Bitcoin is a digital currency, also known as a cryptocurrency, that allows people and businesses to send and receive value online. Blockchain is the technology platform that enables Bitcoin to operate. Like every square is a rectangle but not every rectangle is a square, Bitcoin is a Blockchain, but not every Blockchain is a Bitcoin. Bitcoin has made Blockchain famous, but the technological innovation will revolutionize industries, including the buying and selling of real estate.
When you hear Bitcoin, you may think of PayPal or even services such as Chase QuickPay that allow you to send money securely and conveniently online and wonder: what makes Bitcoin special? Bitcoin is different because it is not only a service, it is a medium of exchange, just like the Dollar or the Euro.
An Example of How Bitcoin/Blockchain Works
To understand what makes Bitcoin unique from these and all other services, all you have to know is what Blockchain really is: a ledger.
Imagine Jackie borrows five dollars from her neighbor Sally. In order to keep track of this (they aren’t that close of friends), they decide to use a ledger.
Some questions immediately arise. Who will hold onto the ledger? If it stays at Sally’s house, what if Sally decides to erase $5.00 and write in $500.00? Perhaps they should both keep a copy?
Say Jackie wanted to borrow more money from someone who lives across town, or out of state, or across the world? What about from a complete stranger? You can see things instantly get more complicated.
We’ve Seen This Before
This is where banks traditionally have come in. As trusted institutions, they keep the ledgers safe and accurate, for global personal and business transactions. If we believed banks were just giving our money away willy-nilly and telling us otherwise, we wouldn’t give them our money!
For their services, banks charge fees, and sometimes these services can take time. For a centralized bank computer to scratch off $5.00 for Sally and write on $5.00 for Jackie, it costs us money in fees and can
sometimes take several days for the transaction to clear. The creator of Bitcoin asked, if banks are all digital today, if our money is all 1s and 0s, what are the fees for, and why does it take so long?
Bitcoin takes digital ledgers out from the bank vault and into the Internet. But what about those same old problems Sally and Jackie had of who will keep track of the ledger and how can it be protected from
Who trusts the Internet with their money? Hardly anyone, especially with all these hacks going on nowadays! What Bitcoin did was create a *trustless* online currency, where trust was no longer necessary for
Remember the bank? People trust the bank to handle transactions. If I just threw the transaction history of the customers of Bank of America or Wells Fargo on the Internet, of course all hell would break loose! But because Bitcoin uses Blockchain, it’s able to process transactions without any central, trusted institution.
Distribution + Cryptography = Blockchain
Blockchain combines two innovations in computer technology to accomplish this – distribution and cryptography (code making and code breaking). Distribution means that anyone who wants a copy of the ledger can have one. Every single Bitcoin transaction in history is public and can be downloaded for free. This way, if Sally is changing $5.00 to $500.00, everyone will know that. The cryptography part (and we’re talking military-grade levels of secrecy here) keeps the world out of Jackie’s business and money troubles. All we can see are account numbers sending and receiving Bitcoin on the ledger.
The cryptography has one more very important job, maybe the most important job. What if Sally is very persuasive and has a lot of friends. She tells all of them to change their ledgers to show that Jackie actually owes her $500.00, not $5.00! The Blockchain takes all of the data from the ledgers and uses math to turn it into a nearly unbreakable code. Nobody can know what this code means until computers work very hard to figure it out and turn it back into the transactions that happened between Jackie and Sally (and Mark and John, and Harry and Fiona). Not only must everyone agree on the same ledger, everyone must agree on the same *code* for the ledger to move forward. And only the Blockchain technology can know which code is correct.
A dollar has value because of the trust in the US government. A Bitcoin has value because of trust in the power of the Internet and of highly complex mathematics.
Check out our next post by Jonathan on how this will affect the real estate industry and why agents should know about it now.