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Cryptocurrency vs Blockchain: What’s the Difference?
Whenever digital assets are mentioned, the terms cryptocurrency and blockchain are often used interchangeably. Given the technical depth of this new technology, and its complexity, it can often be confusing to understand the many terms and concepts that surround it.
These two concepts are fundamentally different. This article will look at the differences between cryptocurrency and blockchain technology, with the aim of exploring the various different nuances and features of these seemingly interchangeable terms.
In 2008, an anonymous user calling themselves Satoshi Nakamoto published a white paper, which illustrated a ground-breaking new technology that functioned as peer-to-peer digital cash, called Bitcoin. At that time, Bitcoin was deemed to be a revolutionary innovation, since its underlying technology solved fundamental issues within the realm of digital assets and cryptography, which had prevailed for decades.
Although several digital currencies existed prior to Bitcoin, the architectural system of Bitcoin and its cutting-edge consensus mechanism resulted in a superior technology that was able to disrupt the definition of money. For this reason, Bitcoin is credited as the first ever decentralized cryptocurrency.
Differences Between Cryptocurrency vs Blockchain
To fully understand the differences between the two terms requires that the context also be understood.
Cryptocurrency: Medium of Exchange
Cryptocurrency is a digital asset that functions as a medium of exchange, much like cash in digital form. Given that cryptocurrencies are the digital adaptation of cash, they possess three major characteristics:
Medium of Exchange: Cryptocurrency facilitates various kinds of exchange transactions, including for goods and services.
Unit of Account: Cryptocurrency provides a common measure of the value of goods and services, allowing different things to be measured against each other intuitively.
Store of Value: A currency must be able to retain its value over time for it to effectively function as a medium of exchange. Cryptocurrencies are a great store of value given their finite supply.
As mentioned above, Bitcoin was the first decentralized cryptocurrency. It functions as peer-to-peer digital cash that is free from the control of such intermediaries as banks and governments. Since Bitcoin was launched, more than 2,100 coins have followed, which are traded on public exchanges, as well as thousands more that have been created, but have not yet been listed on cryptocurrency exchanges. Since Bitcoin represents the first implementation of blockchain technology, it is easy to automatically assume that both terms are one and the same.
Cryptocurrencies are a measure of value on the underlying network, and can encompass a wide variety of utilities and use cases.
Types of Cryptocurrency Use Cases
The use of cryptocurrency has often been thought of as a means of payment. However, there are different cases in which cryptocurrencies can be used.
- Currency: The most obvious and original use case of a cryptocurrency is that of a form of currency used to pay for goods and services external to the native network. This use case falls under the same category of any other currency, including such major Fiat currencies as USD, CAD, EUR or JPY. For example, with Bitcoin or Litecoin, users can pay for any kind of product and service globally, as long as the merchant accepts cryptocurrency as payments.
- Utility: Most cryptocurrencies include a utility other than a means of payment. This is usually in the form of an exclusive access to the products and services within the platform that issues the coin. The difference between a coin being a currency and a utility is that holding a utility coin provides the holder access to a function of the native network, while a coin functioning primarily as currency can be used outside of the native network. Utility is another term for benefit, and can confer various advantages upon token holders, such as voting rights and discounts on future services to be offered by the platform.
- Representation of an Asset: Blockchain technology allows any asset to be ‘tokenized’ on the public ledger. This means that any real-world asset can digitized and represented by digital coins. The most obvious use case of this are stablecoins, which are cryptoassets backed by Fiat currencies such as the US Dollar (USD). Any other assets such as stocks, bonds, commodities and real estate can also be tokenized.
- Investment: Certain coins function primarily as an investment asset, largely serving to provide financial returns to holders. These kinds of coin are also known as security tokens, and represent a share of the underlying profits generated by blockchain. Security tokens are fast becoming a preferred coin structure, due to their elevated credibility in comparison with unregulated ICOs. For example, this could be in the form of an equity stake for the business, with holders being granted dividends, similar to that of a stock or share.
It is important to note that a cryptocurrency can comprise various combinations of the above specified functions. This means that a coin is not necessarily confined to one specific function, but can simultaneously be a currency, a utility coin, and also represent an asset.
Coins vs Tokens
Moving deeper into the realm of cryptocurrencies, there is a fundamental difference between a coin and a token, terms that are both often used synonymously to represent a cryptocurrency.
On a technical level, coins are cryptocurrencies that have their own native blockchain. (See the section below for a description of Blockchain.) For example, Bitcoin has its own independent blockchain where all transactions involving Bitcoin are recorded on the Bitcoin ledger. Other coins with their own natively-developed blockchain include Ethereum, Ripple and EOS.
Alternately, tokens are a representation of a particular asset or utility that usually resides on top of another blockchain. This means that instead of “reinventing the wheel” by creating their own native blockchain, some cryptocurrency projects leverage existing blockchains, using their own infrastructure and tools, and issuing their own tokens. The most popular blockchain platform on which cryptocurrency projects tend to issue their own token is Ethereum, on which 94 of the top 100 publicly traded tokens are built.
Blockchain: Technology That Powers Cryptocurrency
Blockchain is the technology behind cryptocurrencies, and is defined as a shared ledger that records all transactions, which is controlled by a distributed global network of computers. The renowned revolutionary features of cryptocurrencies – transparency, immutability, being decentralized – are a direct effect of blockchain technology’s ground-breaking innovation. Prior to the creation of Bitcoin and blockchain, digital currencies were easy to hack and replicate. Blockchain is considered highly innovative as it solves the long-standing issues of centralized digital coins, by facilitating a common record of truth between all participants in the network. There is no central authority that manages the records or that have any say in the network; every computer in the decentralized network maintains a replicated copy of the unified database of transactions to prevent a single point of failure.
Every cryptocurrency transaction that occurs involves two main parties:
- Sender and Receiver: Users that send cryptocurrencies to each other
- Miners: Individuals in the network that validate and secure the transaction
Miners hold an important role in securing the network. They validate transactions using cryptographic techniques, and are rewarded for their work in the native coin. In the greater scale of things, the blockchain itself is the infrastructure that supports the cryptocurrencies within the network. Blockchain technology has many applications, above and beyond being a medium of exchange, such as with Bitcoin.
Applications of Blockchain Technology
There are numerous use cases for blockchain technology that can be used to positively impact our lives:
- Smart Contracts: One of blockchain technology’s ground-breaking functionalities is that it allows the creation of smart contracts. Smart contracts are self-automated, programmable contracts in the digital world. This eliminates the need for third parties required for traditional contracts, and automates the entire process, thereby streamlining the work flow and significantly reducing costs.
- Data Storage: Distributed cloud storage is an exciting application that allows anyone to store their data in an affordable, secure and fast environment. Instead of relying on centralized companies to store and manage the data, users can leverage on decentralized storage solutions to keep their data safe and also earn incentives along the way.
- Digital Identity: When it comes to digitizing such sensitive data as personal identity, there are numerous risks that must be considered to ensure that someone’s identity does not fall into the wrong hands. Blockchain offers a wide range of solutions for the authentication of identity in a secure, enduring, and irrefutable manner.
- Supply Chain: Blockchain can streamline the entire supply chain, which is accustomed to legacy systems that are slow, inefficient and largely a manual process. Having the ability to proactively provide digitally permanent, auditable and transparent records for all stakeholders within the system would offer far greater efficiency and accountability. This would allow you to track your ordered goods transparently, from the beginning of the process until the time you receive them.
There are many more ways in which blockchain technology could disrupt the status quo. As long as there is sufficient data, a blockchain is equipped to handle and streamline the entire workflow process.
Cryptocurrencies and blockchain technology are separate but related concepts which are often misunderstood. Blockchains are the underlying technology that serves as the fundamental infrastructure for cryptocurrencies to operate on, while cryptocurrencies are representation of value that can be transferred from one party to another.