What is Blockchain and Cryptocurrency?

What is Blockchain and Cryptocurrency?

 

“Bitcoin will do to banks what email did to the postal industry.” — Rick Falkvinge

What is Cryptocurrency?

Cryptocurrency is essentially a type of currency, just like the dollars and cents we are so familiar with. It can also be seen as a payment system, similar to bank transfers or Paypal (but better – this will be discussed later).

However, unlike any other currency available to us before, Cryptocurrency has these defining traits:

  • Entirely virtual and digital.
  • Decentralized control – it is not controlled by any single person or entity. Quite like the Internet.
  • Has a stable value and doesn’t degrade. Quite like gold.

What is Bitcoin?

Bitcoin is first of the cryptocurrencies introduced to the world (more in-depth info here), and currently the dominant currency (aka coin) in the crypto-market.

For simplicity, we shall be using the term ‘Bitcoin’ to discuss blockchain technology herewith, but, generally, the same technology applies to any form of cryptocurrency.

What is Blockchain?

Let’s imagine the following scenario:

You and three other pebble-loving friends, Tom, Dick and Harry decide to share a mountain-pile of pebbles. You also create a pebble ledger to keep track of the number of pebbles each of you have. Some days, you trade pebbles for candy with these friends (transactions). Other days, you get lucky and find a nice new pebble in the river (mining). All these are recorded in the pebble ledger.

For convenience, you all decide to leave Tom in charge of this pebble ledger.

On Pebble Appreciation Night, you realize there are discrepancies with the recorded quantities in the pebble ledger. Turns out Tom isn’t the most meticulous when it comes to recording details. He either input the wrong quantities or forgot to update it altogether. You all decided to pass the task to Dick instead.

Now Dick wasn’t quite happy with this rather thankless job, and he decides to ‘reward’ himself with a pebble every time he had to amend the record. On the next Pebble Appreciation Night, he tries to demand pebbles he didn’t actually own, even accusing the rest of stealing his pebbles. (Yes, Dick was being quite the… dick.)

To eradicate this problem, you decide that everyone kept their own pebble ledger, and whenever a pebble transaction was made, everyone came together and updated their ledgers such that they were all the same. That way, everyone was kept accountable, and the pebble ledgers always reflected the correct quantities.

The scenarios with the ledger controlled by Tom and Dick represent possible problems with currencies controlled by a single entity, e.g. a bank or financial institution. The final scenario represents the decentralized system known as blockchain.

Blockchain is the technology by which Bitcoin (or any cryptocurrency) is transacted.

How is Bitcoin stored and moved?

Since Bitcoin is a virtual currency, it needs a tangible system for us to use it. Thus, all Bitcoin stashes are tied to an address, or a public key. These addresses are in turn accessible by a private key. The private key generates a signature that verifies for everyone that the transaction is authentic.

Let’s revisit this in pebble terms.

Pebbles can be a chore to lug around in your pockets. So, you and your friends keep them in glass display cabinets, to showcase them and all their beauty. (Also, to keep track of who has how many pebbles. Likewise, the amount of Bitcoin kept at a certain address is visible to everyone.)

For security,

  • each display cabinet is locked and only the owner has the key (private key),
  • and each key has its own unique cut pattern (signature) such that it works on only the lock of their display cabinet and none other (Thankfully, skeleton keys don’t exist in the world of Cryptocurrency – at least not yet).

Keeping this private key safe is of paramount importance because it literally is the key (lol) to accessing your Bitcoins. If lost, the Bitcoins it safeguards will be forever inaccessible. If stolen, the thief will be free to access and move the coins to a new address without ever being caught (if he is careful).

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