Bitcoin? Blockchain? Which is Which? Does it Matter?

Lately, the media have been reporting almost non-stop on bitcoin.  Or is it blockchain?   Or is it both?

If you’re new to bitcoin (and blockchain), all of the news around these two may seem like a bunch of buzz words and random statements. Without understanding what bitcoin is, what blockchain does, and how they fit in the financial world, you might be tempted to ignore these technologies.

But as you’ll see in upcoming blog posts, you ignore these at your own peril. Both blockchain and bitcoin will have an impact on small-to-medium businesses, including retail and restaurants. In fact, they already do.

What is Bitcoin?

At its simplest, bitcoin is a form of currency. But that is where the simple explanation ends. Because bitcoin is neither created or managed like traditional currency. And it’s not just a currency, it’s also a commodity that can be traded.

If a business will accept bitcoin, you can use it to pay for goods and services. Bitcoin can also be acquired like other local currency and can be used to pay employees and consultants, or even to buy a pizza (assuming the business is willing to accept it).

To start with, there are no physical bitcoins. They exist entirely as digital entities. You can’t stuff them in your mattress or carry them around in your purse. Instead, you can purchase them through an exchange, such as Coinbase in the U.S.

Secondly, they aren’t minted, like traditional currency. Instead, bitcoins are “mined,” meaning computers from across the globe participate in the creation of bitcoins, with the most powerful participating computers earning bitcoins for their work.

Thirdly, bitcoins are international, but there is no exchange rate. Instead, the value of a bitcoin in the U.K. is the same as a bitcoin in Osaka, Japan. And the value at any moment is determined by open-market bidding, similar to the value of gold.

The big question, though, is how is all of this possible. How is it kept straight? Who keeps track of how many bitcoins people have? How are bitcoin miners prevented from just giving themselves thousands of bitcoins?

This is where blockchain comes in.

Well then, what is Blockchain?

Blockchain is the technology that underlies bitcoin and makes it possible. And while blockchain was created specifically for bitcoin, the technology has turned out to be valuable on its own.

Think of the blockchain as a type of database that stores information, like amounts of bitcoins and their owners. Except instead of that database residing in one place, or even one place with a backup somewhere else, it lives on thousands of computers across the world.

It’s this distributed structure, plus 4 defining principles, that keep bitcoin viable and make it attractive for other applications:

1. Blockchain is append-only: The records on a blockchain are immutable. They never get deleted nor can they be changed.  In other words, new records are added on to the chain, instead of changing old records. That way the entire history of the data is kept and can be referenced and that data can’t be changed.
2. Blockchain provides privacy: That might seem like an odd statement when you know that the database that is blockchain is saved on many thousands of computers. But because each transaction or exchange of data is secure and verifiable, it can be authenticated without the need for identities to be traded between the transaction participants.  That makes it very secure.
3. Blockchains are verifiable: For a record to be considered valid on the blockchain, 51 percent of the chain’s participants must agree that the information is correct. Because the computers storing a blockchain are distributed across the world, it’s difficult if not impossible to gain control of a majority of those machines.  This makes blockchain trustworthy.
4. Blockchain can record provenance: The origin of anything – regardless if it’s money or car parts – can be tracked and stored by the chain. This makes it possible to verify with certainty where a product or a bitcoin came from. (See principle 1 above for more details.)

Because of these principles, blockchain is now being used in applications from supply chain to food safety to contracts to payments!  Blockchain can be used as the foundation for a number of tools that can be used by companies, and by small businesses.

For instance, thanks to blockchain’s ability to record provenance, a local restaurant that claims it offers farm-to-table dishes could actually show you where the food in the dish came from!  Or, thanks to the verifiability and security of blockchain, a rental agent could create what’s called a “smart contract,” in which the keycode for a rental property is automatically released when a deposit is received.  And it’s all done electronically, without either party ever meeting face to face!

As we continue to explore blockchain in the next few articles, you’ll see applications that have meaning for small to medium businesses, including restaurants. Whatever the eventual fate of bitcoin, its blockchain foundation is here to stay.