it is paired with a decentralized structure. At its core, a blockchain is an immutable, tamper-proof ledger of transactions – no more, no less. In centralized systems, these characteristics are hard to achieve and even harder to credibly prove to an outside inspector. They will always possess single points of failures, be it from a technical or a human perspective. Decentralized systems are tolerant towards faulty behavior: Failure of one computer, one node, or one participant in the network does not have an impact. This is illustrated, for example, by the near-100% uptime that both Bitcoin and Ethereum boast.

Decentralized systems come with separate challenges, however. The absence of a central authority means that no single entity pays for operating the blockchain. Thus, the protocol needs a means to transfer value from the users of the network to its operators. A decentralized blockchain protocol cannot print government-issued currencies – this is where cryptocurrencies enter the picture. The protocol can issue more cryptocurrency to pay its operators, such as miners (Proof-of-Work blockchains such as Bitcoin) or validators (Proof-of-Stake blockchains such as Ethereum 2). The rules for this issuance are hard-coded into the protocol and should follow the mantra “as little as possible, but as much as needed to keep the network secure”. Hence, cryptocurrencies were created as an incentive system that secures the ledger under the game-theoretical assumption that all network participants act in their self-interest.

[Satoshi] treated cryptographic protocols as being economic protocols, where the economics is not just an afterthought – the incentives are a fundamental building-layer of the entire system.

Vitalik Buterin

While this outlines the supply side of cryptocurrencies, where does the demand come from in the long run? As described above, people or companies looking to use public blockchains will need to acquire a certain amount of cryptocurrency to access the public infrastructure. The amount of demand that can be expected here depends largely on the extent of adoption and creates the link between blockchain usage and part of its value.

On the other hand, additional demand might also come from the potential role of cryptocurrencies as stores of value and as part of regular portfolios. The portfolio benefits of incorporating uncorrelated asset classes are widely known, and some go as far as calling it the “Holy Grail of Investing”.

Bitcoin was born out of the subprime mortgage crisis and offers an alternative money whose issuance is controlled by code instead of central banks. This is perhaps not as significant today with inflation rates sitting at levels of around 2%. However, it may become more relevant in the future as governments start to experiment with more aggressive forms of expanding the total monetary supply, such as helicopter money.
In conclusion, cryptocurrencies are a crucial ingredient in a decentralized blockchain protocol and provide a game-theoretically balanced incentive system to run such networks. The degree of decentralization that such blockchains have is tightly linked to their value proposition, as this guarantees some key aspects such as immutability. Many of the older cryptocurrencies, for example Bitcoin or Ether, have proven over the course of the past years that they have found a game-theoretically stable equilibrium and hence have the potential to provide the infrastructure for the “Internet of Value”.

Bitcoin Suisse