Bitcoin, Blockchain and Cryptocurrency
What’s the difference between cryptocurrency, bitcoin, blockchain? It’s a bit like comparing squares and rectangles — these terms are all seemingly used interchangeably, but have distinct meanings. Put simply, blockchain is a technology which all cryptocurrencies are built on, including the oldest, most prominent currency, bitcoin.
Blockchain
A blockchain is simply an ever-growing list of records, with each entry (“block”) being “chained” to the one before it. Blocks are made up of a group of transactions, which will be processed once the block is added to the chain. The manner in which these blocks are chained is cryptographically: each block contains a cryptographic hash, or random mess of letters and numbers. As a new block is made, it takes the hash from the previous block, then hashes (jumbles) the hash — bear with us — producing a brand new, completely random hash for the new block. The process then repeats as the next block chained.
Think of this sort of like encoding a secret message — as long as you have the key, you can take a message that’s been coded several times and revert it back to its original form. It is in this same manner that blocks are connected. Since the blocks are chained in this way, it is very easy to detect and reject fraudulent transactions and blocks.
While the first-ever blockchain was in fact bitcoin, it has applications outside of transaction settlement. Bitcoin eliminated the need for a trusted third party, in this case banks, to make an electronic payment. The idea is the same model can be applied to many other systems traditionally dependent on a trusted third party, or middleman. Imagine the cost savings promised by eliminating middlemen from supply chains.
Cryptocurrency
A cryptocurrency is simply a currency built on blockchain. They leverage the strong cryptography inherent to blockchain to secure transactions, as well as to provide a means of decentralized control.
Virtually every other aspect of a cryptocurrency can coincide or diverge from bitcoin’s protocol. A few examples of such variances are currencies that prioritize privacy, currencies designed for faster transaction speeds, or currencies with an inflationary supply built into the protocol.
Bitcoin
Bitcoin is the first, most widespread, most secure, and most valuable of all cryptocurrencies. What is unique about bitcoin, is its function as a digital cash. On the surface, bitcoin’s function may seem quite similar to PayPal, Venmo, or electronic bank transfers; this is somewhat true, with one big difference: with bitcoin, one can anonymously pay someone they don’t know. Like handing a $5 bill to someone you don’t know, but see on the street, bitcoin is the first successful electronic cash that can do the same. In an increasingly internet-based world, the implications for this single use-case are profound.
The main attribute of bitcoin (and cryptocurrencies) that begets its function as digital cash is that it is decentralized, as is the case with any true blockchain. A typical database has very centralized power in the form of an administrator, with the ability to amend records or change protocol on the fly. A blockchain is a much more democratic form of keeping records, where many independent parties watching the blockchain must come to consensus, following a strict protocol, on what is the correct blockchain. Since the blocks are chained together by hashes, the parties verifying the blockchain, called “nodes,” can easily distinguish the real blockchain from dishonest blockchains, without need of a central authority. By keeping things decentralized, any transaction is solely between two bitcoin wallets, with as little or as much identifying information tied to them as the owners please.
By eliminating the need for a central authority to verify transactions, bitcoin is highly resistant to tampering in ways typical currencies are not. You never need to worry about your money losing value for a number of typical reasons like inflation, central bank manipulation, or poor government performance. While functioning as cash, bitcoin differs from most normal currencies in that it is deflationary. There will only ever be 21 million bitcoins ever created, many of which have already been permanently lost. You will never have to worry about bitcoin being devalued by a central authority like the Fed flooding the market with new bitcoins. A lack of central authority also covers the risk of bitcoin holders ever having their bitcoin seized, forced to identify themselves, or blocked from making/receiving payments — all things which are very real in the incumbent monetary system.
