There’s a lot of confusion about what exactly Blockchain and Bitcoin are and how they function in the real world. Some people even think the two are synonymous, but they are two unique technologies. However, Bitcoin can’t operate without Blockchain. Bitcoin is the best-known form of cryptocurrency, and Blockchain was created to enable its use and existence.
Cryptocurrency is a digital medium of exchange that uses encryption to control the creation of “monetary” units, and Bitcoin is the most widely known and largely used medium. Blockchain, on the other hand, is a decentralized, transparent ledger of transactions across a P2P (peer-to-peer) network that allows for clearcut activity for all parties with no need for a middleman or central clearing authority.
Today, most businesses are only beginning to understand how blockchain works and are just starting to tap into the potential of the technology.
Bitcoin deep dive
One Bitcoin is worth more than $4,000 USD as of January 2019. But why is it worth so much? ShapeShift CEO Erik Voorhees breaks it down by saying, “Economists and journalists often get caught up in this question: Why does Bitcoin have value? And the answer is very easy. Because it is useful and scarce.” Essentially, it is valuable because people want it. Much like a stock traded on the market, Bitcoin is based on trading for potential worth. Bitcoin is used as a store of value, a placeholder of sorts. If people invest in it, the value goes up, and they make money back on their investment.
There’s a limited number of Bitcoin available on the internet (a maximum of 21 million coins), and that number needs to be discovered and located. Think of it as akin to rare baseball cards. There are only a certain number in circulation, and no more will be made. That rarity is what gives them value — some can even be worth hundreds of thousands of dollars. Bitcoin is much the same. Despite the lack of an official backing, Bitcoin has generated a community that accepts and trades it, therefore making it a legitimate currency.
How Bitcoin and blockchain work together
Blockchain’s primary intended use was to be able to complete Bitcoin transactions on a completely transparent network that’s permanent and cannot be manipulated or changed. It creates a clear path of exchange that’s visible to every member of the blockchain by adding a new “block” of data to the “chain” each time a transaction occurs. This happens through the following series of steps, without the need for a third party to verify the activity.
- Step 1: A transaction is requested (in this case, the transfer of Bitcoin).
- Step 2: The request is broadcast to the entire P2P network of “nodes,” which are individual computers on the network.
- Step 3: The network of nodes validates the transaction and users’ statuses using known algorithms embedded into the blockchain.
- Step 4: Once the transaction is verified, it’s added to previous transactions, forming a new block of data and thus completing the transaction.
Once those steps have been completed, they cannot be changed, undone or removed from the blockchain. They’re part of a permanent digital ledger with a clear path tracking the Bitcoin transfer from one user to another.
Benefits of using blockchain
Because blockchain was created to enable the use of Bitcoin as a viable currency, there’s an inherent benefit in that alone. However, for Bitcoin to provide value to its users, it needs a platform to operate on, and that platform needs to be accessible by multiple parties. To that end, Oracle CEO and tech mogul Mark Hurd noted, “blockchain’s promise is the fact that it can help bring sets of data from different variable applications and make it secure.”
Blockchain is safer, faster and cheaper than any other form of data tracking. The business benefits of full transparency cannot be understated. Complete visibility eliminates the risk of questionable transactions and provides safety to all users. Because the network itself is decentralized and open, blockchain is a cost-effective channel. Without the need for a middleman, it’s also much faster than any other data-transfer method. Lastly, the permanence of the ledger doesn’t allow for any alterations, therefore ensuring the safety of the data it contains and offering a complete record to reference.
Although buying and trading Bitcoin is exciting, the ultimate reason anyone wants it is so they can use it as a valid form of payment for purchases. The first step to buying and selling with Bitcoin is getting a secure digital wallet. Bitcoin wallets have a public key, which can only be used for the transfer of funds into the account or the initiation of a transaction, and a private key, which can only be used by the owner to authorize the spending of funds inside.
Though mobile devices serve as payment methods like cash or credit cards, a digital wallet serves as a sort of Bitcoin bank account. Rather than physically holding Bitcoin (an impossible task), a Bitcoin wallet holds the private key needed to access a user’s Bitcoin address and sign for any transactions. There are several different types of Bitcoin wallets, each with a unique offering and level of security, which are outlined below.
Bitcoin itself isn’t a tangible entity. However, wallets in the shape of coins were created to serve as a physical representation of the cryptocurrency and held value through private keys hidden underneath a peelable hologram with a tamper-proof seal that left a pattern if altered, much like signing the back of an envelope or using a wax stamp. Once a coin’s code was redeemed, it lost all monetary worth and simply turned into a collector’s item.
Though the physical manifestation of Bitcoin was a convenient way to trade funds back and forth in person, it did not last long. After about two years of circulation, the Financial Crimes Enforcement Network stepped in and rendered physical Bitcoin as money transmitters, which come with heavy regulations. Mike Cadwell, the creator of the physical Bitcoin, found the requirements to be too much work and stopped production altogether.
A paper Bitcoin wallet is arguably one of the most secure storage options and best option for those just beginning to use Bitcoin. Essentially, a paper wallet is a document, like a business card, that includes the public and private keys, often in the form of QR-codes that can be scanned when needed. Companies like BitAddress generate documents that can then be printed for use.
What makes paper wallets so special is their immunity to any kind of hack or malware, as they’re not connected to any kind of network. The downside is that they are much easier to lose since they are physical documents, and users have to employ extra precautions to ensure they remain in a safe place at all times.
Anyone actively using Bitcoin as a payment method needs a mobile wallet to be able to complete transactions. A mobile wallet is an app on a mobile device that stores the necessary keys and allows users to pay for things directly with their phones. These wallets access a small piece of the blockchain containing the Bitcoin and use simplified payment verification (SPV) technology that relies on trusted nodes to contain the correct information.
Mobile wallets are by far the most conducive medium for using Bitcoin as an everyday payment method. However, they also run the highest risk for hacker attacks and malware. If anyone gains physical or digital access to the device using the digital wallet, they have full control over the Bitcoin contained in the wallet.
An online or cloud-based wallet offers a similar level of convenience and more security than a mobile wallet. With the correct passwords, users can access funds from any device and use it for payments. These wallets rely on a server controlled by the company providing the wallet service.
E-wallets allow users to access their Bitcoin at any time from anywhere, but they also require the users to put full trust in the organization controlling their wallet. Those using this method rely on the company’s security procedure and must trust the organization won’t scam them out of their Bitcoin, disappear with it, or close down suddenly and take everyone’s money with them.
Desktop wallets are downloaded and installed on a desktop computer or laptop and store private keys on the hard drive. They are not controlled by any third-party sources, so they’re safer than online or mobile wallets. However, those devices still have to connect to the internet, making them susceptible to attacks.
Desktop wallets also require a higher level of personal security because they are a somewhat physical objects. Because the keys live on a hard drive inside a computer, they need to be backed up elsewhere in case of theft or corruption. If the computer is infiltrated, users lose their Bitcoin.
Hardware wallets are highly secure as they store the private keys in a secured hardware device like a USB drive. They only connect to the internet occasionally in order to complete transactions and remain offline at all other times, making them virtually unhackable. There haven’t been any instances of stolen Bitcoin from hardware units, proving them to be the most secure platform.
The Bitcoin stored on the device can’t be transferred out in plaintext, and the software contained on the hardware is open source. Some hardware wallets even have screens, adding an extra layer of security through access codes or passwords.
Depending on the depth of a business’s intended use of Bitcoin and security requirements, the different wallet options all offer their own set of pros and cons that should be carefully weighed before any storage decisions are made.
Bitcoin was originally created as a way to overthrow the government currency and become the preferred method for global transactions. However, the buoyancy of its worth and lengthy transaction times make it difficult for businesses to currently accept Bitcoin as payment.
Peter Thiel, co-founder of Paypal stated, “I think Bitcoin has succeeded on the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.”
It has a long way to go before becoming competitive on a global scale; however, Bitcoin is slowly becoming a more viable payment option and is even being used in some brick-and-mortar locations.
Because Bitcoin is a completely digital currency and is most often stored online, it makes the most sense to use it via websites and ecommerce businesses. One of the most popular uses of Bitcoin is through gift card companies. For example, sites like Gyft and eGifter allow Bitcoin payments for gift cards to well-known companies including Dunkin’ Donuts and Target.
Making a purchase using Bitcoin is relatively uniform in any setting. In places Bitcoin is accepted, users simply have to choose it as their payment option, provide payment information (often in the form of a QR code so as not to release the private keys), and place an order.
Additionally, payment apps like Cash and Square are testing Bitcoin payments to see if they can be implemented more widely. Sites including OKCupid, Etsy and CheapAir also allow for Bitcoin payments.
Using Bitcoin as a payment option for any business comes with several benefits, including lower or no transaction fees, reduced instances of fraud because of its reliance on Blockchain technology, and removal of the currency barrier between countries. Offering Bitcoin processing can also give a business a leg up over the competition. There has been a lot of progress in the ten years since Bitcoin and Blockchain were developed, but they are both emerging technologies. Many future uses are still waiting to be discovered and many advances are in the works. Regardless, Bitcoin, and the bBlockchain technology created for it, makes the process of transferring a non-physical currency from one person or business to another safer, more secure, faster and cheaper than ever before.