Cryptocurrency and Smart Contract are inseparable from Blockchain
The year 2017 witnessed an outburst of worldwide hype in Fintech. We are thrilled to talk about blockchain, Bitcoin, smart contracts, and ICO. Being engaged in blockchain industry for a while, I have been raised so many questions as to why almost every blockchain project is releasing tokens? Is token offering that much necessary for fund raising? Can cryptocurrency be stripped wholly from blockchain (e.g. Chinese governments banned ICO and cryptocurrency trading yet promoted blockchain development)? And there are more coming to me every day.
I soon realized that it’s extremely common that newbies confuse blockchain, bitcoin/token/cryptocurrency and smart contract. According to Melanie Swan, author of Blockchain: Blueprint for a New Economy, bitcoin and blockchain are used interchangeably to describe any three parts of the concept, from the underlying blockchain technology, the protocol and client through which transactions are effected, and the actual cryptocurrency. The more living example would be as if PayPal had called the Internet “PayPal”, upon which the PayPal protocol was run, to transfer the PayPal currency, as said by Melanie Swan in her book.
So how do we distinguish blockchain, bitcoin and smart contracts? It’s not that hard to figure out. What we need is to clarify these concepts. In the next two sections, I will cover a brief discussion about what’s the essence behind blockchain, bitcoin and smart contract, together with an illustration of their inner relationships.
What is blockchain, bitcoin and smart contract in nature?
Blockchain
To be brief, blockchain is a distributed ledger. Blockchain network allows everyone to check the public ledger, where it cannot be controlled by any single entity and has no single point of failure. Users within the system manage and update the ledger in a collective manner, and stick to consensus rules for further modification. Blockchain Technology is viewed as the next radical, transformational invention after Industrial Revolution and Information Revolution. It will play a massive role in building machine trust and digitalizing value transfer.
Cryptocurrency (i.e. Bitcoin)
Bitcoin is the first application of blockchain, a decentralized cryptocurrency whose payment tech is derived from blockchain. Cryptocurrencies make peer-to-peer direct transaction realized, thus resolving chronic issues such as expensive transaction fees, prolonged procedures in the conventional centralized payment system. In blockchain network, all transactions must be verified by network nodes, and recorded in the blockchain-based public distributed ledger.
Smart Contract
A smart contract is a computer protocol intended to facilitate, verify, or enforce the negotiation or performance of a contract. Likewise, smart contracts cannot be controlled by any single entity.
A smart contract can be an automatically executed algorithm and system participants at the same time, when it is able to receive, store and send value.
How are these three concepts interconnected?
In brief, blockchain is a foundational technology, while tokens and smart contracts are examples of blockchain-based applications. The graph below gives a straightforward illustration of their inner connections.
It can be regarded as, that blockchain is the foundation of a residential building, protocols are pre-pave power grid, and tokens are the layer of floor. The up-layer applications, such as smart contract, refer to inner decoration and other amenities within the building. Just imagine that can you live in a luxury-decorated residential property without floor, and you have to step on the water and power grid without floor?
We are now taking a deeper insight into the role played by token in this network. Tokens are a must for blockchain to realize value transfer.
First, worldwide circulation. Tokens can circulate worldwide, facilitating peer-to-peer transactions and value transfer. Second, value absorption brought by token circulation and token economy. Purchase of a token is not simply the purchase of a commodity or service, but an entrance ticket to a big ecosystem. The most typical example would be blockchain-based content platform Steemit. Steemit distributes STEEM tokens as a reward to great content generators. In less than 2 years on board, Steemit has attracted over 170,000 users, saying that token circulation can really help absorb value.
To sum up, blockchain and digital tokens are two sides of a single coin. Decentralization cannot be realized without cryptocurrency, while cryptocurrencies won’t exist and grow without blockchain.
Reference
[1] 硅谷密探（2017），区块链，将如何重新定义世界 ？
Retrieved from: http://www.svinsight.com/reading/459.html
[2] EthFans/wiki（2017），智能合约
Retrieved from: https://github.com/EthFans/wiki/wiki/%E6%99%BA%E8%83%BD%E5%90%88%E7%BA%A6
[3] What is Blockchain Technology? A Step-by-Step Guide For Beginners (2016)
Retrieved from: https://blockgeeks.com/guides/what-is-blockchain-technology/
[4] Smart Contracts: The Blockchain Technology That Will Replace Lawyers (2016)
Retrieved from: https://blockgeeks.com/guides/smart-contracts/
[5] Swan, M. (2015). Blockchain: Blueprint for a New Economy.
United State of America, O’Reilly Media, Inc