The world of cryptocurrencies is ever-expanding, but there is still a lot of confusion about what digital currencies are. With so many tall tales floating around the internet, it is not easy to distinguish between facts and fiction, especially in such a dynamic environment in which new concepts are constantly appearing.
This is the first in a series of articles dedicated to debunking some of the top myths surrounding the new tech-driven buzzword: blockchain. Today, we dive into five of the most common misconceptions regarding blockchain’s origin, uses and potential.
Myth: Blockchain and Bitcoin are the same
Since the launch of Bitcoin in 2009, there has been a widespread belief that the first cryptocurrency and blockchain technology are synonymous. Even today, many people still use these words interchangeably. Nothing could be further from the truth!
Fact: Blockchain technology was invented for Bitcoin. It did not exist before. But it is not a type of digital currency. It is an open-source system that stores information kept on different computers and is interlinked through a peer-to-peer network. In simple words, blockchain is a distributed digital ledger that records transactions that were carried out.
Blockchain stores transaction details, like the amount of cryptocurrency, date and time, type of transfer, in the so-called blocks. Each block is cryptographically connected to the previous one, creating a chronological chain of data. This structure is the reason behind the name blockchain.
It is also important to mention that blockchain used for cryptocurrencies is typically meant to be decentralized. It means that there is no central authority maintaining it. Information stored on the blockchain is distributed across a network of computers. So, it is not legitimately possible to change or remove a transaction once it is recorded on the blockchain.
Last but not least, blockchain technology aims to increase transparency. When it comes to open networks, most of the recorded information is accessible by everyone through platforms called blockchain explorers. Also, there are many analytic tools developed to have several types of in-depth macro and micro-level insights into the blockchain network. So, it is not so difficult to track all the transactions performed on any given wallet.
Myth: There is only one type of blockchain
The concept of a distributed ledger was first developed in 1991. However, most people heard about blockchain technology only after Bitcoin was born. And because it was the first cryptocurrency, many assumed that the public blockchain developed specifically for Bitcoin was the only one that existed. But that is not true!
Fact: There are hundreds of thousands of individual blockchains on the market. Most cryptocurrencies operate on a public blockchain, but there are other types out there. Soon after Bitcoin was released, banks and other private institutions developed a controlled system that required permission to join. This was the beginning of private and federated blockchains.
Over the years, blockchain technology evolved and was adapted to suit an array of sectors and industries. The first-generation public blockchain had several deficiencies like scalability, efficiency, so other blockchains came into existence to overcome these drawbacks. There are currently four types of blockchain networks: public, private, hybrid and federate.
Myth: Blockchain technology can only be used for cryptocurrencies
Blockchain was indeed introduced because of Bitcoin. Since then, it has been widely used in the cryptocurrency industry. But this innovative technology has other applications beyond the cash and payments system.
Fact: Blockchain is a system of recording information and digital assets in a distributed way. It has been developed to solve the problem of double-spending in a decentralized system. But there are other FinTech applications and services developed based on blockchain technology.
Blockchain-based applications, commonly referred to as DeFi, which stands for decentralized finances, provide services similar to conventional financial operations, but without the involvement of third parties or centralized financial institutions. The developments in this space have come a long way. There are DEXs, stable coins, money markets, insurance solutions, financial contracts, and many others that operate exclusively on the fundamentals of blockchain technology.
The beginning of 2021 saw the total value of assets locked within DeFi applications reach a staggering USD 40+ billion.
Myth: Blockchains are cloud-based ledgers
One of the most common blockchain myths implies that they are just cloud-based databases. But even though all network participants have access to the blockchain, the information it contains is not stored in the cloud.
Fact: Blockchains need to be downloaded and run on computers connected to the internet in a peer-to-peer network. Each computer is called a node, and the better the connection of each node, the stronger the whole network. Another difference between blockchain and a cloud database is that it doesn’t store files in a specific format. Blockchain keeps records with a Proof of Existence service that shows evidence that a file exists without actually showing it.
Now, it is important to point out that some cloud service providers have come up with a solution called BaaS (Blockchain-as-a-Service). The idea behind it was to support the development and management of cloud-based networks for companies that develop blockchain applications.
BaaS is very similar to SaaS (Software-as-a-Service) and allows its users to develop, build, host, and operate blockchain apps on the cloud. This technology helps to boost the future blockchain adoption.
Myth: Blockchain can power up the global economy
It is less a myth and more a widespread perception. Many people believe that blockchain is a massive global network, but in fact it is about the size of NASDAQ’s network. It is not equipped to handle as many transactions as most small global financial institutions deal with.
Fact: According to Gartner’s study conducted in 2019, blockchain technology is still about a decade away from the transformational impact. The report states that this technology is not advanced enough to enable a digital revolution across the business ecosystems. There is still time for it to become fully scalable both technically and operationally.
Currently, the most popular blockchain networks like Bitcoin’s are not designed to handle a huge number of transactions made by financial institutions, so it will not take over any time soon.
Busting the myths helps to understand what blockchain is, how it works and see its limitations. Getting familiar with the technology can increase confidence of its users and support the mass adoption of both blockchain and cryptocurrencies.