Blockchain and cryptocurrency have taken over the headlines. From NFTs sold for hundreds of thousands of dollars, to Coinbase’s IPO, to the frenzy around Dogecoin, many people are wondering what exactly is blockchain? What’s cryptocurrency? How are the two related?
This blog is a quick introduction into blockchain and cryptocurrency, and does not serve as financial advice.
What is Blockchain?
To understand cryptocurrency, it’s necessary to first understand blockchain without the confusing jargon. Many people are reluctant to learn more about blockchain because of the technical terms.
Blockchain is defined as “an immutable public digital ledger” (CNN), “a collection of information that is stored electronically on a computer system” (Investopedia), “a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network” (IBM). Essentially, blockchain is a technology that keeps track of information such as transactions, and most importantly, it can’t be altered.
This is key to how cryptocurrency works. You may have asked yourself, “Well, why can’t I copy an NFT or copy Bitcoin?”. This was a dilemma addressed by Satoshi Nakamoto, who is widely credited as the creator of Bitcoin.
In October 2008, Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System”. The paper outlined the need for “an electronic payment system based on cryptographic proof instead of trust”. In addition, this payment system must be able to verify each token to prevent duplication or manipulation.
Satoshi’s solution: a timestamp server. This method “proves that the data must have existed at the time, obviously in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it”.
What is cryptocurrency?
Cryptocurrency is defined by James Royal, Ph.D. and Kevin Voigt as “a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions”.
Cryptocurrency is based on blockchain technology. Below is a helpful comparison between cryptocurrency and other (likely fiat) currency.
Why is cryptocurrency popular?
Using Bitcoin as an example, there will only be 21 million mined. Having a finite supply means the value can’t be changed by an increase in production.
Free of “management”
Since cryptocurrency — Bitcoin, in this example — is mined through blockchain, and blockchain is maintained by a distributed set of servers, it isn’t controlled by any single entity.
There are very few, if any, ways to track who spent it, only that it’s been spent. With Bitcoin, “privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous. The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone”.
What is a “wallet”?
A “wallet” is how you access your cryptocurrency. Coinbase explains that “crypto wallets keep your private keys…safe and accessible, allowing you to send and receive cryptocurrencies”. Your crypto wallet holds your keys, which prove your ownership. If your keys are lost, that’s it for your cryptocurrency and why you hear horror stories of people trying to find their keys in their old computers.
There are various types of crypto wallets. Each have their own benefits and drawbacks.
What is an exchange?
An exchange is different from a crypto wallet. In an exchange, you can exchange your fiat money for its equivalent in cryptocurrency. You can store your keys and cryptocurrency in your crypto wallet for long-term access.
Blockchain and cryptocurrency are interesting to learn about, especially now that it’s more widely accepted by companies and retailers. I highly recommend you do additional research if you want to learn more about blockchain or about cryptocurrency.
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