The blockchain promises are more relevant than the Bitcoin frenzy - Julien Prat, Research Director (CNRS), Crest

The price of bitcoin has experienced a new surge exceeding 50,000 dollars after the car manufacturer Tesla and its founder Elon Musk declared their interest for this cryptoasset. Is Bitcoin just a giant speculative bubble?

When the bitcoin booms, it’s always the same story! Everyone focuses on its speculative nature with often negative questions without really being interested in the technology behind it, the blockchain that has a real disruptive potential and that can help to meet many contemporary challenges. This technology can be used to securely disintermediate a very large number of operations, particularly in the financial field. It can also make it easier for users of digital networks to regain control of their personal data at a time when the stranglehold of Internet and social network giants is a major concern.

The question of whether Bitcoin is a speculative bubble is a very difficult question because nobody knows how to answer it! Like many assets, gold for example, Bitcoin is valuable because many people value it. If I wanted to be a little provocative, I would say that even currencies like the euro or the dollar are bubbles, especially at this time when central banks are issuing very large amounts of them. Even though central bank money has unique characteristics compared to other assets, its value is also based on the trust placed in it. This trust is based on a social consensus that gives value to a medium of exchange and there is a self-fulfilling dimension in this process.

When a few of us created the chair dedicated to the technological and economic implications of the blockchain three years ago, we had in mind to promote higher education and research in this emerging field, which at the time aroused a certain amount of skepticism. The speculative dimension, or not, of cryptoasset was not our concern!

At the time of the launch of the “Blockchains and B2B Platforms” chair, the bitcoin was worth around 2000 euros. Today it is worth more than 50,000 but our goal was not to turn our students into speculators! We were interested in the blockchain and its potential consequences for the relations between companies, institutions and individuals and very early on we formed a multidisciplinary team, notably with Daniel Angot, research director at the INRIA Saclay center and co-head of the chair, or Linda Schilling, assistant professor at CREST and a specialist of central bank digital currencies (CBDC). And I think it is fair to say that there are few higher education and research institutions where as many researchers are working on the blockchain as at École Polytechnique.

Beyond the self-fulfilling confidence, are there any intrinsic properties of Bitcoin that justify the craze for it?

The first intrinsic quality of Bitcoin is to be a "proof of concept", to have shown that an asset based on the blockchain could be created and exchanged under secure conditions allowing transactions to be carried out for even very large amounts, since we have seen 500 million or even a billion dollars pass through the transaction network.

The speciality of Bitcoin is that it is an entirely autonomous asset, not dependent on a central authority that could seize or confiscate it and administered by its community. Entirely decentralised, its management is determined by mathematical algorithms that have foreseen from the outset its transfer modes, its rules of consensus among its community and the circumstances of its issuance so as avoid any risk of falsification while dispensing with a central regulatory authority and the associated risks of arbitrariness.

It is worth recalling that the first blockchain, that of Bitcoin, was developed in the wake of the financial crisis of 2008 and the resulting crisis of confidence in financial institutions. The origin of cryptoassets is also linked to the dystopian risk identified by cryptographers in academic circles who, anticipating the advent of digitized central bank currencies that would allow the tracing of all the transactions carried out by each individual and centralized control of each individual's assets, sought to develop alternatives that would ensure the protection of privacy and preserve the integrity of at least part of the assets held.

But Bitcoin is to the blockchain what email is to the internet. Since the beginning of the Bitcoin network, many peer-to-peer networking initiatives have emerged with a distributed database similarly structured in chains of blocks where the blocks are linked together by a cryptographic chain designed to ensure and make data storage tamper-proof.

The long-term promise of the blockchain is the internet of values. Every time assets of value are exchanged on the internet, they currently have to go through bank servers or financial intermediaries, and it is not the network itself, it is not the protocol, that allows the exchange. The long-term vision would be that the assets would exist directly at the protocol level and therefore there would be no need for intermediaries. In particular, this would allow each individual to control his or her personal data and to decide whether or not to be paid for it. This is the long-term vision and that is why the blockchain is potentially so valuable. Bitcoin was just a "proof of concept", a first example that worked.

A frequent criticism of crypto-assets and bitcoin in particular is the cost, both financial and environmental, of validating blocks that result in the creation of new issuances for the benefit of the participant whose block has been validated? Is this limit relevant and to what extent can it constitute a brake on the development of crypto-assets or even other initiatives based on the blockchain?

This could be the case since the Bitcoin validation process currently uses between 0.3% and 0.4% of the world's electricity production and energy consumption increases with the value of Bitcoin. Since the Bitcoins issued currently represent 700 billion dollars, if their value increases further to reach, let us say, 2,000 billion dollars, the consumption of electricity will increase, and we can go like this up to 1% of the world's production or even more. This makes no sense from an ecological and environmental point of view, but for the time being, it is clear that this has not been a hindrance.

More fundamentally, the "proof of work" validation mode for Bitcoins is not the only energy-intensive way to validate a blockchain, the alternative being the "proof of stake", which is much less energy-intensive. In the "proof of work" approach, a network participant who wishes to update the blockchain must perform work to resolve a cryptographic problem before being able to modify the database by adding a block. In the "proof of stake" approach, to change the state of the network, a member must show that he or she is already involved in the system. Blockchain systems are already based on and operate on this approach.

This is notably the case with Tezos, a blockchain platform for the development of intelligent contracts and the cryptoasset tez, co-founded by a polytechnicien, Arthur Breitman, and one of the few French unicorns. The second blockchain of cryptoasset in terms of valorisation, Ethereum, is in the process of switching from "proof of work" to "proof of stake".

Questions exist as to whether "proof of stake" is as robust as "proof of work" but for now proof of work seems to work and there is a great deal of research underway to develop alternatives to "proof of work". Will Bitcoin give it up? I don't think so, because Bitcoin has proven itself and gained such confidence through "proof of work" that it seems unlikely that the community will give it up.

*CREST : a joint research unit CNRS, ENSAE Paris, École polytechnique - Institut Polytechnique de Paris, GENES