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What Is Blockchain Technology?

Few people understand what it is, but Wall Street banks, IT organizations, and consultants are buzzing about blockchain technology.

It's hard to remove blockchain from Bitcoin, so we'll start with Bitcoin as we work to understand this technology's potential.

Bitcoin. Blockchain technology. Cryptocurrencies. Initial coin offerings.

Everyone’s talking about them, but what do these terms really mean?

At its peak in January 2018, the total market cap of cryptocurrencies surpassed $800B, according to Coin Market Cap, while the price of bitcoin hit a high of almost $20,000 in December 2017. Initial coin offerings (ICOs) exploded in popularity in 2018, with billions being raised. Huge corporations — like Walmart and Pfizer — have completed blockchain pilots, with many more partnering on projects ranging from remittance to title transfer.

Let’s get started with a broad definition:

What is Blockchain?

Blockchain technology offers a way for untrusted parties to reach consensus on a common digital history. A common digital history is important because digital assets and transactions are in theory easily faked and/or duplicated. Blockchain technology solves this problem without using a trusted intermediary.

This explainer will offer simple definitions and analogies for blockchain technology. It will also define Bitcoin, Bitcoin Cash, Ethereum, Litecoin, blockchain, and initial coin offerings. Along the way, we’ll highlight promising use cases for blockchain technology.

(For a deep dive into how Ethereum works specifically, you can read our What Is Ethereum explainer.)

Lastly, this report will make clear the distinctions between distributed ledger technology and blockchain, and highlight where these technologies have an application – and where they do not.

Bitcoin

What is Bitcoin?

Bitcoin is, according to its whitepaper, a “peer-to-peer electronic cash system” that “allow[s] for online payments to be sent directly from one party to another without going through a financial institution.”

The 2008 financial crisis caused a lot of people to lose trust in banks as trusted third parties. Many questioned whether banks were the best guardians of the global financial system. Bad investment decisions by major banks had proved catastrophic, with rippling consequences.

Bitcoin — also proposed in 2008 — presented an alternative.

Bitcoin made digital transactions possible without a “trusted intermediary.” The technology allowed this to happen at scale, globally, with cryptography doing what institutions like commercial banks, financial regulators, and central banks used to do: verify the legitimacy of transactions and safeguard the integrity of the underlying asset.

Bitcoin is a decentralized, public ledger. There is no trusted third party controlling the ledger. Anyone with bitcoin can participate in the network, send and receive bitcoin, and even hold a copy of this ledger if they want to. In that sense, the ledger is “trustless” and transparent.

The Bitcoin ledger tracks a single asset: bitcoin. (Note: “Bitcoin” capitalized refers to the Bitcoin ledger, or protocol, while “bitcoin” in lowercase refers to the currency or a unit of account on the Bitcoin ledger.)

The ledger has rules encoded into it, one of which states that there will only ever be...