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For newcomers to cryptocurrency, the terms can be quite confusing and even misleading. Some people refer to Bitcoin when talking about blockchain technology, while others will refer to blockchain when talking about cryptocurrencies in general. These terms are not really interchangeable. They refer to different but connected concepts. Therefore, it is important to understand the difference between them. In the following, we introduce you to the basics of blockchain technology, cryptocurrency and Bitcoin.
A very basic analogy
Consider this:
- A website is a specific technology used to share information.
- Search engines are one of the most popular and best known ways to use website technology.
- On the other hand, Google is one of the best known and most popular examples of a search engine.
The same, similar:
- Blockchain is a specific technology used to record information (blocks of data).
- Cryptocurrencies are one of the most popular and well-known ways to use blockchain.
- In turn, Bitcoin is the first and most popular example of a cryptocurrency.
Blockchain: Concept
Most blockchains are designed as a decentralized and distributed digital ledger.. In a word, blockchain is a digital ledger that is basically an electronic version of a paper ledger and it is responsible for recording a list of transactions.
More specifically, a blockchain is a linear chain of multiple blocks connected and secured by cryptographic proofs. Blockchain technology can also be applied in other activities that are not necessarily financial activities, but in the context of cryptocurrencies, they are responsible for keeping a permanent record of all confirmed transactions. take.
‘Distributed’ and ‘decentralized’ refer to how the ledger is structured and maintained. To understand the difference, think about common forms of centralized ledgers like public records of home sales, bank ATM withdrawal records, or eBay’s list of sold items. In any case, only one organization controls the ledger: a government agency, a bank, or eBay. Another common factor is that there is only one primary copy of the ledger, and anything else is simply a backup that is not an official record. Thus, traditional ledgers are centralized because they are maintained by a single entity and often depend on a single database.
In contrast, a blockchain is typically built as a distributed system that functions as a decentralized ledger. This means that there is no single copy of the ledger (distributed) and no single control (decentralized). Simply put, every user who decides to join and participate in the maintenance of the blockchain network keeps an electronic copy of the blockchain data, which is regularly updated with all the latest transactions, at the same time. set with other users’ copies.
In other words, a distributed system is maintained by the joint work of many users, these systems are spread around the world. These users are also known as network nodes and all these nodes participate in the verification and validation of transactions, according to the rules of the system. Thus, power is decentralized (there is no central authority).
Blockchain: Practice
Blockchain gets its name from the way records are organized: a chain of linked blocks. Basically, a block is a piece of data that contains a list of recent transactions (like a page that prints entries). Blocks, like transactions, are public and visible, but they cannot be changed (like putting each page in a sealed glass case). As new blocks are added to the blockchain, a persistent record of the linked blocks is formed (much like a physical ledger and its multiple pages of records). This is a very simple analogy, but the process is much more complicated than that.
One of the main reasons blockchains are resistant to modification is that blocks are linked and secured by cryptographic proofs. To generate new blocks, network participants need to engage in a computationally intensive and expensive operation known as mining. Basically, miners are responsible for verifying transactions and grouping them into newly created blocks that are then added to the blockchain (if certain conditions are met). They are also responsible for introducing new coins into the system, which are released as a reward for their work.
Every newly confirmed block is associated with the block that precedes it. The beauty of this setup is that it is practically impossible to change the data in a block once it has been added to the blockchain, as they are secured with cryptographic proofs, are extremely difficult to undo, and very expensive to produce.
In a nutshell, a blockchain is a chronologically arranged chain of linked data blocks secured by cryptographic proofs.
Cryptocurrency and blockchain
In simple terms, a cryptocurrency is a digital form of money that is used as a medium of exchange in a distributed network of users. Unlike traditional banking systems, these transactions are tracked through a public digital ledger (blockchain) and can occur directly between participants (peer to peer) without intermediate.
‘Crypto’ refers to cryptographic techniques used to secure the economic system and ensure that the creation of new units of cryptocurrencies and confirmation of transactions goes smoothly.
While not all cryptocurrencies are mineable, many cryptocurrencies, like Bitcoin, are dependent on the mining process, have a slow and controlled growth in circulating supply. . Therefore, mining is the only way to generate new units of these coins and this avoids the inflationary risk that threatens traditional fiat currencies, where the government can control the money supply.
Bitcoin
Bitcoin is the first cryptocurrency ever created and of course the most famous one. It was introduced in 2009 by a developer with the pseudonym Satoshi Nakamoto. The main idea is to create an independent and decentralized electronic payment system based on mathematical and cryptographic proofs.
Despite being the best known, Bitcoin is not alone. There are many other cryptocurrencies, each with its own specific features and mechanisms. Besides, not all cryptocurrencies have their own blockchain. Some are created on top of an existing blockchain, while others are created entirely from scratch.
Like most other cryptocurrencies, Bitcoin has a limited supply, which means that the system will not create more Bitcoins after the maximum supply is reached. While this varies from project to project, the maximum Bitcoin supply is set at 21 million units. Typically, the total supply is public information determined when the cryptocurrency was created.
The Bitcoin protocol is open source. Everyone can also review or copy the code. Many developers contribute to the development of the project.
