While the title says bitcoin, I’m really using that as a catchall, and I intend to address cryptocurrencies and tokens in general. I’m fully aware that in the literal sense they are not all the same, but the mental scaffolding that underpins the whole of the space very much IS the same, and that’s what I want to dig into.
Cryptocurrencies are the method of compensation for those who host and run their representative decentralized ledgers (blockchains, peer-to-peer). If you host the Bitcoin ledger and process the cryptographic hashes that run the network, you get paid in bitcoin. Same goes for other cryptocurrencies. Tokens are a bit different, in that they are compensation for supporting projects built on top of existing blockchains (often secured via an ICO, or initial coin offering), but for the purposes of this post I’ll refer primarily to cryptocurrencies to represent both.
A ledger of course is a record of transactions intended to prevent double-spending or skimming, but since a single ledger is subject to tampering and requires a high degree of trust, the double-entry ledger system was created. By having 2+ copies of your ledger, kept in different locations, and managed by different people, you create a system without a single point of failure, and thus create a system where less trust is necessary AND where risk is reduced. This is a good thing (and a 700+ year old idea).
Blockchains do this, but they have many copies of the ledger, and because of the decentralization are very difficult to tamper with. This is even better. Continue reading…