In our guess everyone has heard about Blockchain, Cryptocurrency, Bitcoin, Ethereum, etc. as well as some other related terms like Digital Wallet, Ledger and Bitcoin Mining.
At first, things may look rather messy and overwhelming, so let’s try to simplify it and link these concepts to our real word.
To begin with, the concept of cryptocurrency was born as a substitute to the Centralized Banking System that we currently have. For example, any banking transfer nowadays has to go through the central bank in New York! So, the need for a decentralized system (Blockchain) came as a mean to bypass such centralized system, which is one of the core motives for Cryptocurrencies.
Bitcoin, Etheruem, Ripple, Litecoin, etc. are types of cryptocurrencies. Each one has its own value which is something similar to the normal currencies we use like US Dollars, Euro, Kuwait Dinar, Lebanese Pound and other international currencies. The main difference here is that the normal currencies we use are governed by several set of rules and regulations that determine the value of such currencies (for example the price of Gold, Price of Petrol, Politics, etc.), and those currencies are tangible which means that we can touch them and use them in Cash (granted, the use of credit cards and online transactions has in some parts replaced the need for physical cash).
On the other hand, the cryptocurrencies are digital currencies that cannot be used in Cash and their value is based on demand and supply only and there is no to very little rules or regulations that govern such currencies until now.
As we usually do in our day to day life, we have a wallet to put our money in. Similarly for Cryptocurrencies, there are Digital Wallets. For example, when you pay $100 from your wallet (physical or digital), you take the “bill” out of the wallet, and transfer it to someone else. This $100 no longer exists in your wallet. It has been transferred to someone else’s wallet. That is, it cannot be duplicated or copied!
Now let’s consider cryptocurrencies as being similar to a computer “file”. A digital file can be duplicated or sent to another person while keeping a copy (think of emails). So, the challenge in cryptocurrency is making sure that once you perform a payment or a transfer, that:
1) The funds exist (that is, you have the money in your wallet)
2) The transaction is completed (that is, you transferred the money to the recipient)
3) The money is not fake (that is, this was a unique transfer, using a unique “bill” that was not duplicated).
So, how can we verify these things? This is where the concept of a Blockchain; which is the technology behind most cryptocurrencies; comes into play.
So what is Blockchain? As mentioned earlier, it is the technology that powers most cryptocurrencies and many other services. To simplify it, cryptocurrencies use Blockchain as the process of verifying each and every transaction being made.
So the whole process can be explained as per the below example:
We have 2 users (User1 and User2) each one has 10 Bitcoins. User1 said that he needs to transfer 3 bitcoins to User2. This transaction, once performed, must be written down in a global “ledger” so that everyone in the world can verify that User1 transferred this amount to User2.
Here comes the roles of the Bitcoin Miners in the Blockchain where they have to verify that this user has enough funds to send the 3 bitcoins, and they will verify this by documenting all the transactions in the Blockchain Ledger. So after verifying the transaction, the ledger will have a new record stating that user1 now has 7 Bitcoins and user2 has 13 Bitcoins.
The Blockchain Ledger is the Historical Records of all the transactions that have taken place. Once the transaction has happened and was stored in the Ledger, it can never be edited or deleted. What makes Blockchain different is that the Ledger is not available only in one place, it is available for every single user in the Blockchain, and so all users can track and check the Ledger at any time and even go back to the first transaction! But at the same time, No user can change anything in the Ledger by themselves. This moves the “trust” from a central entity, to a global and decentralized one.
To summarize, Bitcoin is a cryptocurrency that uses Blockchain technology to verify and store all transactions in the Ledger. In addition to that, the concept of a Blockchain can also be used in any transaction verification process like selling houses, ID verification, etc.