The Difference Between Blockchain and Cryptocurrencies
Over the past couple of weeks local dialog about the phenomenon that is bitcoin and by extension crypto currency and blockchain has seemingly escalated. As is normally the case with new technologies, especially those that are touted to fundamentally change the very fabric of how we do things, there is a lot of information and more-so misinformation floating around. This, in many cases, is bourne out of a lack of understanding in many circles of what these new technologies and such are. As such it is important for those who may be in the know to shed as much light as possible so that the general public can be informed and make informed decisions.
So coming out of statements made by our central bank and some articles that were recently published in the print media, I felt compelled to add my voice to the discussions in an attempt to inform and to educate to some extent as best I can on the topic of Blockchain and Crypto currencies.
Blockchain, Bitcoin, bitcoin and cryptocurrency – What’s the difference?
Bitocoin – the first decentralized digital currency
Bitcoin is a cryptocurrency and global payment system that is generally referred to as the first decentralized digital currency because it operates without the need for a central authority (e.g. a bank). Bitcoin is the creation of a group of ingenious minds who go by the pseudonym Satoshi Nakamoto. It first came to prominence in 2009 after the financial meltdown that occurred during that time. The network on which Bitcoin runs is a peer to peer network in which transactions are conducted directly between users and cryptographically verified by nodes (computer systems) that exist on the network. Every transaction is recorded in a public distributed ledger. It is this ledger that is called the blockchain. So in simple terms blockchain is the technology on which Bitcoin runs but they are not one in the same because blockchian itself is used for and can be used for many other types of transactions that have value of some sort.
The difference with the B’s in bitcoin
So next let me quickly highlighting a little known tidbit…There is a difference between Bitcoin with an uppercase “B” and bitcoin with a lowercase “b”. Bitcoin with a capital “B” is typically associated with Bitcoin the protocol and payment network while bitcoin with a lowercase “b” refers to bitcoin as the currency. So when you speak about how much of the currency was transacted, or you’re focusing solely on the currency “b” and not the payment network or protocol “B”
Blockchain – The Distributed Ledger Technology
Blockchain is an extremely secure, immutable and almost incorruptible robust distributed ledger that records virtually any type of transaction of value. Believe it or not blockchain started life back in the early nineties but gained full maturity when it was employed as the core underlying component of the digital currency bitcoin in an effort to solve the problem of digital currency “double spend” without the need for a “trusted” intermediary (e.g. a bank).
It is important to note that this distributed ledger can exist in two forms
- public (or permissionless) and
- private (or permissioned)
Bitcoin uses a public blockchain, as such all transactions can be viewed by anyone conducting transactions. Of note however is that while you can see all transactions you are not privy to who (e.g. the name of the person or entity) is doing the transaction. This is where the security and anonymity embedded in the blockchain technology comes into play.
Private blockchains have the same securities as public blockchains with additional access controls that determine who can access the private blockchain network. Access is normally controlled by the owner of that network.
Blockchain technology has so many uses far beyond just cryptocurrency. Its capabilities extend to Insurance, Healthcare, Intellectual property and Digital Rights, Identity Management, Cybersecurity, Titles and Registration, Remittances, Wagers and Betting, Voting and eCommerce. But because of its intrinsic design perhaps one of blockchains biggest benefits is its inherent transparency and ability to mitigate corruption while promoting inclusiveness. It is these attributes that make blockchain such an appealing technology outside of the financial markets. Blockchain creates TRUST and VALUE by being a trustless technology while at the same time removing components of no value.
Pros and Cons of Blockchain
Blockchain has some clear advantages and disadvantages.
Pros: Efficiency, Immutability, Transparency, Corruption Mitigation, Lower transactions time and costs.
Cons: Still has scalability and power consumption issues, Immutability has some drawbacks, Rare instances where security can be compromised and Speculative market creation.
The positive thing about blockchain is that so many entities have recognized its potential it enjoys a lot of support from reputable entities in the technology space and the financial services space as well.
Cryptocurrency and where the problems start!
That leaves us with this overarching thing called cyptocurrency. I like the wikipedia definition of cryptocurrency which states “A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets.” I like this definition because it accurately introduces the concept of the “digital asset” This is where most of the concerns, confusion, misconceptions and trouble in the world of cryptocurrency and currency in general starts, with digital assets.
To understand why the trouble starts here you have to now understand one more thing, Fiat, and no I am not talking about the car company. Fiat refers to the traditional currency that we use every day, it’s money that is regulated and whose value is controlled by governments and regulators (e.g. central banks) and is typically what is defined or described globally as “legal tender”. It has value because the government says so. Now some financial scholars, economists, and those beholden to traditional financial precepts may chastise me for oversimplifying this but I will invoke Occam’s razor here.
Pro’s and Cons of Cryptocurrency
So let me quickly outline some of the Pros and Cons of cryptocurrency.
Pros: Fraud reduction (this is particularly beneficial if you are a bitcoin lender), Anonymity, Faster transaction time, lower/zero transaction fees, secure, decentralized and no more middle man (e.g banks, financial institutions)
Cons: Limited Knowledge and Understanding, Anonymity, Volatility & Uncertainty, Global acceptance, Transaction reversibility and No more middle man (e.g banks, financial institutions)
You will notice that there are some pros which are also cons. This is delibarate and true depending on the context of the discussion however it is through full understanding that we will be able to take full advantage of each.
Let us be clear on a couple of things, cryptocurrency, bitcoin and its siblings (over 1500 of them) are causing shockwaves throughout the financial markets. It is also poised to rattle the fundamentals of economies and traditional banking systems globally in good and in some cases bad ways. This is a source of consternation for Governments and Central Banks. And understandably so because changing the status quo to a state where it appears they have less control is not readily entertained. However this cannot be the sole reason for not embracing the possibilities and benefits abound.
Lets face it we cannot even contemplate at this time some of the possibilities and opportunities associated with these innovations because many of us don’t fully understand what is possible. I liken what is happening now with the advent of the Internet back in the late 80’s early 90’s. Only the esoteric few had visions of the electronic and wireless communication we now take for granted today, but to many others “no such thing was possible”. But what we must appreciate about the history of innovation and technology is that it is most important to make an honest effort to understand the innovations and the technology before making decisions steep in bad information or lack of understanding.