Let’s clear a common mistake. Probably the biggest misconception in technology and finance that there is nowadays. There tends to be lots of confusion between blockchain and crypto (abbreviation of cryptocurrency). The confusion stems from the fact that the former powers the latter. You need to know the difference though: many people use these two terms interchangeably, which is absolutely wrong!
The crypto and blockchain genesis
The year is 2009. The world is just getting out of the Great Financial Crisis of 2007–2008. The biggest financial crisis since 1929 (just bear in mind that there are small-scale financial crisis every few years though). We finally see the light at the end of the tunnel after a period of absolute misery. Furthermore, the public sentiment towards banks is very negative. Rightly so in most cases, investment banks have gambled and lost, plunging the whole world into a complete chaos (watch or read The Big Short, that’s a perfect summary). This is, by the way, when fintech really emerges as an industry. A mysterious man, Satoshi Nakamoto, publishes the bitcoin white paper. The rest is history.
To put it really simply, Bitcoin is an electronic cash system that is fully peer-to-peer. Thus, no trusted third party is required. The idea is just to be able to send a currency from one person to another without going through any financial body.
This is a big change as most financial transactions involve a third party or a middleman. For example, this third party can be a bank or a clearing house. If you want to pay someone with say US Dollars or Euros, at some point it will go through some sort of financial infrastructure. If you use a credit or debit card, there will be plenty, from the payment processor to the card issuer, including the card schemes (Visa, Mastercard). And if you use cash, it eventually came from an ATM and an account (unless you print your own money at home, which we would not advise).
The promise of Bitcoin is therefore to be free from the shackles of the financial industry. Bitcoin is also known as a cryptocurreny because it uses cryptography as a security mechanism. Indeed, Bitcoin is the very first crypto. So, how does it work then?
Blockchain magic
The magic happens with the underlying technology, blockchain. The first blockchain database in the case of Bitcoin. It is a bit the same as talking about a Mercedes and an internal combustion engine. Same thing but not the same, right? Well, Bitcoin is the Mercedes and blockchain technology is the engine. You can have other brands of cars but in the end, they will run with a variant of that engine.
There are now many variants of blockchain technology. Different version of the engine, that can be electric or else, if you still follow the analogy. However, in its essence it is a distributed ledger (it should be, we now see centralized version which are a bit of a Frankenstein monster). Explaining exactly how it works can become very complex, like any other technology. Try explaining how the internet works. Or a microwave. Hard, isn’t it? And also, why would you? You know what it does and why it’s useful, that’s what is actually important.
In the end, if you are not an engineer or a developer, it does not add a lot of value to go really in the details as long as you understand the business benefits.
Over a decade later, where is the blockchain revolution then?
What should matter is how deploying the technology in an organization can deliver improvements. If you are a bank or another large company’s CEO, you don’t particularly care how the technology works. What you will care about are the cost savings associated with it and the efficiency gains. Ultimately, how this will help you gain a competitive advantage. That is what innovation is all about. That’s the important part.
That has been a bit of the issue with blockchain and the crypto industry. A lot of focus on the technology, and not enough on why the average person outside the blockchain industry should care. Even more, why business people should care. There has been a lot of talks about how this could replace the financial system, but the problem is that most people do not care about joining this little revolution. Therefore, cryptos have not really taken off. The hassle of being outside the financial system when banking is quite convenient nowadays with all these neobanks around…
You see more and more enterprise blockchain solutions, as the technology matures. That’s when it becomes actually interesting for business leaders: when you focus on the problem you are trying to solve, with the delivery mechanism (in this case blockchain) coming after. Only like that, you will see broader adoption of the technology. And that’s valid for individuals as well.
Here you go, that is the difference between blockchain and cryptocurrency. As simple as that. Bitcoin works thanks to blockchain technology. There are now plenty of different cryptocurrencies such a Ether or Monero. However, blockchain technology has plenty of applications outside of the crypto world.
Notably in financial services…