Whenever people start talking about blockchain they often imply crypto currencies. However, a blockchain itself doesn’t require any token and still be a blockchain. The mere requirement for being public and permission-less, however makes a token (of some value) a requirement.
A simple and stupid blockchain
On a technical basis, a blockchain is a simple hash-linked list. That means arbitrary data is stored in a block and these blocks are linked through the hash of the previous block’s data. By linking many blocks, we end up in a blockchain. Quite easy to understand.
Now, what makes blockchain technologies interesting is that they come with a protocol. To us, this protocol describes the rules of the game in the sense that you have to play by the rules or you cannot play. The protocol is what gives a blockchain some meaning. For instance, if we break down Bitcoin’s protocol, it could be simplified by these two rules:
- You can transfer bitcoins to another bitcoin address
- You cannot make your own balance go below zero
Obviously, Bitcoin can do way more than that (for the interested reader look up Bitcoin Script)
Either way, you can only get transactions into the blockchain that follow these rules. And there are other blockchain systems that have other rules, some of which offer a lot of features and flexibility - but that’s outside the scope of this article.
The need for a token
As with a stupid blockchain, the protocol itself doesn’t require a ‘token’ per-se. One could build a chess-game using computer slang and make those the protocol of your chess-game blockchain.
However, there is one aspect that may require your blockchain to have a core token of value and that is the consensus scheme. Think of the consensus scheme as the part of the technology that makes all participants agree on what’s going on and for that someone has to operate servers in the network that connects your participants. These servers come at an expense to the operates so that they seek for an incentive to continue providing a consensus node. That is why block producers are almost always paid for their service of producing blocks.
In case of Bitcoin, the consensus mechanism requires additional work for block producers in that some additional (hard) metric (find a certain hash that fulfills some dynamic target difficulty) is met. This proof of work comes with additional expenses for computational hardware and makes for a huge upfront investment of block producers.
Obviously, there are other consensus schemes achieve the same production of blocks at far less expenses at the potential cost of centralization, permissiveness, security or even scalability. It is outside the scope of this article to go into further detail of alternatives to POW.
Either way, to overcome the need for a token, one can either keep the block production in-house which makes the system centralized and probably private. The alternative is to have block producers selected (and incentivised) off-chain which makes it a permissive blockchain as it comes with a much higher barrier-of-entry.
What’s open for further experimentation is the incentive-structure provided to block producers. While a financial compensation by means of token is an easy route other rewards could come into play, such as
- participation in governance
- discounts on fees
- no compensation at all (voluntarism)
To conclude this article, a argument was made that public and permission-less blockchains are open for anyone to participate in block production. Due to the expenses required to take for operating a block producers, the blockchain has to provide an incentive (often financially) to the operate to continue with block production.