By now, most people have heard of blockchain and cryptocurrencies, most likely through some news article mentioning Bitcoin. But what is the blockchain? And what are cryptocurrencies? This is a purely theoretical article with the intent to help people with different levels of familiarity with blockchain get a better understanding of the topic, meaning some aspects might be oversimplified and subject to the personal views of the writer.
Blockchain is known as Distributed Ledger Technology (DLT). As a distributed ledger, blockchain functions like a decentralized database. Information is stored on the blockchain. However, this blockchain isn’t in one place. The actual location of the database or ledger is spread out (or decentralized).[efn_note]van de Ven, 2018[/efn_note]
Software built on top of the ledger enables people to interact with the blockchain. For example, the Bitcoin blockchain on a fundamental level is the Bitcoin ledger. On top of that ledger, the Bitcoin protocol runs, which makes the cryptocurrency Bitcoin, secures the ledger, and lets people interact with the blockchain. When people interact with the Bitcoin ledger, they submit their transactions to the Bitcoin protocol. Those transactions then get added to the ledger.
Therefore, blockchain technology is the technology of storing data (in simple terms). Blockchain technology offers numerous advantages in comparison to other data storing technology. Most importantly, blockchain is more secure, decentralized, and interactable.
So, why is it called blockchain?
Well, the data is stored in blocks. These blocks are continually added, creating a chain. Hence, we have the name, “blockchain”.
- Block 100 is added to the blockchain at 10 PM
- Block 101 is added at 11 PM
- When block 101 is added, most data and transactions between 10 and 11 PM, or between block 100 and 101, are included on the chain in block 101. Additionally, all the data from previous blocks leading up to block 101 is stored on the blockchain.
Since blocks are added to the chain, all previous data is linked. This creates an ever-extending ledger (or chain).
Now, how do cryptocurrencies come into play?
Cryptocurrencies are built on top of the blockchain. This proves that, without the blockchain, there are no cryptocurrencies. But without crypto, there can still be blockchain technology.
Within cryptocurrency, it’s important to know there is a distinction between tokens and coins. Coins are cryptocurrencies that have their own code or protocol and run on their own blockchain. Tokens are created on top of an existing blockchain protocol.[efn_note]van de Ven, 2018[/efn_note]
For example, if Token X is an Ethereum token, then it runs on the Ethereum blockchain. Transactions in token X will also process via the Ethereum network. On the other hand, since Bitcoin runs on its own Bitcoin blockchain, it’s a coin. Bitcoin transactions process via their own Bitcoin network.
Why should the blockchain use cryptocurrencies?
What cryptocurrencies offer is end-user usage of the blockchain. In its essence, crypto started as a counter-movement to the centralized system, offering decentralized money. However, it quickly evolved and offered even more use cases for blockchain, including utility and security tokens. [efn_note]van de Ven, 2018[/efn_note]
Utility tokens are used to fill a certain “utility”. For instance, grocery store points could be made into a utility token, whereby, the actual data would be stored on the blockchain and the interactions with the points would be visible on the blockchain. Security tokens are crypto that needs to adhere to securities legislation. For instance, security tokens could function as digital shares/stock for a company.
All of these use cases are only possible due to blockchain technology. To have these functions, there must be a database to save all the information. If you think about a bank, it’s essentially a big database that holds information that tells you how much money you have. A loyalty card is a big database that holds your name and the number of points you have. So, the foundation of most systems is a database.
So, what the blockchain offers is the ‘next level’, as its more secure, decentralized and flexible. As the efficiency of blockchain improves, standard databases could lose their competitiveness. Companies, institutions, and people then might want to move towards distributed ledger technology. Blockchain and cryptocurrencies could become a part of everyday life, without people even noticing.
Written and researched by Nathan van de Ven from the EMI R&D department.