This resource was originally published on Medium, May 30, 2019.
What is Bitcoin? What is a cryptocurrency, for that matter? And blockchain… isn’t that just another word for Bitcoin? What is blockchain vs. crypto vs. Bitcoin vs. I-can’t-keep-up?
This 101 overview includes a high-level breakdown to help build a basic understanding of this new technology and budding industry. This guide is intended to answer these what questions. It is not intended to provide the how of technical instruction or detailed mechanics.
Let’s begin with a simple analogy:
The internet is to the blockchain as online banking is to cryptocurrency as the US Dollar is to the Bitcoin token.
Layer 1: Blockchain, The New Internet?
The internet — this invisible technology that powers industries, communications, and transactions globally. Although seemingly invisible and somewhat undefinable by your Average Joe or Jane, it is a very real and now critical infrastructure integrated into our daily lives. At its most basic, it is a connected “network of networks.” This wasn’t always the case though.
The first usable generation of the internet dates back to the 1960s. It was made of independent networks that existed within their individual bubbles, limited to a closed-off company, group, etc. They didn’t speak to each other and were not accessible to non-network members. The internet as we know it today — this interconnected, online, seemingly-infinite network of networks — came to life in the 1990s.
Source: Who invented the internet?
That is 30 years of development and discovery of the logic’s theoretical capabilities and practical applications as well as the mechanics of effective and sustainable implementations.
Now let’s bring it back to the blockchain. Familiar with the concept of a ledger? A record of transactions noting amounts, directions, and participating parties?
A blockchain is a decentralized, immutable, and public ledger:
There is no central authority that owns the ledger, oversight, and computing power. Instead, independent participants can use, govern, and power the ledger.
A direct synonym is “unchangeable.” One of blockchain’s greatest competitive advantages is its security of records and information due to its cryptography and governance structures. In theory, transactions recorded on a blockchain ledger should be secure in that their details are unchangeable by bad or corrupt parties looking to manipulate the ledger for personal gain.
It is available to the public for viewing, reconciling, and auditing in contrast to a private entity (e.g. a financial services provider such as Wells Fargo or a third-party auditor like PwC).
Notice it is “a” blockchain, not “the” blockchain.
Let’s equate a blockchain to a single network independently designed and built. The blockchain industry is composed of multiple blockchain companies designing and building individual blockchain networks looking to differentiate via functionality, adaptability, and security.
Some of these companies, or projects, are looking to develop an “internet” of blockchains, creating an interconnected network of blockchain networks.
- Blockchain is a logic-based platform that supports the applications of different use-cases, like cryptocurrency markets.
- A blockchain is an independent platform (or network) that has the potential to be linked to other blockchains (networks).
- The internet took over 30+ years of development through trial and error to grow into something recognizable today. Give blockchain time and patience.
We will skip over the details, or “cryptography,” of how a blockchain delivers 1) immutable security, 2) public access while protecting private information, and 3) decentralized development and computing power. Let’s save that for another day.
Layer 2: Use-Cases, More Than Just Cryptocurrency Markets
I say “just” with a heavy conscience. Cryptocurrency developments have been central to blockchain formation, success, and adoption to-date. Before touching on use-case potential, let’s first clarify the intrinsic link between blockchain and cryptocurrency… specifically Bitcoin.
In 2008, the original Bitcoin White Paper was released by the mysterious Satoshi Nakamoto. The paper introduced the logic of blockchain and the digital currency called Bitcoin in-tandem, interweaving them in both concept and implementation since Day One. Blockchain theory was laid out as the immutable network, independent of any singular controlling third-party, that could and would support the evolution of decentralized, peer-to-peer cash (i.e. Bitcoin cryptocurrency) and marketplace. Put simply, the geneses of blockchain and Bitcoin were intertwined in one proposal.
Satoshi is a faceless individual to the blockchain community at large.
Is he a real person?
Is this a pen name?
Or rather a team of people?
Not all questions need answers.
Now back to cryptocurrency more broadly.
Cryptocurrency is a digital currency for which transactions and user identities are secured through cryptography. It is held in a “digital wallet,” your online bank account parallel, that allows a user to send and/or receive “cash” (cryptocurrency value) to/from other network members. The blockchain platform serves as both the e-commerce marketplace facilitator (e.g. Amazon) and the cryptography that creates a secure cash transfer, as opposed to a third-party (e.g. PayPal).
The cryptocurrency world has grown monumentally beyond Bitcoin. There are multiple currencies, issuers, and marketplaces representing an active and dynamic sub-sector of the broader blockchain industry. Users can participate in e-commerce transactions, day-trading, long-term investing, etc. Details on how a blockchain company not only issues but creates transactional value for their cryptocurrency is best saved for another time.
Cryptocurrency marketplaces, however, represent only a portion of the potential for blockchain application. Project teams are exploring how blockchain logic and security can be used for I.D. management, real estate investing, voter registration and election results, contract development, and implementation, etc. The list goes on and on. The use-case challenge is working through the noise of what is possible to the reality of what is actionable, usable, and scalable.
- A blockchain is a platform that supports the use-case application, such as cryptocurrency marketplaces.
- Not all blockchains are made for cryptocurrencies. Use-cases and potential applications layered on are broad and up for debate.
Layer 3: Transactional Units
Wait. Isn’t Bitcoin a blockchain company? And a cryptocurrency? Are there two Bitcoins?
The Bitcoin name applies to both the company developing the blockchain and issuing the cryptocurrency as well as the name of their issued token. Other blockchain companies choose to attach a unique name to their actual token. Example: Ethereum, a competitor, named its token “Ether.”
Hold up. What is a token? A token is the actual unit of value used in cryptocurrency transactions.
Let’s lay out an example against a fiat currency where the value is attached to a ledger backed by the issuing sovereign government. Think the U.S. Dollar, European Union Euro, or Japanese Yen. Now, these are just identifying names used in general conversation. The transactional unit is the $1 dollar bill, whose values can be divided into the quarter, dime, nickel, and penny.
Back to tokens. A token is the dollar bill, or transactional unit, of the cryptocurrency. When you buy into the Bitcoin blockchain, you are buying Bitcoin tokens (or a fraction of a token). When you buy into the Ethereum blockchain, you are buying Ether tokens.
Tokens can be seen as both “cash” for marketplace activity as well as long-term investments to hold in the belief that a token’s value will appreciate over time due to adoption and use of the cryptocurrency.
- A token is a unit that has purchasing power or value.
- Depending on how much you want to invest in a blockchain, you can choose to buy a whole or a fraction of a token.
Special thanks to my family for their (un)solicited feedback and my talented friend and all-things-crypto advocate Michelle Robinson.