What Exactly Are Blockchain and Bitcoin?
The past couple of years have seen the addition of a number of new words to our day-to-day vocabulary. Variant, spike protein, antigen and quarantine are just a few pandemic-related words that come to mind, but many others are technological terms such as blockchain, Bitcoin, NFT, cryptography and cryptomining. Just like the vocabulary that applies to our new post-COVID reality, these are words that have existed for years but have only recently have become something that you’ll hear mentioned on the news or on social media on practically a daily basis.
If you’re not exactly sure what all those terms mean, you’re not alone. Many people get the general gist of what a digital currency implies, but don’t want to admit that they don’t understand the specifics. In our tech-centric world, it can be embarrassing to say “listen, I know what a Bitcoin is, but I don’t know how it works,” or “what exactly is an NFT and why do celebrities seem to be talking about them all the time?”
Why should you care what all this stuff is, anyway?
What Is Blockchain?
Blockchain is the main underlying technology that makes cryptocurrencies like Bitcoin, NFTs and other things possible. (That, and encryption, which allows personal data to be kept private.)
In the e-book Blockchain for Dummies, Manav Gupta defines blockchain as “a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, a car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. Why? The need for an efficient, cost-effective, reliable and secure system for conducting and recording financial transactions.”
In short, blockchain is like a database of information, but with a structure that is designed to be unhackable due to its chronological and decentralized nature.
The “chain” is composed of blocks of information. Every transaction on the chain has to meet certain requirements and be verified by the previous “block” in order to take place. Once a transaction occurs, it’s recorded in the chain, and there’s no way to change it. The only way to undo a transaction is through another transaction that reverses the previous one, which also becomes part of the information chain. The chain’s decentralized nature—the replication of this information across many computers, rather than being stored in just one place—is what makes the chronological database essentially impossible to hack or alter.
A transaction takes place when certain conditions are met, triggering an automatic reaction. These conditions and its automatic effect are known as a smart contract, and function via what are called consensus algorithms. (This means that if A and B conditions are met, C will occur automatically; for example, once a certain number of resources are received in an account, a contract can be deployed to order the sale of a particular product.)
What creates the consensus regarding the rules? The participants in the chain. Once these smart contracts are set up, the transaction may take place without any additional actors involved. That the chain of information is updated in real time saves time and headaches when it comes to record-keeping, and because the blockchain essentially timestamps the moment when the contract was executed, any transaction is easily auditable.
In spite of its inherent transparency, blockchain technology also affords privacy and security thanks to cryptography and encryption techniques, which protect important information. They allow for confidentiality in permission-based transactions, authentication of a user’s identity, and the integrity of the data being transmitted without making this information public. This means that blockchain technology can be used in business and in other situations where the participants want or need privacy; for example, when dealing with pending patents or bank account details.
Permissions-based blockchains may have users who have access to more information who function as auditors, to double-check transaction details if needed. These permissioned blockchains are made possible thanks to digital certificates, similar to the digital ID that allows you to identify yourself digitally in Spain.
What Does Blockchain Have to Do With Bitcoin?
Bitcoin is the digital or cryptocurrency that everyone has heard about. A cryptocurrency has no physical presence. The “coins” are each a segment of unique digital code that may be exchanged between a buyer and a seller for an agreed-upon price. These pieces of code, or tokens, are stored on a wallet application.
There is no bank or other central monetary authority that controls digital currency—blockchain’s peer-to-peer network is what enables digital currency to function. The data that is replicated across all the computers in the network is automatically updated each time a transaction takes place, which allows for transparency and protects the network from tampering. This “shared ledger” of information guarantees the authenticity of the digital tokens, which is what makes cryptocurrencies impossible to forge.
Bitcoin was launched in 2009, supposedly by a mysterious individual named Satoshi Nakamoto. No one knows who he is, or he even exists. A documentary is in the works that aims to discover Nakamoto’s identity.
It dominates the crypto arena: in 2020, Bitcoin constituted 66% of the market, though it has fallen from its peak of an estimated 86% in 2015. The runner-up for most popular cryptocurrency, Ethereum, or Ether, has a market cap and market value that are just a fraction of those of Bitcoin, and other digital currencies—Binance Coin, Dogecoin, Litecoin, Dash and Cardano, to name a few—represent substantially less. (Ethereum was also hurt by one of the only notable hacks in the history of cryptocurrency. The damage was able to be repaired, but it caused confusion and hurt the company’s reputation.) Smaller digital currencies can be more efficient, as smaller size offers increased flexibility and make them less attractive to potential hackers—even though it’s nearly impossible to hack the blockchain, someone is always going to try—but their limited networks make it impossible for them to compete with larger cryptocurrencies.
What Is the Difference between Bitcoin and Other Digital Currencies?
Bitcoin runs on its own blockchain, or chronological database, designed with cryptocurrency in mind. Ethereum runs on a different kind of blockchain platform that was designed to have more than one application. Essentially, the creators of Ethereum decided to apply the technology that allows for secure cryptocurrency exchanges to not only record Ether cryptocoin transactions, but also to be applied to other kinds of information interactions. A “token” or string of code on the Ethereum system could represent a cryptocoin, but it could also be used to represent other digital assets, such as IOUs or even real-world physical objects. Because it’s set up to be programmable for applications beyond currency, it permits the creation of decentralized applications for business, finance or entertainment.
You Can Use Bitcoin at Starbucks (Just Not in Russia)
Once seen as something on the fringes of tech and investment culture, digital currency is becoming more and more common, and it’s changing the way the world does business today.
Several major US companies now accept Bitcoin as payment for goods and services, including Microsoft (an early adopter back in 2014), AT&T, Burger King, Whole Foods and Starbucks, as do other businesses around the world. In October of 2020, PayPal got in on the game and launched a service enabling people to buy and sell cryptocurrency on its platform and to use cryptos as a source of funds for digital commerce.
One event that dramatically affected Bitcoin's credibility in the eyes of the general public in 2021 was when tech innovator Elon Musk stated on social media that he considered it to be “a positive thing” for the world. His endorsement is widely credited with helping the value of one single Bitcoin to increase nearly ten times over in the space of less than one year.
Japan was the first country to officially recognize cryptocurrency as a payment method, and the Bank of Singapore has talked of linking their currency to Bitcoin instead of gold. In September of 2021, the country of El Salvador actually made Bitcoin its official currency.
Yet in spite of its growing popularity, not all the major world powers are on the same page. The United States officially recognizes digital currency as a commodity, but in practice it is trying to figure out whether to treat it as property or currency and what that means in terms of regulation. China, Russia, India and other countries have prohibited the use of cryptos to be used as a payment method or exchanged as commodities, citing its potential as a tool to be used in money laundering.
The lack of a central monetary authority behind digital currencies makes governments nervous, as does the idea of people doing business with a currency that the government doesn’t control. Most countries are still unsure of how to effectively regulate cryptocurrencies, though many (including Spain) have plans in the works to try to keep a closer eye on them.
How Do You Get a Cryptocoin?
People acquire Bitcoin and other cryptos by buying them on cybertrading platforms such as Bitfinex, Kraken or Coinbase. Certain investment applications like Robinhood also allow you to buy cryptos.
The other way to get them is by what’s known as mining, which is a process that involves huge amounts of computational power and is the way that new digital “coins” are entered into circulation. The way that cryptomining works is that people and companies use incredibly sophisticated computers to race to find solutions to complex mathematical problems—the first to arrive at the answer is awarded the next “block” of cryptos, which the person or company may keep or sell for profit, and the process starts all over again. It requires massive amounts of money to pay for the hardware and electricity necessary to try to mine Bitcoin and other digital currencies.
Some smaller currency networks reward their users with digital coins for participating in the community, which can then be redeemed for content and experiences, such as the Kin coins that can only be “spent” by users of the Kik messaging app. Kin coins only have value within the Kik system, which is composed of a network of 300 million global users.
Other Blockchain Applications: Art, Business, Government and More
The same kind of security provided by blockchain that allows for digital currencies has also spawned the birth of other kinds of non-tangible property, such as non-fungible tokens or NFTs. An NFT is basically a fancy term for an original piece of content in the digital realm.
NFTs are revolutionizing fields that have nothing to do with currency at all, such as the art world. Each NFT is essentially a token that represents a digital certificate of ownership for a unique piece of digital content, such as a 2-D or 3-D image, a piece of music or a video. The provenance as well as the sale of an NFT can be authenticated because of blockchain technology. This means that an NFT can’t be duplicated, which is what gives it its value—just like a piece of art in the physical world.
Think of the idea of a painting or a statue. You could paint or carve a copy of the original work, but you couldn’t literally duplicate it. Why not? Well, because the copy wouldn’t be the same as the original. The original piece that constitutes the NFT is a unique entity created by a specific artist or individual in the same way that an original painting or other piece of art in the non-digital world is not the same as its copy.
Celebrities like Paris Hilton have become notable collectors as well as creators of these one-of-a-kind digital pieces, and some NFTs have been known to sell for multiple millions of euros. Even brands like Budweiser are getting in on the action, including an NFT cameo in its big-budget commercial during the 2022 Super Bowl.
The same technology that allows a digital piece of art to be authenticated has sparked a revolution when it comes to business transactions. The ability to authenticate a transaction between a producer and a supplier, or between a car rental company and a customer via a smart contract can drastically speed up and significantly lower the cost of doing business.
Remember, smart contracts automatically execute when certain conditions are met, which eliminates the need for middlemen and therefore cuts down on transaction and regulatory costs. Once these transactions are recorded on the blockchain, the information automatically becomes available to everyone on the blockchain network, which makes communication more efficient. Because transactions on the blockchain can’t be erased or changed, it makes doing business safer. This transparency via the shared ledger creates trust. Higher efficiency, the resulting lower costs and greater confidence are all favorable to the market.
And because blockchain technology can make use of permissions through encryption, it’s possible to regulate the information that certain users can access. For example, if medical records are stored on a blockchain, only the patient and doctor would have access to the content of those records; for anyone else in the system with the possible exception of an auditor, it would only be possible to verify that those medical records exist.
Blockchain is also making its way into how people view their countries’ political systems. The Democracy4all international conference has been held in Barcelona every November since 2019 and brings together tech experts and policymakers in a quest to help the real-world application of blockchain innovations keep step with its technological advancement. According to its mission statement, the goal is to encourage blockchain as “an instrument of democratic improvement in terms of social, corporate and individual governance.” Conference panels and discussions address topics such as restoring voter confidence through the implementation of blockchain (no voter tampering possible when using the blockchain system), transparency in governance, closing the knowledge gap in public administrations when it comes to implementing a blockchain-based record-keeping system and how blockchain could affect environmental sustainability.
In other words, there seems to be no limit to what blockchain could make possible in the future, which could hopefully be a more efficient, cost-effective, transparent future thanks to this unique technology.