Gaining clarity on key terminology: Bitcoin versus blockchain versus distributed ledger technology
Over the next month or so, I plan to share some thoughts about the world of distributed ledger technology. As a business leader, you should have the confidence to innovate and drive growth within your organisation, particularly when it comes to new technologies. That is why I intend to guide you through this exciting space.
In order to gain a better understanding of distributed ledger technology, you must first understand the complex world of cryptocurrency, and the various terms associated with it.
Cryptos, capital and the quest for control
In 2017, the rise of cryptocurrencies, most notably bitcoin, brought the word ‘blockchain’ to headlines, book titles and dinner table discussions around the world.
To an extent, the word ‘blockchain’ has become synonymous with bitcoin, and both of these terms have been synonymous with the idea of tokenisation — a term I’ll define and discuss more in future articles.
Cryptocurrencies are now often described as cryptos, while the wave of capital flowing into this space is referred to as the ‘blockchain movement’. Then there’s the world of initial coin offerings (ICOs), and figuring out the right amount of governance and control over these new ecosystems.
The crypto landscape is complex, to say the least. A good understanding of it all is therefore integral in helping you make the right decisions as a business leader.
Unfortunately, there’s a bit of confusion surrounding the terminology in this space.
Early this year, I wrote an article for Hacker Noon on why blockchain will change the world — you can check it out here. Based on the encouraging response to the article, along with the exponential increase in demand for talent in this area, and the increasing rate of start-up creation and capital flowing into this space, I am confident this technology will change the world.
However, when I wrote the article, I mistakenly referred to ‘blockchain’ rather than ‘distributed ledger technology’ (DLT). So, with that in mind, I’d like to take this opportunity to clear up any confusion.
Bitcoin versus blockchain
Understanding the distinction between bitcoin, blockchains and DLTs will serve you well in asking the right questions and, understanding the opportunities and risks for your business.
Let’s start with bitcoin.
Considered the greatest technological innovation since the internet, bitcoin emerged in response to the global financial crisis and the collapse of many banking institutions in 2008.
It is the world’s first decentralised digital currency, as the system works without a central bank or system administrator.
Similarly, blockchain technology “…facilitates peer-to-peer transactions without any intermediary such as a bank or governing body…”.
Based on these descriptions, the terms ‘bitcoin’ and ‘blockchain’ appear quite similar. But are these words synonyms?
In short, no.
Like many principles in life and technology, think of this domain of technology as a cake or multilayered stack.
At a conceptual level, the higher you go, the more likely you will be describing an application focused on a specific business problem. At the bottom of the stack, you’ll find principles and core tenants related to the technology. Cutting to the chase, the conceptual hierarchy looks something like this.
Put another way, bitcoin is an implementation of a blockchain, and a blockchain is an implementation of a DLT.
The ever-changing role of distributed ledger technology
On October 31, 2008, a paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ was posted to a cryptography mailing list under the pseudonym ‘Satoshi Nakamoto’.
Bitcoin was based on blockchain technology, and in particular the proof-of-work consensus algorithm. And, as hundreds of projects were built onto blockchain platforms, the terms ‘blockchain’ and ‘DLT’ were considered by many to be one and the same.
A blockchain, however, is simply a database that is public (no one owns it), distributed (there is no centralised server), continuously updated by everyone, and secured by cryptography that each participant constantly validates. It’s also incredibly slow for the most part, and is not immediately useful for most business applications.
In around 2016, the term “Distributed Ledger Technology” was used to describe technology that did not rely on a blockchain specifically. These new non-blockchain implementations emerged to support high-transaction volumes and micro-transaction data, most notably the DAG (Directed Acyclic Graph).
Projects like Hashgraph describe a new way of ensuring the replication of consensus of data across nodes in a distributed ledger system. It was conceptualised as an alternative to the cryptographic principles that underpinned proof-of-work (more on these principles, and the different types of consensus algorithms, later). These new DLTs may however have other challenges that I’ll review in future articles.
Today, distributed ledger technology is an umbrella term used to describe technologies which distribute data in a ledger form, publicly or privately across one or many nodes in a distributed system.
There are now several different types of DLT, each distinguished largely by the manner in which it replicates data across the nodes.
There are other points of distinction, including the basis on which the technology is provided — open source, or licensed in some way. Related, the governance and controls associated with the nodes and related distribution are interesting as well. In a distributed system, the security of the network, nodes and data within are also critical to understand, and vary across each of the projects focused on.
A shift to other forms of DLT?
As the crypto world continues to grow and change, we see an abundance of interesting projects eager to test, tune and tamper with the idea of DLT. This has led to the creation of several variations of the original bitcoin blockchain, but also DLT systems which have ditched the idea of a blockchain altogether.
As entrepreneurs become more aware of their options, we could see less reliance on traditional blockchain systems, and a shift to other forms of distributed ledger technology .
As a business leader, knowing the difference will prove invaluable.