MAKING SENSE OF THE BITCOIN / BLOCKCHAIN RELATIONSHIP

July 22nd, 2016 9:00 am
making sense of the bitcoin and blockchain Coverage of blockchain technology and blockchain innovation has exploded over the last six months and as a term has become impossible to miss in the mainstream and bitcoin media. Recent investment has received much of the attention as businesses begin to announce funding and research into blockchain applications. The relationship between blockchain technology and Bitcoin can sometimes be taken for granted in the growing coverage, so we hope to provide a clear explanation of the relationship.

Bitcoin as you may already be familiar, refers to the digital currency being bought, sold and spent all over the world, it lets people exchange money outside of the traditional banking model. When you send bitcoin to someone the transaction is confirmed by a distributed network of computers working 24/7. All the information regarding transactions and your current bitcoin balance are stored on this network of computers in a public ledger. This ledger can be viewed by anyone and traces back to the very beginning of bitcoin. It’s the concept of dispersed computers all over the world working together to validate a single record which is Bitcoins major innovation. This ledger is called a blockchain, and as a term not only describes bitcoins network but more broadly refers to the technology itself.

So, Bitcoin is the asset or currency and blockchain describes the technology that it’s built upon. The two complement each other, Bitcoin relies on the blockchain to make sure a perfect record of bitcoin ownership is kept, and the blockchain relies on bitcoin to make sure the network remains secure and evenly distributed. There must be an incentive for computers to contribute to the network, which as we explained when looking at the recent halving event, comes in the form of a reward paid in bitcoin.

It’s called a blockchain as data is stored in blocks stacked chronologically to form a single chain. The distributed computers working to record and verify the chain must all agree it is correct for a new block to be added, and it's this unique feature that makes blockchain technology so special. A new level of security and protection is now available within the blockchain as it becomes impossible for any single party or computer to alter the history of the chain. The element of trust or faith we normally give to central institutions to keep accurate records can be removed by a model which is instead based on distributed consensus.

Having an incorruptible way to record information, while extremely effective as a method of transferring bitcoin, has many other applications. You may have noticed many of the blockchain announcements revolve around financial institutions and this makes perfect sense when you consider the solution it offers. Banks for example may be interested in using the blockchain principle to manage their own ledgers and settle transactions in a much more efficient and secure way than the current centralised model. The idea can be extended to all types of record keeping, contracts, property deeds or shipping information for example, prompting many to label it a disruptive technology.

The entire field is new and still in the early stages of development, but as an increasing number businesses begin exploring the solutions offered by distributed ledgers you can expect to see the term blockchain feature in the headlines more and more. Hopefully we've helped clear up what has gotten everyone so excited and put bitcoin into perspective. Just remember, the bitcoin you buy and sell is just one application of a broader blockchain innovation.
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