For those new to the world of cryptocurrencies, this terminology can be a little confusing and even misleading. Some people refer to Bitcoin when trying to talk about Blockchain, while others mention Blockchain when talking about cryptocurrencies in a general context. However, these terms are not nearly interchangeable: they refer to distinct but connected concepts. Therefore, it is important to understand the differences between them. Here we will present the basic fundamentals of Blockchain technology, cryptocurrencies and Bitcoin.


A Basic Analogy

Consider this:

  • Website is a specific technology used to propagate information.

  • Search engines are one of the most popular and well-known ways to use website technology.

  • In turn, Google is one of the best-known examples of a search engine.

Similarities:

  • Blockchain is a specific technology used to store information (blocks of data).

  • Cryptocurrencies are one of the most popular ways to use Blockchain technology.

  • In this case, Bitcoin was the first and most famous example of cryptocurrency.


Blockchain: Teoria

Most Blockchains are designed as fully decentralized, distributed ledgers. Quite simply, Blockchain is like a book, but completely electronically, being responsible for recording a list of transactions.

More specifically, Blockchain is a linear chain of multiple blocks connected and protected by cryptographic proof. The technology can also be applied to other activities that do not necessarily require financial operations, but in the context of cryptocurrencies, it is responsible for maintaining a permanent record of all transactions confirmed within the network.

The words “distributed” and “decentralized” refer to the way the ledger is structured and maintained. To understand the difference, think about common centralized records, such as a registry of real estate sales at a notary's office, an ATM withdrawal record or a list of items sold on eBay. In all cases, only one organization controls the ledger: the government agency, the bank, or eBay. Another common factor is that there is only one master copy of the book and any other is simply a backup. Therefore, traditional ledgers are centralized because they are being maintained by a single entity and generally rely on a single database.

In contrast, a Blockchain is generally constructed as a distributed system that functions similarly to a decentralized ledger. This means there is no single copy of the book (distributed) and no central authority in control (decentralized). Basically, all users who decide to participate in the process of keeping a Blockchain network running have an electronic copy of that Blockchain's data, which is frequently updated with the latest transactions, in synchronization with the copies of other users.

In other words, the distributed system is maintained by the collective effort of thousands of users, who are spread around the world. These users are also known as network nodes and all of these nodes participate in the transaction verification and validation process, according to the system rules. Consequently, power is decentralized (there is no central authority).


Blockchain: Practice

Blockchain gets its name because of the way records are organized: a chain of interconnected blocks. Basically speaking, a block is a set of data that contains, among other things, a list of recent transactions (like a printed entry page). Blocks, like transactions, are public and visible, but cannot be changed (it's like putting each page in a tamper-proof glass box). As new blocks are added to the Blockchain, a continuous record of linked blocks is formed (like a physical ledger and its many pages of record). This analogy is very simple, but the process is much more complex than that.

One of the main reasons why Blockchains are so resistant to modification is the fact that the blocks are linked and protected by cryptographic proofs. To produce new blocks, network participants must engage in a costly and extremely intensive computational activity known as mining. Basically, miners are responsible for verifying transactions and grouping them into newly created blocks that are then added to the Blockchain (if certain conditions are met). They are also responsible for introducing new currencies into the system, which are created as a reward for their work.

Each new confirmed block is linked to the block that came immediately before it. The beauty of this configuration is the fact that it is practically impossible to change the data of a block once it has been added to the Blockchain because they are protected by cryptographic proofs, which are very costly and difficult to resolve.

In short, Blockchain is a chain of interconnected data blocks, organized in chronological order and protected by cryptographic proof.


Cryptocurrencies

Simply put, cryptocurrency is a form of digital money that is used as a medium of exchange within a distributed network of users. Unlike traditional banking systems, these transactions are tracked through a public digital ledger (Blockchain) and can be executed directly between participants (peer-to-peer) without the need for intermediaries.

The word “crypto” refers to the cryptographic techniques used to protect the economic system and ensure that the creation of new units of a given cryptocurrency and the validation of its transactions occur smoothly.

Although not all cryptocurrencies are mineable, the many that, like Bitcoin, depend on the mining process, have a slow and controlled growth in their circulating supply. Therefore, mining is the only way to create new units of these currencies, avoiding the risks of inflation that threaten traditional fiat currencies, where governments have the power to control the money supply.


Bitcoin

Bitcoin is the first cryptocurrency ever created and naturally, the most famous. It was introduced in 2009 by a developer with the pseudonym Satoshi Nakamoto. The main idea was to create an independent and decentralized electronic payment system based on mathematical proofs and cryptography.

Despite being the best known, Bitcoin is not alone. There are many other cryptocurrencies, each with its own characteristics and mechanisms. Furthermore, not all cryptocurrencies have their own Blockchain. Some were created on top of an existing Blockchain, while others were created completely from scratch.

Just like most cryptocurrencies, Bitcoin has a limited supply, which means that no extra Bitcoin will be generated by the system right after the maximum creation ceiling is reached. Although this varies from project to project, Bitcoin's maximum supply is set at 21 million units. Normally, the total supply of each currency is public information and defined at the time of its creation.

The Bitcoin protocol is open source and anyone can review or copy it. Many developers around the world contribute to the development of this project.