It’s a little weird, but most people refer to Bitcoin (BTC) whenever the topic of cryptocurrencies comes up. Bitcoin was the first one. Bitcoin has the largest market value (ie. number of tokens available x value of each token). However, it’s not correct to refer to the huge number of different cryptocurrencies as Bitcoin. There are many others. But, and most importantly, Bitcoin laid out the groundwork for how a blockchain would work.
A ‘blockchain’ is like a ledger, or a two-dimensional chart, a spreadsheet. The purpose of a blockchain is to record transactions.
Blockchains are stored on computers. They can be on a single computer (i.e. centralized) or many identical copies of the same blockchain can be stored on multiple computers (i.e. decentralized, distributed). Different storage approaches can result in a blockchain being private (for example stored and accessible only within a specific organization), or public (accessible to anyone with an internet connection), or even a combination of private and public components. Bitcoin was designed as a decentralized and public form of blockchain with the intent of eliminating the possibility of corruption, making it possible to step away from centralized banking systems.
Each blockchain has one or more ‘tokens’ associated with it and there are different purposes for different tokens. As examples, Security Tokens could represent an investment as cryptocurrency and Governance Tokens give people votes on how the blockchain is to operate. There are all sorts of possibilities regarding the function of tokens.
Each blockchain has software associated with it. Some of that software is designed to approve and process transactions. Some will be designed to maintain security. Some will be designed to handle governance issues. It seems that the term ‘blockchain’ is typically used to refer to both the records stored on a computer system(s) and the software that manages those records and all related activities.
Another term that is now common is ‘Smart Contracts’. Smart Contracts are software-based processes designed such that the system automatically (autonomously) responds when certain criteria or conditions are met. For example, a Smart Contract could be designed such that if you confirm your age to be above 65 years, and a Canadian Citizen, and you provide a valid address, the system would automatically send you Old Age Security. At another time, I’ll try to explain DAO (Decentralized Autonomous Organization), which could be an entire organization built around the blockchain/software combo.
Some issues with blockchains include throughput speed, volume scalability, and consensus processes. Throughput and scalability are about how quickly and how many transactions can be confirmed and approved. Different blockchains have different approaches.
Bitcoin uses mining as a consensus process to confirm ‘blocks’ on a blockchain. Mining involves numerous people competing at computing data to be the first to reach a particular solution for each block of data. These computations involve cryptographic hashes and the process is referred to as ‘Proof of Work’. Ethereum uses a ‘Proof of Stake’ approach for reaching consensus on a block. This involves people providing guarantees of accuracy by way of ‘staking’ or committing their own funds. Other consensus approaches have been developed and are being used.
I wrote this to help me clarify my understanding. For me, blockchain technology creates an opportunity to implement clear and certain rules about how things shall be done, without any intervening human discretion. Even though it is proving to be useful in creating decentralized financial exchange, It has, in my view, huge potential for changing how organizations could operate.
Thanks, Jim.