Inevitably you have read about the bitcoin vs blockchain debate. For years we have seen bitcoin in the news for both amazing and terrible reasons. Everyone has their own opinion on bitcoin though most people don’t fully understand how it works. These days we are starting to see major companies move away from ‘bitcoin’ and start talking about this new thing ‘the blockchain’ that is going to shape the future.
What’s the difference between bitcoin & the blockchain?
Bitcoin is a digital token that lets you send money to any person in the world to pay for goods and services. A large network of computers works 24/7 to check the legitimacy of transactions and process them in real time so that no bank or government needs to be a middle man. The computers also keep track of everyone’s bitcoin balance and publish them online as a shared public ledger. The ledger lets anyone check transaction records to make sure they received payments or payments they sent were accepted. Every 10 minutes or so the computers update the ledger with a ‘block’ of the recent transactions from all bitcoin users worldwide. Once the block is added to the ledger and all computers agree it is legitimate, everyone’s bitcoin balance is permanently updated. This long public ledger of transaction blocks is what we call the blockchain.
Blockchain technology is simply using a network of computers as a ledger system to keep perfect records. It has mostly been touted as a simple payment system, but it can also be used for a wide range of accounting purposes that could revolutionize how financial services operate worldwide.
Why do we need bitcoin if we have the blockchain?
The blockchain is secured by the computer processing power in the network that updates the records. If someone controls 51% of the computers on the network they can stop user transactions from processing and the blockchain become ineffective. The network being large and decentralized greatly improves how secure the ledger is, so a healthy blockchain is powered by computers which are owned by a huge variety different people around the world. To achieve this there needs to be incentive for users worldwide to add their computer power to the network. Bitcoin is a way to reward those computers through bitcoin mining.
What is bitcoin mining?
The computers maintaining the blockchain are actually doing complex math calculations, trying to solve a problem to the next block in the chain. Once a solution to the problem is found by a computer in the network, a new block of all the recent transactions is published to the blockchain and all the other computers double check the answer to confirm the solution. If the solution is accepted, the computer who first found the solution is rewarded with newly generated bitcoin and the fees that bitcoin users paid to have their transaction processed. Since bitcoin can be sold for real money, miners want to solve as many blocks as possible and the only way to do that is add more computers to the network. This incentive system works to grow the network strength through competition. Every day as new miners join in it gets more difficult to mine new bitcoins, and every 4 years the bitcoin reward for a successful block is cut in half. Eventually there will be no new bitcoins and the only reward will be the fees in bitcoin that people pay for using the network. The important part to take from this is the transaction fees. Anyone who wants to use the blockchain, whether to pay for goods or run a financial service, has to pay fees in bitcoin to the bitcoin miners to have their transaction processed in a timely manner. Below is a graph of the global computer power (hash rate) that is maintaining the blockchain by competing for bitcoin.
Some people would suggest that this chart represents how secure the blockchain is; while that may be true, it could also represent the historical demand for bitcoin, so one could argue that the bitcoin vs blockchain debate is stupid. Bitcoin as a ‘digital currency’ powers the blockchain through incentivized mining. There is no bitcoin vs blockchain technology because without bitcoin the blockchain system would be insecure. Anyone can create a new blockchain but it would not be secure without a network of computers that are incentivized to protect and maintain it. Bitcoin was the first and is still the largest, most secure and decentralized network, making it the healthiest blockchain in existence.
So don’t pay too much attention to the doubts you see in the media. Technology companies and the financial sector can boast blockchain technology as revolutionary, but they still have to use bitcoin. Bitcoin and the blockchain compliment each other as parts of a greater system. Bitcoin vs Blockchain is not a real issue because no one can use the blockchain without buying or mining bitcoin first.