After years as a software and product developer in the blockchain industry, I’ve developed some opinions about what is, and what isn’t, a blockchain. Here is my best effort at explaining the characteristics that define a blockchain.
- Profit Incentive - blockchains are economically incentivized by a cryptocurrency that aligns individuals with the interests of the blockchain. Owners of this cryptocurrency are stakeholders in the blockchain, meaning everyone from network infrastructure providers (miners) to retail investors on Coinbase want the blockchain to succeed. This creates a system where no parties involved benefit from the failure of the blockchain, and all parties involved benefit from the continued success of the blockchain.
- Decentralization - blockchains are decentralized. This means any individual has equal access to all parts of a blockchain, be it as an auditor, contributor, or miner. Every actor in a blockchain becomes a stakeholder, contributing to the blockchain in a mutually beneficial relationship. Every auditor produces an independent copy of the blockchain’s ledger, increasing its integrity via redundant storage. Every miner is incentivized to support a functional blockchain, as their reward is delivered as the blockchain’s own cryptocurrency. Every contributor, be it in the form of awareness, development, or education, can reap the benefits of their contributions by increasing the value of the cryptocurrency they are presumably owners of.
- Network Autonomy - profit incentive and decentralization result in stakeholders creating and maintaining an autonomous network that doesn’t require third-party services to operate. It is integral for a blockchain to rely solely on its stakeholders (in this case, miners) who are aligned with its success. While cloud computing providers such as AWS and Microsoft Azure can provide value when used in conjunction with a blockchain, a private, entirely cloud-hosted system doesn’t offer the profit incentive and decentralized network a blockchain requires.
- Automated Governance - the processes that govern a blockchain must be automated. Trustlessness is formed in the absence of the human authority that controls adherence, decision making, and regulation in the systems of yesterday. It is common sense, observable throughout society, that human systems are prone to human error. With computers, instead of humans, acting as the arbiter of truth in a system, we are placing trust in an entity that is immune to blackmail, bribery, and all forms of corruption. All forms of delegation inject a human element into the system and thus destroy the integrity of the system. This is inclusive of any system in which validators (typically referred to as miners) are selected through human means, or any subset of individual stakeholders receive special privileges in the system granted by a human authority. Now, this is not to say there is no human element to a blockchain. It is quite the opposite, and a blockchain is very much a human system. No human system is equal. Certain individuals may be more capable of directing the course a blockchain due to capital resources, social influence, or technical skill. However, these contributions are just that - contributions - and thus a pure meritocracy is present without a predefined hierarchy or other human governance structure that is the precise flawed template we are seeking to escape through blockchain technology. The important concept is, no individual or group of individuals has authority over the processes by which a blockchain validates activity on the network.
- Unique Value - a blockchain must offer a value proposition that is unique from an existing leading blockchain; this value must be offered without sacrificing the preceding characteristics in this list. For example, the Ethereum blockchain has a very different objective and use case from the Bitcoin blockchain, and offers a unique value as a development platform for decentralized applications. However, we hear of many “Ethereum killers”, often touting large insignificant numbers that prove their superiority over Ethereum as a development platform. In most cases, these networks have sacrificed one or all of the preceding characteristics in this list and thus are not blockchains. In all other cases, the blockchain is in direct competition with Ethereum, which is a venture destined to fail.
- Non-Competitive - it is a common misconception to those unfamiliar with open source software that being able to reproduce and alter a piece of software devalues it. This is certainly not the case. When a network attempts to compete with a leading blockchain, such as Ethereum, that network is not competing with the Ethereum software. They are competing with an army of software developers, evangelists, investors, marketers, and miners. They are competing with thousands of meetups, hundreds of conferences, podcasts, interviews, news articles, blog posts, conversations, and passionate fanatics. They are competing with years of blood, sweat, and tears of the stakeholders of that blockchain. To understand the value of a blockchain is to understand the sum of its parts and the impact of network effects over time. The same can be seen in the graveyard of would be “Bitcoin killers”. Blockchains are resilient by definition. It is highly unlikely for a network in direct competition with a blockchain of a greater value to usurp the leader. In fact, it would be wiser to “buy in” to a blockchain you wish to compete with and contribute to its ecosystem instead. You’d be contributing to increasing the value of the blockchain and positioned to reap the benefits of your investment. In real life, organizations have the luxury of competition. They don’t have to be leaders. They can experience mergers, acquisitions, and any number of financial events that reward stakeholders for some temporary value the organization provided. In the world of blockchains, there are no M&As. You have to win.
- Integrity - the effect of the compounded preceding characteristics is resistance to censorship, corruption, and human error. These effects form the value of a blockchain: integrity over time. Since its inception, the Bitcoin blockchain has remained the most resilient store of data and value in human history. Its integrity is derived from the design of the system itself and by the combined efforts of many individual stakeholders working to protect it (a byproduct of the system’s design). The explanation is simple: if I am a stakeholder in Bitcoin, I most likely own bitcoin. And if I own bitcoin, I am incentivized in any event to protect the integrity of Bitcoin because I want the value of my bitcoin to increase. Acting in any way that doesn’t benefit Bitcoin is an act of mutually assured destruction, and so, blockchain and stakeholders prevail together.
These characteristics define a blockchain, being a system secure enough to use as a primary financial instrument (for me, Bitcoin) or a system secure enough to lay the reputation of my business and the future success of our clients on the line (for example, Ethereum). If you’re going to build on blockchain, make sure to invest in a leader.