Have you heard a friend mention Bitcoin, seen graphs on Cryptocurrencies or read that “the blockchain” is going to change the world as we know it?
It is unlikely that you haven’t. In 2017 the transformative impact of the blockchain technology burst into the forefront of media attention, and for good reason. Therefore, the need to team up with a professional like these UK cryptocurrency accountants about your digital assets has become critical.
“Okay, now you’re as bonkers as the rest of them. What good reason is that?!”
In this article, we are going to decrypt the most widely used words in this emerging space to help you understand what on earth is going on. We have been around the block(chain) a few times and heard a lot of the same questions so this should certainly answer some of yours!
We are excited to show you that this space is not as confusing as it first appears. To do that, we’ll start with a paragraph that will (most likely) make no sense to you. As we go through the article, we will use different examples to define each of the key terms in this paragraph. The goal is for you to understand how the key terms all fit together, preparing you for the world of blockchain and cryptocurrency.
First Things First: What is Blockchain?
“The term blockchain refers to a decentralized, distributed, public ledger that can support a number of (software) applications. Cryptocurrencies are one type of application that run on a blockchain. Bitcoin is the first and most successful cryptocurrency at the time of writing. As well as currencies, the blockchain can support smart contracts, decentralized applications and much more. Ethereum is currently the most successful blockchain protocol to support smart contracts and decentralized applications.”
Confused? Not to worry. That was the point, if you aren’t confused then I expect you are more knowledgeable than you thought and you can check out our article on “Crypto in 2021 and Beyond: A Glimmer of Hope.”
Since Bitcoin is probably the most frequently used word in this space, we will take our first look at blockchain technology through its application as a digital currency. Bitcoin is not dissimilar to cash in the way it is used to store and transfer value between two parties.
But if Bitcoin is just another currency, what does the blockchain have to do with it?
The blockchain is the technology that Bitcoin and other cryptocurrencies run on. In simple terms, a blockchain is a string or chain of blocks in chronological order, where each block contains a record of the transactions. The type of information stored in the blocks varies depending on the application of the blockchain. For Bitcoin, this application is as a currency.
So, at this point, it would be worthwhile to get our head around how the technology works.
How Does Blockchain Works: Simply Explained
This part is not all about using ambiguous words that will complicate the concept of Blockchain technology. We are going to walk you through the very real basics of this disruptive and transformative technology.
Let us take a look at an example of how the blockchain works in reference to a currency – just like Bitcoin….
Assume you have 10 dollars’ note, which represents a Bitcoin for this case scenario. Using a permanent marker, you jot down your name on the 10 dollars note. And then take a photo just to confirm it’s yours. The following day you purchase a few items from your buddy Ken. And used the 10 dollars to pay him. Ken also writes his name below yours and snap it to confirm that it now belongs to him.
Ken later pays Nancy who does the exact same things of writing her name and taking a photo. Put simply, with every subsequent transaction, the new owner jots down his/her name below the prior holder before giving another folk.
After a year, Ken acquires the 10 dollars again when leasing his lawnmower. On the note, Ken is able to see all the individuals who had previously owned it. As expected, Ken again jots down his name at the very bottom of the list. As before, he then takes a picture to confirm that the 10-dollar note now belongs to him.
Just to shift gears a little away from this development, there are a couple of key bits of information here on how the blockchain technology works.
To begin with, you will appreciate the fact that the exchange of this 10 dollars was decentralized. Why? Because there was no intermediary and each individual interacted directly with the buyer. Even better, they did not have to visit a bank or even use a third party escrow like PayPal. And because it had a record of all the prior transactions, any new holder had confidence and trust in the fact that the 10 dollars’ note was exchangeable.
Furthermore, the records of the previous owners of the 10 dollars’ note was distributed across all that had intermingled with it. Remember that each and every recipient took a picture of the 10 dollars note after writing his/her name, using a permanent marker, under the name of the previous owner. Provided that no one deleted nor lost the picture, every new owner was privileged to see all the preceding transactions. So this takes us to the third subject.
A record of all the owners of the 10 dollars’ note were distributed and shared like a public ledger. The list of previous owners was accessible to anyone who interacted with it. In case the 10 dollars got lost, it would be so easy to identify the real owner because his/her will be appearing at the bottom of the list.
Still with us? Going back to our introductory paragraph, we now know that…
“The term Blockchain refers to a decentralized, distributed, public ledger that can support a number of (software) applications. Cryptocurrencies are one type of application that run on a blockchain. Bitcoin is the first and most successful cryptocurrency at the time of writing.”
To scale out the example above, there is more than 10 dollars in circulation. Different blockchain applications choose to have a different number of dollars in circulation. When a “snapshot” of each new transaction is taken, it’s not only the buyer and seller that have the picture. In fact, all the users on the blockchain network receive a copy each time.
Why does this matter? This makes it near impossible to change or modify the transaction history. Finally, with prices going through the roof (a Bitcoin costs $11,000 at time of writing), you’ll be pleased to know that users can transact in fractions of a Bitcoin, just like a dollar.
Now we understand that Bitcoin is a currency and that blockchain is the technology that supports this currency, we can look at what else the blockchain can do. There are many different blockchains out there that serve different purposes, of which currency is just one of them.
In fact, out of 100+ different unique blockchains in the space, currencies only account for around 10 of them. While people often call all the assets in the market cryptocurrencies, they technically are not.
A Quick Definition of a Cryptocurrency
A cryptocurrency is a currency that runs on blockchain technology, with a high level of data security provided by cryptography. Although it might sound complicated, cryptography simply means that data is scrambled into meaningless letters and numbers. In order to unscramble the data, you need to crack the code.
I think you get the point; a cryptocurrency is a type of currency. It is also one of many uses of a blockchain. Now that we are confident on what a blockchain is and one of its uses, let us tackle the second part of that introductory paragraph…
“As well as currencies, the blockchain can support smart contracts, decentralized applications and more. Ethereum is currently the most successful blockchain protocol to support smart contracts and decentralized applications.“
What Blockchain Does and What It Means to You
Once blockchain technology had proven to be successful in supporting a digital currency, programming experts began to think about the other types of information they could store on it. After all, a decentralized, distributed and public database was a profound breakthrough for the software development community. It allowed buyers and sellers to interact freely and affordably.
No single person or company could control the network, no single person or company was responsible for maintaining the network and every person using the network could spot and prevent fraudulent transactions.
The first successful non-currency application for the blockchain technology was called Ethereum. Its purpose was to support smart contracts and decentralized applications (Dapps).
Smart contracts are written onto the public ledger of the Ethereum blockchain in the same way that ownership of Bitcoin is written onto the Bitcoin blockchain. Remember, these two blockchains work in a similar way but are independent of one another and serve different purposes. Think of them as engines. Even though all engines work in much the same way, converting fuel into energy, they vary significantly in design depending on the purpose they are built for.
For instance, a 1.1-liter engine for a three door Peugeot is not the same as Mclaren’s high performance V8 engine. Since Peugeot is looking to provide a low cost and efficient engine for short journeys they design their engine very differently to a car that races around track at over 100mph.
Okay, Back to Smart Contracts.
Smart Contracts can still be equated to real world contracts. However, Smart contracts are absolutely digital and are automatically executed when the specified conditions of the contract have been fulfilled. Their ability to automatically execute is what makes them “smart”. By self executing, the costs of contract administration are greatly reduced, allowing for buyers to pay less and sellers to receive more.
The fact that these contracts are on a public ledger allows for the contracts to be easily audited. Even better, by having the entire transaction history on the blockchain, users of the contracts can be confident that the terms and conditions will not be altered whatsoever. Since the blockchain relies on data to be stored chronologically, altering the historic record of the Terms and Conditions would require the whole blockchain history to be rewritten…. clearly this would not be accepted by the network.
Smart contracts have a number of applications, especially when we look at the sharing economy that has emerged over the past decade, taking apartment letting as an example…
You may know the apartment letting company Airbnb. Airbnb is fundamentally a third party company which sits between the guests and the apartment owners. The owners can set the price as they choose. When guests want to stay at an apartment, they either pay for the apartment up front or at the least are required to pay a deposit.
This money is not given to the owner immediately but is held by the third party, Airbnb. The deposit, or even full payment, is held by Airbnb in case either party is dissatisfied with the service that they have received. The booking could be cancelled, the property damaged or perhaps the location is not the same as the guest was led to believe.
Once both parties have confirmed they are satisfied with the service, Airbnb releases the funds to the owner and charge a contract administration fee. If the guests are not satisfied with the service or the host cancels, then Airbnb will return the payments back to the guest in accordance with the contract. Both parties must trust Airbnb to manage their interaction as per the T&Cs.
As for Smart contracts, we set the contract to hold the funds until the services have been completed. If both parties are satisfied, the smart contract automatically sends the funds to the apartment owners. Say there was an additional deposit to cover damages, if there are no damages logged by the owner, this additional deposit will also be returned to the guests automatically.
That is not all, in case of disputes, the network can vote on the outcome or there can be a team of human advisors specifically for this task. Though this does require some staffing, the majority of the agreements go undisputed, meaning administration of the contracts can be taken care of automatically by these smart contracts.
It’s also worth noting that smart contracts are immutable, which simply means, once it’s created, you cannot change or alter it. In addition, they’re also distributed, meaning that everyone on the network has to validate it. This makes corrupting smart contracts almost impossible.
Smart contracts can be applicable in many spheres of our daily lives. For instance, banks could utilize smart contracts to offer loans or even issue automatic payments. Besides, insurance companies could also use such contracts to process claims while postal companies can use it to issue payment upon goods receipt. All enabled by the decentralized, distributed and public ledger technology that is the blockchain.
While Ethereum is currently the largest platform for building smart contracts on the blockchain, there are other platforms making progress including NEO, EOS and Cardano.
Since we now understand Blockchain, Bitcoin and Smart Contracts, it’s time to look at yet another application of blockchain technology that you will commonly hear – Decentralized applications (Dapps). At the moment, the majority of Dapps are being built on top of Ethereum but this is likely to change.
The Birth of Decentralized Applications (Dapps).
Dapps make up the majority of all the coins in the ecosystem, there are literally hundreds of different Dapps available to trade (although very few have a functioning platform). A Dapp is essentially a start-up business that sits on top of a blockchain – using the decentralized, distributed and public qualities of a blockchain to add value to the users. Dapps use a blockchain’s protocol, its network and smart contract functionality in providing a service. A prime example of this is in storing personal identities.
Civic is a decentralized application that is built on top of the Ethereum blockchain. Civic allows users to store a record of their identity, benefiting from the immutable properties of a blockchain. Once done, individuals have the power to control and protect their identity going forward. Using such a platform, it would be virtually impossible to steal someone’s identity.
If you are interested in learning more you can find a list of the decentralized applications being developed here.
So there we have it. And if you have come to this end, you now have a good grasp of the world of blockchain and crypto.
Wrapping up!
A blockchain is a software program that stores different types of information in a decentralized, distributed and public way. Bitcoin is a cryptocurrency that runs on its own blockchain program. There are a number of different blockchain programs that support different use cases, not only digital currencies. The main alternative to cryptocurrencies are blockchain programs that support smart contracts and decentralized applications such as Ethereum.
Not so hard after all…. right?!
