In so doing, it offers the potential to create a new and innovative trading paradigm where transaction validation is managed via a secure, decentralized, disintermediate virtual network. To understand the revolutionary potential of this technology it is best to contrast it to current system. In most centralized payment systems, any secure exchange of value between two parties who do not know one another has to be brokered through a third party.
In contrast, Blockchain is a distributed system that records all of the transactions conducted by users (called “nodes”) within a network in an encrypted public ledger that is held jointly by all nodes. All transaction within the network are continuously and sequentially recorded in the ledger creating a chain of transactions (or blocks).
Transaction are validated by individual nodes and miners (who take as a reward a small share of the value of the transaction) using complex, resource-intensive mathematics operations. The central innovation of the Blockchain is to discourage fraud, and to encourage its discovery, by means of the “proof of work” puzzle. Any miner must solve this puzzle in order to claim the reward for validating the block.
Solving the puzzle is computationally hard, but validating its solution and the other contents of a block is computationally easy. This asymmetry in computational difficulty makes committing fraud so hard, compared to discovering it, that fraud becomes practically impossible. The result is to create a secure method of exchanging value (e.g., money, financial instruments, intellectual property, contracts) that do not depend on a single, trusted authority to manage and clear transactions.
The difference ?
Bitcoin is a specific cryptocurrency application build on top of Blockchain. Bitcoin uses the basic Blockchain architecture to create a payment system. It is simply a protocol written on top of Blockchain to facilitate the exchange of specific units of value (i.e., Bitcoins).
However, Blockchain has much greater applications. It is an entire platform which provides trustless transactional activity that can be used to transfer ownership of any asset with no intermediately. Thus, while Bitcoin is the best known, there are many other potential implementations of Blockchain in areas such as financial instruments, legal instruments, healthcare and other services. If its potential is fully exploited, Blockchain could create the Internet of Money (IoM) and transform the way the businesses and the economy work.