Nairobi is a buzz with the words; "Bitcoin", and "blockchain". But many can't really figure out how the two are related or what exactly is a bitcoin. I went to the web to find the best explanation of the two and found Professor Shai Rubin's explanation.
Professor Rubin explains that Bitcoin is not blockchain. Bitcoin is a digital coin, whereas blockchain is the technology that allows movement of digital coins from one party to another. Digital currency is just one of the many applications of the block chain technology. Blockchain like any other new technology seeks to solve an existing problem. The following are the problems that blockchain seeks to solve;
Blockchain technology seeks to solve three problems;
- Remove a middleman in the money transfer system. Currently if you wanted to transfer money from Catalonia to Kenya you will need a trusted middle man like the western union. With blockhain, the middle man is bypassed.
- Reduce the speed of money transfer . Probably this has no advantage over the M-Pesa mobile money transfer system popular in Kenya. However, blockchain has the advantage of being able to transfer larger sums plus able to keep safe the identities of parties involved.
- Reduce the cost of money transfer. Transactions done over blockchain are cheaper since the middleman's cut is not applicable.
How does blockchain solve this problems?
Blockchain solves these problems through three concepts:
- Through the concept of an open ledger. An open ledger allows everybody on the network to see transactions on the network. An open ledger is basically a public chain of transaction. The ledger contains information on who is moving how much to whom.
- The concept of a distributed ledger. The open ledger is not held in a central place, the ledger is distributed to everyone in the network. The ledger is synchronized so that every node in the network has the same copy of the ledger.
- The concept of Miners. Miners are special nodes in the network who validate transactions and enter them in the ledger. After a miner validates the transaction, the miner needs to lock this transaction on the ledger. A special key is required for this. The search of the key is random and is done by super computers. The computers go through several keys till a match is found. The first miner to validate and lock a transaction gets a financial incentive (bitcoin or one of the other digital currencies depending on the network)
This is a very simplified explanation of the blockchain technology,hopefully has brought clarity to you on what bitcoin and blockchain are. You may watch Professor Rubin’s YouTube lecture in the link below.