Blockchain and Bitcoin: What are they?

Are Bitcoin and blockchain the same thing? No, they aren’t. However, they are closely related and often confused. In this article we’ll explore the two technologies, outlining their differences between the crypto-currency, Bitcoin, and the distributed ledger system, Blockchain.

Blockchain and Bitcoin: What are they?

What is bitcoin?

 

Bitcoin is a form of digital currency launched in 2009 by an anonymous person (or group of people) named Satoshi Nakamoto.  It is created and held electronically with the intention of enhancing privacy while simplifying and reducing the cost of transactions. No one controls it. A Bitcoin is stored and transacted over an open, public, anonymous, peer-to-peer network. It is stored on a blockchain, rather than a central monetary repository—like a bank.

Bitcoin is but one application of Blockchain. You can think of blockchain as a database, and Bitcoin as one of the many applications that run on that system.

Bitcoin is the first, and most famous example of a growing category of money known as cryptocurrency. It can be used to buy things electronically like conventional currencies and can be converted to and from a fiat currency through exchanges. Bitcoin’s most important characteristic and the thing that makes it different to conventional currencies is that it is decentralized. No single institution controls Bitcoin.  There is no trusted 3rd party holding, guaranteeing, or mandating the acceptance of the currency.

So how could it possibly work? It works because it sits on top of a blockchain.

What is blockchain?

The key to any business network is the trustworthiness of the transaction ledger. Without trust in a common record of transactions, all business interactions grind to a halt.

A blockchain is a distributed ledger database.  It is an authoritative, immutable record of transactions. Transactions are entered into the database and bundled into “blocks”. These blocks are encrypted and chained together in a process where each block contains not only the encrypted transactions in the block but also the encryption signature of the previous block. In this way, blocks are “chained” together so that no one can ever go back and change an entry in any of the blocks without destroying the chain. This mechanism allows for agreement on a transaction record between strangers, without the need for a trusted third party to administrate and hold the authoritative record.  The chain itself is maintained on many peer computer servers called “nodes”; data is continuously synchronized between those nodes. In aggregate, this means that transaction records on a blockchain are very durable, highly redundant, highly secure, virtually unhackable, very cost efficient and highly trustworthy. Money, goods, property, work, or even votes can be transacted on a blockchain.

A further characteristic of a blockchain is the ability to build “smart contracts” (preprogrammed logic) that can execute automatically based on any combination of triggers. This mechanism can dramatically accelerate the speed of transactions and contract fulfilment and significantly cut the overhead cost of administering those contracts.

Blockchain will create new economics, allowing new markets to emerge and will allow businesses to re-architect existing processes, making them faster, more secure, more cost-effective, and more fraud resistant

 


Blockchain and Bitcoin: What are they?