Cryptocurrency 101

The Difference Between Cryptocurrency and Blockchain

A completely non-technical explanation

You probably have heard the terms cryptocurrency and blockchain quite a bit, but maybe don’t exactly know all the ins and outs of the two concepts.

You aren’t alone!

In this article I will outline what the two terms mean, how they are related and what you need to know about each at a basic user level.

Cryptocurrency

Very simply, cryptocurrency is an electronic form of currency. But why would we need that? After all, banks can electronically transfer funds. Why change the current banking system?

The answer is that although we are all very accustomed to the banking and commerce system, it has always had one downfall which is that the banking customer has to trust that the bank will keep track of their money.

Banks know that trust is fundamental to their business model, so they largely do an excellent job keeping tabs on your funds, because they want you as a customer.

However, they charge fees to do so, and they leverage the power of physically holding on to your money by lending it out to others and charging interest.

For the average person, it wouldn’t be worth their time to loan out the relatively small amount of money they have in the bank to earn meager interest; plus, they need to be to access that money at any moment to spend it.

By pooling many, many little batches of money the bank then has enough capital to lend some of that money out to earn interest while still being able to allow people access to their own funds.

Banks count on the fact that not everyone will need to spend all of their money simultaneously. So, the regular ebb and flow of business allows banks to earn money by using your money temporarily.

Quickly, let’s go back to the tracking aspect of that concept:

We rely on the bank to “account” for the money that we give them. They do that by tracking each account through a statement, and displaying that statement in real-time through electronic banking.

You can log on and look at your account totals at any time. Only you and the bank have access to your account balance.

If we feel there is an error in accounting we go to the bank, present our evidence and urge them to essentially do a “recount”. In virtually any and all cases of error (on either our part or the bank’s) the discrepancy is then sorted out and everyone is happy.

But fundamentally we rely on the bank to keep track of our money. The official ledger of transactions resides with the bank. And, only the bank knows the total balance of every account.

Cryptocurrency turns that model on its head.

The central concept of any cryptocurrency is that everyone is responsible for keeping track of the money, and everyone can see the balances of everyone else’s account. The official ledger is public domain, and changes to the ledger are visible to everyone.

Each user has a key, which is how they control whether currency flows in or out of their account. This keeps others from reaching into your account and grabbing some funds, and vice versa. Both parties have to agree to the transfer and use their key to allow it to happen.

Everyone can see that happen. Anyone can analyze the account totals; and for further transparency, disinterested parties get paid some of the cryptocurrency to conduct audits.

This is called “mining” as the amount paid to the auditor is actually newly minted currency. That concept is a bit complex, but for now just know that in addition to everyone being able to see the transactions, there are also independent parties that specifically audit the transactions to assure there are no errors.

Types of Cryptocurrency

There are many different versions of cryptocurrency, the most well-known and widely used being Bitcoin. However, there are also other prominent cryptocurrencies such as Ethereum, Ripple, Bitcoin Cash, Litecoin and Cardano.

All the cryptocurrency models function the same way. The limit of that particular currency’s scope is how many people are using it. For example, if you had some Litecoin, you could only spend that with a person or vendor that accepted Litecoin.

Blockchain

Very simply, blockchain is the “Crypto” part of cryptocurrency. It is the technology that allows everyone in the network to agree that a transaction has happened and record the event.

When someone wants to transfer funds, they use their key to initiate a transfer. This fact is recorded as a “block”. That block is transmitted to all the nodes in the network. Each node then validates the existence of the block. Then, that block is added to the historical “chain” of all the transactions in that network.

Each block can only be written once; then it is attached to the chain and can never be altered. This creates the permanent recording and sequence of the transaction event.

Blockchain isn’t necessarily related to currency, it can be used to track the exchange of any sort of data. However, people are most often extremely interested in tracking their money so blockchain has become a bit synonymous with currency and finance.

Potentially blockchain could be used for digital voting, real estate or physical property transfers, copyright protection, tax compliance, medical record keeping or any host of other applications.

For right now, its prevalence in cryptocurrency is making people more aware of the possibilities and uses of the technology, which is why it is important to keep up with the concept.

I hope this lays out the basics of cryptocurrency and blockchain in a non-technical manner and allows the “normal” person (like you and me) to better understand the concepts.

Please leave any questions in the comment section and I will try and address them as best I can. I plan to expand out some of these concepts further in basic language in the near future.

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Timothy Key spent over 26 years in the fire service as a firefighter/paramedic and various fire chief management roles. He firmly believes that bad managers destroy more than companies, and good managers create a passion that is contagious. Compassion, grace and gratitude drive the world; or at least they should. Follow me on Instagram, Facebook, and Twitter, and join the mail list.