Holland Fintech has a network of many professionals, start-ups and veterans in the FinTech scene. This does not imply that everyone understands automatically all the innovations and developments within Fintech. We thought it nice to be able to share some ELI5 type of explanations of blockchain technology. For us it’s good practice and for you it’s a way to slowly get to know the implications of blockchain technology. Without diving into concepts as decentralization, mining, consensus algorithms etc., we present to you an explanation of how we see blockchain take the role of banks as regulators of currency.
What are the advantages of crypto currency over regular currency, like euro’s or dollars, exactly?
You probably know a few things about Bitcoin, or at least, you’ll have heard of it. You’ll know people speculate with Bitcoin, some of them got rich, and seemingly it can be a risky business. But what makes Bitcoin so very special, do you know that?
The word ‘crypto’ may not sound very appealing to really try and understand it. It sounds rather, well, cryptic. But it’s not so difficult at all! In this blog I’ll explain to you what a cryptocurrency is exactly, and why this is so very interesting. After reading this you’ll have a good sense why it is such a good innovation to pay with crypto currency.
To make things clear, I believe it’s interesting to compare cryptocurrency to regular money, like euro’s. Next we can compare sending someone regular money to sending a cryptocurrency, like Bitcoin.
Bank versus Blockchain, who’s in?
When I make a bank transfer with a euro, what happens?
In a way, a bank is really just an accounting genius. Wow, I’m being positive about banks? Yes, because my money and your money are all stored in one big pile, and still banks know exactly how much money belongs to my account, and how much to yours. Banks keep record of our transfer history, and they know precisely how much right each of us has to the big stack of money they keep in store. That seems like quite a job to me.
Since the bank keeps all of our money in one big pile, our personal bank account is simply a claim to a part of that heap of money. I don’t actually have the amount that’s displayed on my bank account, I have a right to a piece of the total sum the bank keeps in store.
Imagine I transfer one euro to you, what would the bank need for this transaction?
- My bank account number and my account’s balance.
- The sum I want to send.
- The bank account number and balance of you, the receiver.
This seems logical. So what does this mean in reality, behind the scenes? When I transfer one euro to you, I effectively request the bank to lower my claim to the entire money pile with one euro, and raise your claim with one. No real transfer is being made, only the subtraction of a number on my balance, and the addition of one on yours. A digital euro cannot exist outside of a bank, and the actual euro I sent never changed spots. It’s still in that big money stack at the bank.
What’s really important in this example, is that the euro I sent is not unique. If, later on, I would want that specific euro back, that wouldn’t be possible. There is no way digital euro’s can be told apart from each other. This is exactly why banks manage money. Digital money is not unique, and there is no way to tell one euro apart from the other. There must be a party that keeps track of all these euro’s, or else it would be very easy for people to add euro’s to their share.
When I make a transaction with a cryptocurrency, what happens?
So now I make a transfer with a cryptocurrency. It begins with a blockchain. The blockchain is a database, consisting of small blocks of data joined together like a chain. For example, with Bitcoin the data chain consists of the history of all the specific transfers ever done with Bitcoin.
Imagine I send you one Bitcoin. (or rather 0,1). There needs to be a way to make record of the fact that a part of a Bitcoin is taken from my Bitcoin address and is added to yours. This necessary data is recorded in a small block, and this block is added to the chain.
What does this all mean, and what information is necessary for the blockchain to make the transaction work?
- My address with my balance.
- With blockchain technology I can make infinitive addresses. An address is simply a series of numbers and letters, providing the blockchain with information to which cryptocurrency are yours. A cryptocurrency can never be taken off a blockchain, it can only be linked to another address. This is what we call the transfer of a cryptocurrency.
- The amount I want to send.
- In this case 0.1 BTC
- Your Bitcoin address and your balance.
- This way the blockchain will know to whom it should link the 0.1 BTC.
- A set of data saying what has happened exactly with this particular 0.1 Bitcoin up to this moment.
The four items above are put together and then encrypted. This just means the information gets mixed thoroughly and is then translated in a different cryptic language. The only way to be able to decipher this code, is if you have access to the right key. Now take note! The outcome becomes the fourth item at the next transfer. This is how the chain is made.
An interesting insight: the cryptocurrency itself is not ‘crypto’, it is the blockchain that is encrypted. In other words; a cryptocurrency is simply a piece of data (the coin), that has been secured with a very complex code (encrypted). So this is the story behind the name ‘cryptocurrency’.
Bank versus blockchain.
Perhaps you notice similarities between a blockchain and a bank, because there are quite a few. Perhaps you’ve also notices the difference.
These are the major similarities:
- A bank and a blockchain both keep track of the transfer history.
- A bank and a blockchain need information from their clients, like an address and balance, to be able to exercise their function.
- A cryptocurrency can’t be taken off the blockchain, and a digital euro can’t be taken off a bank.
Here is the main difference:
- The euro in the bank is not unique, whereas the cryptocurrency (Bitcoin) is.
Are you starting to see the many consequences this may have?
Four major advantages of a cryptocurrency in comparison with a euro.
With cryptocurrency we no longer need a bank to control and manage our balance. We are perfectly capable of doing this ourselves! Better yet; a blockchain can do a better job than a bank. Because it is fully automated, a blockchain will practically make no mistakes whatsoever.
A bank is managed by people who may not be very idealistic, or who may not be fully committed to the wellbeing of the earth. That’s alright, that’s simply how we are as human beings. However, with blockchain we do not need to take this factor into account. Blockchain does not need people to gather information necessary for a transaction. Again, it is fully automatic.
When you have an address and you manage it yourself, it means no one else has access your particular Bitcoin. It is fully unique and proven. This holds true for all cryptocurrency. The euro in the bank isn’t unique. It may no longer exist tomorrow, or it may be doubled, or who knows what else.
A unique cryptocurrency also means you can trace exactly where it has been. You can even go back all the way to the time it was put into currency. This is cool/ fascinating, isn’t it? This is why we call cryptocurrency and blockchain transparent. Digital euro’s do not offer this option. Who knows at what address a specific euro came on the market? Nobody, because specific euro’s don’t exist in a digital world.
The advantages of blockchain over a bank are summing up. The major advantages of a cryptocurrency are also becoming clear. And we haven’t even discussed all the extra advantages of blockchain. For example, the fact that it is always online and available anywhere, whereas banks may take some time off, or their app might not always be functioning properly.
Blockchain and crypto are interesting technologies. It is clear blockchain is about to thoroughly shake up the financial system. Or it may lend a hand. This all depends on the behaviour and reaction of the current system.
With cryptocurrency you too may have the experience of managing a completely unique coin. It may give you the feeling of being your own small bank. We would love to help you with this. There are many helpful apps that give you full management over cryptocurrency.
Has this blog been helpful? Have you learned anything? We hope so! Don’t hesitate to share or provide us with some feedback.