Did you know that Bitcoin (BTC) price gained 10% on December 18 and crossed the $7,200 level? Some sources talked about a $2 billion Chinese crypto scam that could have affected Bitcoin prices. Xi Jinping, president of the Republic of China, is targeting crypto exchanges in the country. Also, the People’s Bank of China is working to close down these exchanges. On the other hand, Xi Jinping hopes to poise China as a leader in blockchain.
Do not mistake China’s stand on blockchain and Bitcoin. The Chinese are working to integrate the technology but do not want the digital currency in the economy. Blockchain is not a currency like Bitcoin. It is the technology that makes cryptocurrencies like Bitcoin possible. China’s goal is to be a leader in blockchain while banning virtual currency trading in the country.
Bitcoin versus blockchain: An introduction
Generally, many people feel that blockchain and Bitcoin are synonymous. But, fundamentally, both are worlds apart. In simple words, Bitcoin is a currency that you can own trade, purchase, or invest in. This is not something you can do with a blockchain. On the other hand, blockchain is a technology that powers the Bitcoin network as well as supports all digital currencies.
All the countries around the world are trying to adopt blockchain tech. On the contrary, many countries across the globe have banned Bitcoin.
Bitcoin and blockchain: An example
Blockchain is the technology and pitting it against a virtual currency is not a fair comparison. Their functionalities might overlap, but that is where you draw the line. For a better understanding, you could compare blockchain and Bitcoin together with the combination of AI (Artificial Intelligence) and robotics.
AI is a technology that is very important while building robots. But AI is not a robot in itself. A robot is useful to perform routine day to day activities. But the robot functions within a pre-defined set of rules or has AI. In other words, the functioning of a robot relies on AI. In the same way, Bitcoin (or any other virtual currency for that matter) is a digital currency. It could prove useful for day-to-day transactions. However, the functioning of the digital currency relies on blockchain technology.
What is blockchain?
Blockchain is a radical technology that has the potential to change the enterprise approach to business. Do you remember when the internet was in a nascent stage, a concept still gaining people’s approval? You could say that blockchain tech today is what the internet was during the early nineties.
Blockchain makes it possible to record, execute, and maintain a database for transactions in a decentralized network. It is highly scalable and could encompass the whole globe in a single interface. Also, it relies on a DLT (distributed ledger technology). The data storage takes place in ledger form and spread across all the computers in the network. Every new transaction among the network participants gets added to the blockchain and updated in all the individual copies of the ledger.
Blockchain networks function on decentralized network topology. It means that there is no central server that is responsible for handling all the data. Each system is independent and has the same level of authorization. Peers in the network are responsible for updating the transactions and validating the deal in the distributed ledger. They are called miners.
In the network, data blocks serve as the information warehouse. Every new activity keeps adding in these blocks in an encrypted format. New blocks are regularly added to the network and linked to the previous one to form a chain of blocks. This is how the technology got the name blockchain.
History of blockchain tech
The concept of blockchain technology originated back in 1991. The idea was to create a system where the records, once entered, are immutable. Timestamps served as an indicator for this purpose. After adding the transaction in the blockchain, the network takes note of the date and time for this activity. Any attempt to modify the transaction will result in a change in the timestamp, and the network structure will get disrupted. In short, it is impossible to change any data the blockchain or it is tamper-proof. The first application of this technology was in 2008 to create the cryptocurrency Bitcoin.
What is a cryptocurrency?
Let’s dispel the myth about cryptocurrency. As the name suggests, it is a currency that is cryptographically secured, hence the name cryptocurrency. There are no physical or tangible aspects to it, and it is in an entirely digital format. Unlike other forms of currency, like paper and plastic money, virtual currencies allow direct transactions between two parties. It could potentially eliminate the need for an intermediary like banks and payment platforms. Also, it could drastically reduce costs like agent fees, bank charges, et cetera. Additionally, since the transaction is a peer-to-peer transfer, it is much faster than traditional payment methods.
Cryptocurrencies are not only a threat to the banking system. It also poses hazards for economic systems worldwide. Since digital currencies operate using the decentralized function of blockchain. Since there is no central governing authority, it is entirely unregulated and depends totally on the program parameters. The network program is open source, which means it is possible to view the codes and even duplicate it to create a new one.
Trivia: The code for Bitcoin formed the basis to create other digital currencies like Litecoin, Bitcoin cash, et cetera.
Why federal governments fear cryptocurrency
While some countries are open to the idea of cryptos, all federal governments across the world are insecure about adapting it in totality. Cryptos can never replace the existing monetary system or fiat currency. If this becomes a primary currency, then central banks and federal governments could lose authority over the country. Possibly, an anarchist form of the economy could rise.
Trivia: Countries like the US, Canada, Germany, Australia, et cetera accept cryptos. But many countries like China, Russia, and India have not yet taken a stand to accept it.
What is Bitcoin?
To reiterate once again, Bitcoin and blockchain are two different sides of the same coin. They are related but definitely not the same. Bitcoin is a by-product of the stock market crises in 2008. At the time, the stock market crash had a tremendous global impact. This led to a lack of trust between investors and investment service providers. Also, the federal government’s decision-making ability was under fire at the time. The need for a more trustworthy form of investment became a necessity. Thus, Bitcoin was born.
There is a lot of anonymity about the person who created Bitcoin. Although the name Satoshi Nakamoto is the one who created Bitcoin, we are unsure about Nakamoto’s origin. There is no information about the gender, age, or nationality of Satoshi Nakamoto or the actual reason that Nakamoto created the Bitcoin.
Bitcoin’s creation takes place through a process called mining. Participants in the blockchain network help to grow the network by performing computations and calculations that record and encrypt the data. These miners generally direct their computers idle processing power to the blockchain network. It is similar to cloud tech in a way where companies like AWS (Amazon Web Services) provide cloud infrastructure to clients. Clients use this infrastructure to store and access data on the cloud servers. In cloud technology, a centralized server stores the data.
On the other hand, all the computers in the blockchain network store a copy of the ledger. Even if data on the cloud server has security features, the owner of the server can access and change the data. However, this is not possible in a blockchain because of the DLT.
How are Bitcoins created?
Talking about mining bitcoins, there is an upper limit to how many bitcoins can be created. The maximum is 21 million bitcoins. There is a reason for fixing an upper cap for the cryptocurrency. Macroeconomics suggests that for a commodity to have value, there should be a finite quantity. An indefinite and infinite supply will lead investors to look for other assets facing scarcity. This is because scarce assets have a higher value.
Trivia: According to thenextweb.com, approximately 85% of the bitcoin is in circulation as of August 2019. Also, the publication hints that mining all of the 21 million bitcoins could take over 100 more years. I bet you’re wondering how it took ten years to mine 85% of the total Bitcoin supply but another 100 years for the remaining 15%. The reason is that the complexity of mining has increased.
With the increasing number of Bitcoins mined, the mining process has become more complicated. The computations become more complex, and the processing power requirements also keep increasing. Miners have to spend more amounts of time to solve the calculations, thereby delaying the mining outcome.
There is an additional feature in the mining reward system that controls the coin supply. Every time 210,000 blocks get added to the network, the mining rewards drop by 50%. Initially, when the first set of the blocks was being mined, the miners were awarded 50 BTC. From block 210,001, the reward reduced to 25 BTC. Currently, miners earn 12.5 BTC.
Bitcoin versus blockchain: A summary
- Blockchain is a technological breakthrough in recent times. It is a decentralized ledger where transactions are secured using cryptography. Bitcoin is a currency that operates on the idea of encrypted transactions. Bitcoin encourages peer-to-peer transactions without the need for a middleman. However, this is possible only through the decentralized blockchain ledger.
- When it comes to Bitcoin, the transactions are anonymous. Although the activities are visible on the network, the encryption makes it difficult to figure out the specifics of the deal. On the other hand, a blockchain network designed for enterprise solutions could make all the transactions in the private blockchain accessible and viewable by all parties. It could not only improve operational efficiency but will also drive down costs. Also, all the related parties can access the data through one single network.
- From an application point of view, blockchain has much more application when compared to Bitcoin. Blockchain has potential uses in e-commerce, insurance, healthcare, and many other sectors. For instance, IBM (IBM) offers blockchain as a service to the metals and mining industry. This network tracks shipments of Cobalt and makes it easy to handle the supply for all parties involved. However, while Bitcoin is a digital asset that has value, when it comes to application it has restricted applications. Typically, people turn to Bitcoin for investment or trading.
Bitcoin versus blockchain: Legality and security
- Regulators and federal governments are concerned that Bitcoin could bypass current economic policies and create a parallel economy of its own. There were reports that Bitcoin usage was big for illegal activities. According to a Forbes publication in 2018, illicit transactions worth $72 billion per year get routed through Bitcoins. Tracing these transactions becomes very difficult because of the security levels of blockchain tech. On the other hand, entrepreneurs and business leaders realize that this technology could be applied to different facets of the business to improve operational efficiency.
- From the cybersecurity perspective, Bitcoin transactions are anonymous, and only the two parties are involved. Other network participants will update the encrypted transaction in their copy of the ledger. The primary way a hacker could steal the cryptos is by reaching out to innocent investors and asking for the decryption keys or private key to the wallet. Or they could create Ponzi schemes or scam ICOs (initial coin offerings).
- On a similar note, to gain control of the blockchain, a network participant will have to obtain 51% of the computing power of the entire network. If a participant has a majority of the computing power, he could change the transactions on the system faster than other participants in the network and could manipulate the data. But because of blockchain’s design, it is practically impossible for any member to gain control of the blockchain.
From a learning perspective, both Bitcoin and blockchain are vast and detailed concepts (yes, even Bitcoin). Any investor in cryptocurrencies should have fundamental knowledge about what virtual currency is capable of. Bitcoin offers a lot of return on investment when compared to all other asset classes. But investing in them without having a clear and fundamental knowledge could be disastrous. A lot of companies realize that it is not possible to deploy Bitcoin in everyday use, but blockchain tech has a lot of applications.