connecting-crypto-blockchain

CONNECTING CRYPTO & BLOCKCHAIN

Cryptocurrency and blockchain are deeply intertwined today. But where did these innovations come from? This blog explores the origins of blockchain technology and cryptocurrency separately before delving into how they came together. We'll learn about early blockchain research in the 1990s and the development of cryptographic electronic cash in the 1980s. Understanding these distinct histories provides insight into how blockchain enables secure, decentralised cryptocurrency transactions.

Expect to learn:

  • The early history of blockchain and cryptocurrency
  • How cryptocurrency and blockchain technology is connected

Before we start, let’s remind ourselves what cryptocurrency and blockchain are.

Cryptocurrency — Digital currency that uses cryptographic encryption, decentralisation and the internet to make it secure, globally accessible and 24/7.

Blockchain technology — A chronological record of information that is publicly available, stored on many computers and constantly updated with new information

Make sure to refer back to these if you forget. We’re all human!

To understand how cryptocurrency and blockchain technology became synonymous with one another we need to take a quick trip down memory lane.

The genesis of blockchain technology

Back in 1991, research scientists Stuart Haber and W. Scott Stornetta co-authored a paper called “How to Time-Stamp a Digital Document”.

Haber and Stornetta figured out a way to prevent digital documents from being tampered with by developing a system that used a cryptographically secured chain of blocks.

Hmmm.. that sounds familiar.

Their invention went largely unnoticed and the patent expired in 2004. Four years later the Bitcoin whitepaper was published.

Discover more about what blockchain technology is here (link to blockchain tech blog.)

The genesis of cryptocurrency

In 1983 cryptographer David Chaum published a paper called “Blind Signatures for Untraceable Payments”.

Blind signatures for untraceable payments by David Chaum

In his paper, Chaum conceived the idea of anonymous cryptographic electronic money and, in doing so, laid the foundations of what we now know as cryptocurrency. Chaum has been referred to as the ‘Godfather of cryptocurrency’.

Several years later Chaum founded a company called DigiCash and began work on the first-ever cryptocurrency called eCash. DigiCash filed for bankruptcy in 1998 but the idea of cryptocurrency endured.

eCash opened cryptocurrencies Pandora’s box and in the years following its development, many other cryptocurrencies were created. Notable cryptocurrencies such as Bit Gold, B-money and Hashcash all added their own innovations but ultimately all failed to go mainstream.

The predecessors of Bitcoin laid the technological foundations and introduced some of the key concepts that would be instrumental in the development and eventual success of Bitcoin.

Without them, it’s hard to imagine a world where Bitcoin would have ever been created…

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How cryptocurrency uses blockchain technology

Cryptocurrencies are used to transact value between people or businesses over the internet. Blockchains provide the payment infrastructure to enable cryptocurrency transactions.

Paying with cryptocurrency is not dissimilar to paying for something in USD ($) or GBP (£) over the internet. They are just different ways to perform online payments and the user experience is becoming increasingly similar.

When using fiat currency (£/$) to do online payments you don’t physically touch the money. Your money is transferred from your bank account to someone else’s bank account, whether that’s a business or an individual, it makes no difference.

To you, it’s just numbers on a screen.

Your bank records all your online transactions and updates its ledger to reflect your new account balance. A bank ledger is basically a big balance sheet that says how much money each person has. You can imagine it looking like an excel spreadsheet or a big book that gets regularly updated.

Your bank has three important jobs:

  1. Keep your money safe (security)
  2. Update your account balance when you send or receive money
  3. Record those changes on its ledger (record information)

A blockchain is what we call a distributed ledger, this means that many people can own or share it, it’s public. This is different to a bank’s ledger which is private.

Photo by Shubham Dhage on Unsplash

All cryptocurrency transactions are recorded by a blockchain; it performs a very similar function to a bank, without actually needing a bank.

A bank provides a layer of security over your money and keeps track of your transactions. The same can be said for a blockchain.

If that doesn’t make sense to you, here’s another way of thinking about it.

A blockchain is a collectively owned, unfinished book. It has the following properties:

  • Anyone can add a line of text
  • Anyone can get a copy
  • All the copies get updated at the same time
  • Once a line of text is added, you can’t delete it

Photo by Jan Kahánek on Unsplash

If that makes sense to you, congratulations you understand the core principles of blockchain technology. If not, it’ll click soon!

If someone asks you: How are crypto and blockchain connected?

Blockchain technology underpins cryptocurrency. It provides a layer of security and records every single cryptocurrency transaction, just like a bank’s ledger.

Cryptocurrencies are used to transfer value between people or businesses.

In our next blog, we will cover the question on everyone’s mind. What gives cryptocurrency value?

If nothing else, remember this.

Key takeaways:

  • A blockchain performs a similar function to a bank
  • Cryptocurrencies use blockchains to remain secure
  • Blockchains record all cryptocurrency transactions
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