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The recent discussions surrounding the difference between blockchain and cryptocurrency in the media, without proper explanation, have left some people confused about what's going on in the world of digital assets. Considering Bitcoin came out in 2009, and thousands of alternative cryptocurrencies have popped up since then, I would say it is safe to say they'll be around for a while, so let's set the record straight.
With new and evolving cryptocurrencies arising, such as Facebook’s Libra, the two terms are becoming less synonymous than ever. If you think that cryptocurrency and blockchain are the same thing, then you are in the right place, because that is the first myth we will be busting.
MYTH: Cryptocurrency and blockchain are the same thing.
When Bitcoin first came out and it was the first and only cryptocurrency people used, the words blockchain and cryptocurrency were used interchangeably. However, today, with over 4,000 different cryptocurrencies, some not even using the application of blockchain, this is simply not true.
Busting the first myth: Cryptocurrency and blockchain are not the same thing. Bitcoin is one of many cryptocurrencies, and it has its own blockchain. Bitcoin cannot operate without the blockchain; however, the two are not synonymous.
You can think of a cryptocurrency as an actual "currency" or money, and a blockchain as the accounting system or record system for transactions. Cryptocurrency is something of value that you have, and, using blockchain technology, the crypto transactions are recorded. Blockchain is the alternative to a central banking system that traditional, fiat currency uses, while Bitcoin is the alternative to dollar or euros.
What is cryptocurrency?
A cryptocurrency is a form of digital currency, a means of exchange, which uses a strong cryptography. This cryptography controls the amount of currency in rotation, secures financial transactions, and verifies transactions.
A cryptocurrency is different from fiat currency, or traditional currency, in that it is decentralized, meaning that it works without central authorities. Transactions in the blockchain are verified by users or "miners," while a traditional currency uses a central banking system. Miners are rewarded for their work in cryptocurrency with decreased transaction fees.
Cryptocurrencies are typically volatile, due partially to the fact that there is limited government regulations in place, which allows for more market manipulation, as well as the fact that they are not backed by anything. Traditional currency is backed by gold. If a currency is not tied to any material thing, it is more difficult to determine its value.
Bitcoin's value is determined based on supply and demand. The current Bitcoin price can be found and traded on the Luno Exchange, and the price of Bitcoin at a specific time is determined by those trading on the Luno Exchange at the time.
You might have heard Bitcoin being compared to the stock market, with users investing in it, hoping to gain a profit. While owning cryptocurrencies is like playing the stock market because of its volatility, it is not backed by any companies, as stocks are. This is only one of the many major differences between cryptocurrency and stocks.
MYTH: Cryptocurrency is stored in a coin wallet.
With many banks today offering a "virtual wallet," which is just your online bank account, many people assume that a coin wallet is just a digital wallet that holds cryptocurrency; however, this is not the case. This all goes to further explain how cryptocurrencies use decentralized digital systems, as opposed to central banking systems. Everything is stored in open source code, rather than you actually having a physical coin of any kind.
Busting the next myth: Cryptocurrency is not actually kept in a "wallet" in a traditional sense of the word. Cryptocurrency is actually stored in the blockchain itself. The wallet actually contains two keys, one public and one private. The public key allows others to send you money, while the private key allows you to spend money. A wallet can be a physical wallet, a device, or a service that holds these keys.
What is blockchain?
In the simplest terms, a blockchain is the accounting system used by Bitcoin and other cryptocurrencies. A blockchain is a distributed ledger network of users, meaning that it is kept up to date by users who verify the transactions. Blockchain technology is the way that permanent and verified records are kept of all crypto-transactions.
The blockchain is comprised of blocks of transactions, each block containing a series of verified transactions. Each block contains a hash, think of this like an area code, which links it to the previous block, as well as the time and transaction details. The further back into the blockchain a transaction is, the more difficult it becomes to remove or change, therefore making the blockchain a reliable record of transactions made. This also validates transactions as a permeant means of record keeping.
The blockchain is in a chronological order, and with the use of hashes, one can identify where in the blockchain a specific block exists, meaning that the order will stay without disruption.
Blockchain technology keeps a record of transactions, which is done by blockchain validators, who are just users who take on the responsibility of validating transactions and assuring they are legitimate. Those who accept Bitcoin as payment wait a certain amount of time, typically until a payment is six blocks deep (meaning that a number of transactions have taken place after that one), making it irreversible before they consider it confirmed. This prevents users from being unsure if a transaction went through and sending it twice.
One important fact about blockchain technology is that it has been created on an open source code. Open source code does not necessarily need to be created or kept by one person or company. It is created to benefit the whole, rather than a product created by a company to make money, kind of like a community garden. No one person or company owns "Bitcoin," and similarly, no person owns the software that it runs on.
Blockchain is not exclusive to crytopcurrencies.
Many people, when they hear the term blockchain, immediately think of Bitcoin and cryptocurrencies; however, there are many applications of blockchain outside of financial services, such as smart contracts, in which the human processes of creating a contract and checking that all requirements are met are replaced by a blockchain.
Another example of something that Blockchain can be used for is supply chains. They can improve them by keeping a detailed and exact record of production and processes so that one can easily keep track of their supply chain at any given time in transaction history.
Bitcoin and Altcoins
Bitcoin is the most well-known cryptocurrency, it was developed by Satoshi Nakamoto, which is a pseudonym. We do not know who the true creator or creators are.
Bitcoin is generally accepted to be the first cryptocurrency, its open source software was released in 2009. Since the creation of Bitcoin, over 4,000 altcoins have been created.
Altcoins are any cryptocurrency besides Bitcoin. One of the most popular altcoins is Litecoin, created in 2011, which is similar to Bitcoin, but verifies transactions quicker by having a faster block generation rate. Some users believe that Litecoin is better than Bitcoin, and other popular coins are Ethereum, Zcash, and Dash.
MYTH: All Cryptocurrencies use blockchain.
The truth is, not all all cryptocurrencies use blockchain. However, those that do not use blockchain technology use a similar ledger. One cryptocurrency called IOTA uses a distributed ledger called "tangle," and the reason for this choice was based on cost.
IOTA uses "tangle" instead of blockchain because blockchain is extremely expensive. All cryptocurrencies use a distributed ledger technology, which are the nodes that record, and share, transactions.
Understanding cryptocurrencies can be confusing because it goes against everything we know about traditional currency. However, once you better understand the difference between blockchain and cryptocurrency, it doesn't seem so impossible anymore.