What are the differences between cryptocurrency and blockchain? According to the definitions, blockchain is the technology and cryptocurrencies are the coins that exist due to this technology.
Bitcoin, the best known and most popular cryptocurrency, however, is the reason behind the invention and use of blockchain. There are lots of other differences between the two as well. This article is all about that.
The terms blockchain and cryptocurrency may be thrown together often but that does not mean they are the same things.
These are actually two markedly diverse technologies even though these are intertwined inherently with each other.
Add to this, the marketing efforts make things even worse and more difficult for the beginners to understand the difference between the two, thereby creating a lot of confusion among the people who are not so affluent with the jargon of the crypto industry. Well, not anymore.
6 Differences Between Cryptocurrency and Blockchain
A cryptocurrency is typically a medium of exchange. However, it is digital in nature and therefore is much different from the most common medium of exchange, the US Dollar.
It lacks physical form and the creation of this monetary unit is controlled by the use of encryption techniques through blockchain as well as for the verification requirements for the transfer of funds.
The blockchain technology, on the other hand, is actually a decentralized ledger.
It records all of the transactions made over a peer-to-peer network. Check out Crypto vs Digital Currency.
This technology helps the participants in confirming any transaction and for that they do not need any third party or a central clearing authority to intervene.
Blockchain today has several potential applications apart from cryptocurrencies and the transfer of funds. It includes settlement of trades, voting, healthcare, automotive, financial services, music, gaming, and more.
Here are some of the other basic differences between crypto and blockchain which will help you to determine which among the two is more important and worthy to get involved with.
1. Basic Features
Blockchain is actually a distributed ledger. This ledger essentially contains public databases that are usually secured by cryptography. This allows everyone to view the database or add to it at any time.
The blockchain technology copies the data over thousands and thousands of computers spread all over the world instead of it residing on one particular central server.
This means that people from all over the world can access this database through their respective computers. All transactions are recorded in separate ‘blocks’ which are the primary vehicles to hold data.
It helps in making an easier and faster compilation of the data using consecutive strings for every single block which eventually creates a blockchain. And yes, the distributed database is ordered chronologically as per the transactions that allow easy tracking of the source and destinations of funds.
A cryptocurrency, on the other hand, is merely a store of value but is digital in nature. It is primarily used for buying and selling of goods or services, and even properties.
Cryptocurrencies are also sometimes referred to as digital currencies, coins, or tokens and are secured cryptographically. Since these are encrypted, it is protected against counterfeit or alterations even though there are no centralized authorities or regulators controlling the process.
Rather, the entire operation, control and governance are in the hands of the participants in the particular network.
The blockchain technology usually can facilitate decentralized platforms which need a cryptocurrency. The primary purpose of this technology is to serve as a distributed ledger that allows the members of a network involved in a specific transaction to maintain a consensus.
This distributed consensus, in turn, helps the entire network to track the transaction, as and when required, as well as permits the transfer of information and value easily, quickly, and safely. Therefore, in short, the purpose of the blockchain is to create the means for transacting.
Cryptocurrencies, on the other hand, are specific tokens or coins that are used within the network to make such transfer of value. These coins are used to pay for the fees for making such transactions as well as to provide incentives to the participants of a specific network.
Furthermore, these cryptocurrencies can also be seen as an instrument on the blockchain which in some cases serves as a utility or resource. These currencies can also be used at times to digitize or tokenize the possession of an asset.
The blockchain system can exist by itself and can be used for varied purposes serving as the foundational technology but cryptocurrencies cannot exist without a blockchain all by itself.
Therefore, the blockchain system is essentially a technical design pattern that exists in a network and allows the networks to exist in the first place without needing to depend on a central authority for management and maintenance of it.
A particular cryptocurrency, on the other hand, is just a key part of the blockchain ecosystem. Though cryptocurrencies and blockchain go hand in hand, a blockchain is often necessary for its transaction.
Without a blockchain, you will not be able to make such transactions because they will not be recorded in the first place and therefore will not be transmitted in a transparent way. Therefore, cryptocurrency is typically the use case of blockchain technology.
Cryptocurrencies are quite popular among the investors but not as popular as blockchain. It is true that several countries, merchants and retailers have accepted it as a mode of payment but it is still far away from a mass acceptance and adoption.
However, the popularity of crypto assets and the market is growing, especially among the investors. The primary reason behind it is that crypto coins are much easier to use while transferring funds between parties directly.
There is no interference of a bank, regulator, and credit card company or a third party to slow down the process or to pay fees to, making it cheaper as well to use cryptocurrencies. It can be done through the digital wallets simply by using the public and private keys.
A few other features that make crypto so attractive to the investors are the large number of coins that are publicly and easily available and clearly apparent, easy to use and download crypto software, divisibility of the coins that allow making micropayments, and portability of the tokens and coins, being virtual in nature.
Blockchain technology, on the other hand, is more appealing to the different industries on the whole and not only to the investors alone. The main reason behind such popularity is that the technology eliminates the need for a central authority such as a bank or other financial institution to transfer funds or make a payment for a purchase.
There are thousands of computers involved in a network and spread all over the world to verify the transaction, its occurrence as reported, checking the time of the transaction made as well as the dollar amount, and of course, the participants involved in it.
It is based on trust which is immense and well established through the cleverly designed codes and through mass collaboration and not by any powerful institution that needs to do the settlement and authentication.
5. Use cases
When it comes to cryptocurrencies, most of them use the blockchain technology primarily to record transactions such as the Bitcoin network and Ethereum network, where Bitcoin was the first amongst all to use it.
In addition to that, on 8th May 2018, Facebook also announced that it will start a blockchain group. This new group will be headed by David Marcus who was in charge of Facebook Messenger before.
Apart from that, Facebook had also planned to launch a cryptocurrency platform named Libra, the announcement of which was formally made on June 18, 2019.
However, Libra is now known as Diem. The use of blockchain by the criminal enterprise Silk Road operating on Tor to make payments led the US federal government to confiscate some of it in the course of research on the blockchain and forfeiture.
Even governments of a few countries have diverse policies on the usage, ownership, and legality of crypto coins by the banks and their citizens and have initiated several projects to facilitate it.
In comparison, the use of blockchain is across several industries mainly, of which crypto is one of them in particular. This technology helps the industries to solve the issues and complications related to double spending and for that, they do not even need a central server or a trusted authority to back up.
Several other applications were also inspired due to the Bitcoin Blockchain designs that are readable to the public who deal with cryptocurrencies. Mainly, the blockchain is used as a specific kind of payment rail. Several businesses now have started using private blockchain.
Others have however been inspired to take up the permissioned blockchain because that is more decentralized provided it is carefully designed. Therefore, this is more secure and safe in practice in comparison to the permissionless blockchain.
6. Energy Consumption
When it comes to blockchain mining, it needs a considerably high amount of energy for the entire process. In this process, the P2P computer computations are made for validating and verifying the transactions which are necessary and are the most vital part of the blockchain system.
In fact, the Bank for International Settlements or BIS has outright criticized such a high amount of energy consumption by the public Proof-of-Work or PoW blockchain saying that it is highly detrimental for the environment and the natural resources.
According to a recent study conducted by the Cambridge University, researchers found that the Bitcoin blockchain alone uses 121.36 terawatt-hours of energy every year which is more in comparison to the annual electricity consumption of the entire Argentina which stands as 121 TWh or that of the Netherlands which is of 108.8 TWh.
And, according to a research report by Digiconomist, the electrical energy required to transact one Bitcoin is nearly 707.6 kilowatt-hours which is equal to the amount of electrical energy consumed by an average US household in as many as 24 days!
Therefore, experts and critics think that blockchain technology is extremely inefficient in terms of energy consumption to conduct transactions and for processing of each of them. It is not good news for the climate and mankind, they say.
However, when you look inside the cryptocurrency industry, the energy consumption issue is seriously taken into consideration and newer and better alternatives are being thought of that will save the industry as well as the planet.
During research on the online security of blockchain as well as the platforms that are based on this particular technology it was found that the energy efficiency of PoW public blockchain is grossly insufficient.
According to statistical reports, the electricity used for Bitcoin alone in 2018 was within 31 and 45 TWh which produced a footprint ranging between 17 and 22.9 MtCO2.
The insiders of this industry, being concerned about such high energy consumption, started to consider shifting from the PoW model to the Proof of Stake model which is much less energy-intensive.
Can Both Work Together?
Now that you know the differences between blockchain and cryptocurrency, an obvious question may come to your mind: whether or not these two technologies can both work together? The simple answer to this is, yes.
However, a bit more knowledge is required to know exactly how blockchain technology and cryptocurrency can work together. For this, you will need to start from the time when blockchain technology was first used in the crypto space.
Generally speaking, blockchain technology is not an optional feature for cryptocurrencies. In fact, it is the foundational and fundamental feature based on which cryptocurrencies exist.
Both blockchain technology and cryptocurrencies are related to one another via common beginnings, though you should not conclude that both these are of parallel caliber.
Typically, when you compare the two, blockchain usually goes above and beyond cryptocurrencies. This is because its use is not restricted to the crypto industry or to the financial sector only.
In reality, blockchain technology is used in diverse fields since it offers various solutions that have the potential to disrupt different markets in the following years.
However, coming back to the question whether crypto and blockchain technology can work together, it is good to know that the first time blockchain was used in this specific sphere was as a database on which each transaction made with Bitcoin was recorded.
It typically originated in 2009 but it was not known then as such.
The name blockchain was assumed simply on the basis of the way all of the transactions were grouped together in different blocks of data and then united with each other through a chain.
This chain was actually a mathematical function that created a hash code.
However, this design was not new then. In fact, it existed even before Bitcoin emerged. It came to the limelight and became revolutionary when it was used to record the transactions of Bitcoin, the first ever cryptocurrency.
Therefore, ideally, it is this working-together feature that brought the blockchain system or technology to prominence.
Since then, blockchain technology and cryptocurrency have worked hand in hand and quite successfully at it.
Now, you may wonder, quite naturally according to the natural inquisitive nature of human beings, about the future of blockchain and cryptocurrencies.
For this, a few stats and figures as well as the potential applications of blockchain are necessary to know.
According to some statistical reports, the expenditure on blockchain all over the world is predicted to reach nearly $11.7 billion in 2022.
This is due to the fact that several startups along with quite a lot of major traditional financial institutions are showing their interest in this technology.
Apart from that, several other industries have also started to make the most out of the benefits that this technology offers and the momentum it provides.
Therefore, blockchain technology is not going anywhere and will revolutionize the service and production industries soon.
When this innovative technology is coupled with cryptocurrencies, the prospects are even improved further because it provides disruptions over and above the financial services sector in particular.
Regardless of the hype created by the media, the rapid pace at which these two technologies are evolving leaves no doubt that they will not slow down in taking over the financial system and may even replace the traditional methods of fund transfer in the years to come.
Therefore, overlooking the talk on bubble bursting, investing in blockchain-based cryptocurrencies can prove to be a very good investment.
It will surely provide much higher returns in the long term in comparison to the returns offered by the traditional stocks.
As blockchain technology continues to prove its utilitarian nature, it has been the fundamental aspect of innovation across several industries apart from cryptocurrencies.
With the increase in its awareness, uses, and benefits, it is just a matter of time when blockchain will also be associated with other applications.
As of now, three of the most innovative applications of blockchain are the finance sector, smart contracts, and cybersecurity.
It has enabled decentralized and faster transactions making them trackable and transparent and less vulnerable to attacks due to the most advanced cryptographic methods employed.
The non-technical fields are also finding blockchain to be useful such as healthcare, real estate, politics, education, and more.
This is all due to the powerful and secure way of verifying, storing, and encrypting data by blockchain technology.
You can own crypto coins from a variety of places if that is your sole intention. But, if you want a better and proper exposure to the blockchain technology ecosystem, then you must differentiate between crypto and blockchain.