Everyone who encounters bitcoin for the first time must grapple with how it works, and what it means.
The former is relatively easy enough to learn, the latter however is something that everyone seems to have a different opinion on. ‘Is bitcoin the next Internet?’ seems to be the question behind news articles and passionate debates alike.
Entrepreneur and bitcoin advocate Marc Andreessen has most visibly made comparisons between the two, while CNBC reported that many more venture capitalists thought bitcoin could be ‘as big as the Internet’.
Despite obvious buzz appeal, it’s a serious question with profound implications. How alike are bitcoin and the Internet, and what conclusions can we draw from the comparison?
A natural metaphor
Within the world of monetary theory and finance, bitcoin is unprecedented. It is such a radical concept that many in the field are sceptical that the kind of decentralization bitcoin represents is even compatible with the modern economy.
The Internet thus provides an obvious reference point for a technology that seems utterly similar in its decentralization, open-source code, state of development, and most importantly its potential to disrupt on a global scale.
Indeed, if nothing else, the comparison can help effectively communicate the magnitude of bitcoin’s technological achievement.
Chris Ellis, the co-founder of feathercoin, captures this sentiment eloquently:
“The first thing that humanity has built that humanity doesn’t understand, the largest experiment in anarchy that we have ever had.”
That’s actually a quote from Eric Schmidt, talking about the Internet or the ‘network of networks’. Every network it touches it liberates: already we’ve seen publishing, education, retail, and most famously music and film changed in ways we could not have imagined. Does bitcoin represent a similar moment for banking and finance?
Given the fact that bitcoin cannot be centrally regulated, ‘an experiment in anarchy’ seems like an apt description. However for any bitcoin/Internet comparison to be truly useful and tell us where the technology can go from here, we need to compare characteristics in greater detail.
Although bitcoin and the Internet are both decentralized, they serve rather distinct purposes.
The Internet evolved as the general purpose infrastructure for a limitless amount of applications and traffic, such as email. Bitcoin on the other hand has a very specific core purpose, a ‘peer-to-peer electronic cash system’ as described in the title of Satoshi’s original whitepaper.
Ultimately, most services built on top of bitcoin are meant to help it achieve its primary goal as a medium of exchange in one way or another. It exceeds this function by leaps and bounds – accomplishing what the current financial infrastructure is incapable of.
However, as a general platform for new applications to run on bitcoin currently has severe limitations. Mastercoin, Counterparty, and others have attempted to build additional functionality on top of the bitcoin protocol with limited success.
While the bitcoin block chain does contain properties that allow it to be used for third-party purposes, the resources are limited and have led to conflict in the past.
Bitcoin simply isn’t designed to function as the flexible infrastructure for a wide range of applications like the Internet is.
Block chain potential
However, the potential exists to use the fundamental technology underlying bitcoin, the decentralised block chain, to build numerous decentralized applications.
Decentralized applications have been getting much media attention as of late as the true revolution behind bitcoin, and where we’ll see the most groundbreaking innovation.
It opens the doors to decentralized email, domain names, smart contracts, and even Decentralized Autonomous Corporations. As David Jonston, Executive Director of BitAngels, put it:
“[Decentralized applications or DAs] have the potential to become self-sustaining because they empower their stakeholders to invest in the development of the DA. Because of that, it is conceivable that DAs for payments, social networking, and cloud computing may one day surpass the valuation of multinational corporations like Western Union, Visa, Facebook, Google, and Amazon that are are currently active in the space.”
Even Goldman Sachs remarked that the underlying technology behind bitcoin holds promise. Systems designed with the bitcoin blueprint can be extremely specific in nature, or instead provide a backbone that can support as many programs and applications as human creativity can generate – much like the Internet and web. Ethereum is currently being built on that very premise.
Bitcoin itself however remains first and foremost a means of exchanging value. While its block chain technology holds the potential to create a new platform of permissionless innovation, this platform has, until recently, seemed destined to be divorced from the main bitcoin chain and functionality.
Enter side chains
In the context of the Internet comparison debate, new side chain proposals have great significance.
If implemented into the bitcoin core code by the open-source community, it would enable anyone to create a side chain that can interact with the bitcoin block chain via two-way pegging. Coins can be moved from one chain to the other, allowing decentralized systems to be built that are interoperable with bitcoin.
This means that new decentralized applications won’t require their own native unit of exchange and thus can avoid a new ‘race for scarcity’, as well as the extreme volatility that comes with a new, small market cap currency.
Instead, such systems can utilize the rapidly maturing and more widely-accepted bitcoin as their native means of exchange and operation. In turn, the utility of such systems will directly add to the value and staying power of the bitcoin network.
The implications of this are huge, as side chains will allow the general purpose infrastructure needed to allow the permissionless innovation the Internet and web are famous for. All tied in the end, to bitcoin.
Side chains could be the last piece of the puzzle that links together the bitcoin currency, to the limitless possibilities its block chain technology holds.
Brave new world
This would make bitcoin not ‘merely’ a new e-cash system that far outperforms the capabilities of modern financial infrastructure. It would make bitcoin the de-facto currency in a new decentralized online economy of unbound utility and possibility.
An economy of decentralized applications that can’t be shut down, regulated, or censored by governments or even traditional corporations. All exchanging a similarly decentralized transnational digital currency.
Thanks to side chains, bitcoin could become a frictionless global payment system, and a platform for decentralized innovation all in one.
‘Bitcoin is the next Internet’ has been a useful slogan to gain mainstream attention, and underscore bitcoin’s potential impact on the world. However when we take a more systematic view of bitcoin’s growing evolution as a whole, a more appropriate comparison becomes readily apparent.
Rather than the next Internet, bitcoin can become the next killer app for the Internet, much like the web before it. A massive network of decentralized applications run by instant microtransactions rather than the exploitation of users’ personal information and more.
A new web with new rules, and new possibilities.
Bitcoin image via Shutterstock