CEO of Flipside Crypto
Simplifying the distinction between blockchains and cryptocurrencies, excerpted from Flipside Crypto’s guide on the blockchain and cryptocurrency sector .
Blockchains are digital public accounting systems in which transactions between users are stored in a secure, verifiable and permanent way.
Blockchains are the underlying technology and protocol that make distributing data and trust in a decentralized fashion possible.
Blockchain is a mechanism that enables a world without intermediaries.
Decades of financial regulation and experience have created a framework where we should trust financial institutions to process transactions and protect our data.
However, this is nowhere near foolproof; see Wells Fargo, Equifax, Heartland, JP Morgan and CheckFree as prime examples.
Instead of trusting central authorities to control each individual bank ledger like in the conventional financial system, the blockchain distributes account balances, verification, identity, and transactional flow — without any 3rd party.
Nodes are an international network of servers that host the cryptographic toolset which is the blockchain. They are distributed around the world, with no central authority controlling activities.
Nodes must agree on a common set of rules (known as a “consensus protocol”) in order to create and stream valid data. In order to accept a new block of transactions for Bitcoin, miners have to show proof of valid work in order to get their “reward”: a block of Bitcoin and transaction fees for mining that block.
Any individual can run a Bitcoin node on their laptop.
Because data and has to be distributed around a network of servers with no central control, every individual server has to store a copy of the data, and the entire network has to agree to new transactions before validating them. This makes the network more computationally expensive to run than a centralized data server.
Blockchain’s biggest selling point — its distribution and lack of centralized governance — is also one of its biggest weaknesses: scalability and interoperability.
Cryptocurrencies are digital or virtual currencies that are built on top of blockchains.
Bitcoin is a cryptocurrency that has its own blockchain. You’ve likely also heard of Ether, the second largest cryptocurrency by trading volume. Ether is built on the Ethereum blockchain. In this case the cryptocurrency and blockchain unlike Bitcoin, are separately named.
Cryptocurrencies are the tokens of value that allow the underlying technology to capture the value of any applications built on top of it — as a result, they have become investment vehicles that allow individual and institutional investors to invest in blockchains.
If TCP/IP were a blockchain, you’d need InternetCoin to access Facebook or Amazon or Netflix.
InternetCoin would be the cryptocurrency while TCP/IP would be the protocol layer equivalent to the blockchain. You’d trade in InternetCoin and use it to access the services built on top of TCP/IP.
The result? Instead of all of the value of Facebook accruing to Facebook shareholders, you’d actually have the protocol layer — the technology Facebook is built on — gain and capture value through the use of cryptocurrencies.
Want more content like this? Check out Flipside Crypto’s guide to blockchain and cryptocurrencies!