Cryptocurrency vs Blockchain: What's the Difference?

At first glance, cryptocurrency vs blockchain may sound like similar terms. What’s the difference, you might ask. There actually is a clear and distinct difference between these two concepts which we will explore.

Whenever digital assets are mentioned, the terms cryptocurrency and blockchain are often used interchangeably.

Given the depth of complexity and technicality of this new technology, it can often be confusing to understand the myriad of terms and concepts surrounding digital assets.

There is a fundamental difference between these two concepts.

This article will explore the differences between cryptocurrency vs blockchain technology, with the aim to explore the nuances and features of these seemingly interchangeable terms.

History of Cryptocurrency

In 2008, an anonymous user by the moniker Satoshi Nakamoto published a white paper that illustrated a novel and ground-breaking technology that functions as peer-to-peer digital cash, called Bitcoin.

At that time, Bitcoin was deemed to be a revolutionary innovation since its underlying technology has solved fundamental issues within the realm of computer science and cryptography that had spanned decades.

Although there had been several digital currencies prior to Bitcoin, the architectural system of Bitcoin and its cutting-edge consensus mechanism culminated into a superior technology with the ability to disrupt the definition of money.

Bitcoin is therefore credited with being the first-ever decentralized cryptocurrency.

Read more: Middle East Bitcoin Guide: Five Ways to Get Bitcoin

Differences Between Cryptocurrency vs Blockchain

In order to understand the differences between cryptocurrency vs blockchain, it is important for us to understand the context of these two terms.

Cryptocurrency: Medium of Exchange

Cryptocurrency is defined as 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. You can use cryptocurrency to pay 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.

The first decentralized cryptocurrency that was created is Bitcoin, which functions as peer-to-peer digital cash that is free from the control of intermediaries such as banks and governments.

Since then, there are currently over 2,100 coins that are traded on public exchanges, with thousands more that have been created but have not been listed on cryptocurrency exchanges.

Since Bitcoin is the first decentralized cryptocurrency to be created and represents the first implementation of blockchain technology, it is easy to automatically assume that both terms are one and the same.

Cryptocurrencies, therefore, are a measure of value on the underlying network and can encompass a wide variety of utilities and use cases.

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Types of Cryptocurrency Use Cases

The use of cryptocurrency has often been associated with being a means of payment. However, there are different use cases that cryptocurrencies can be used for.

Currency: The most obvious and original use case of a cryptocurrency is being a form of currency that is used to pay for goods and services external to the native network. This use case falls under the same category of any other currency, be it major fiat currencies that include USD, CAD, EUR, or JPY. In the case of Bitcoin, users can pay for any kind of product and service globally if the merchant accepts cryptocurrency as payments.
Utility: Most cryptocurrencies possess a utility other than a means of payment. This is usually in the form of 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 benefits and can confer token holders various advantages such as voting rights and discounts on the services offered by the platform in the future.
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 be represented by digital coins. The most obvious use case of this is stablecoins, which are cryptocurrencies 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: Some coins function primarily as an investment asset, with the main purpose of providing purely financial returns to holders. This can 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 must be mentioned that a cryptocurrency can possess a mix of different functions specified above. This means that a coin can be a currency, a utility coin, and also represent an asset at the same time. It does not necessarily mean that a coin is confined to one specific function.

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Coins vs Tokens

Moving in deeper into the realm of cryptocurrencies, there is a fundamental difference between a coin and a token, which is often used synonymously to represent a cryptocurrency.

On a technical level, coins are cryptocurrencies that possess their own native blockchain. For instance, 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 Waves.

Tokens, on the other hand, are a representation of a particular asset or utility, that usually resides on top of another blockchain.

Instead of reinventing the wheel and creating their own native blockchain, cryptocurrency projects would use the existing infrastructure and tools from an existing blockchain and issue their own tokens.

This means that tokens do not possess their own native blockchain since they leverage on existing blockchains.

The most popular blockchain platform for cryptocurrency projects to issue their own token is the Ethereum blockchain. More than 85% of tokens that are publicly traded are built on the Ethereum blockchain.

Blockchain: Technology That Powers Cryptocurrency

Let’s take a look at uncovering the second part of the equation between cryptocurrency vs blockchain.

The technology behind cryptocurrencies is called blockchain, which is defined as a shared ledger that records all transactions and is controlled by a distributed global network of computers.

The revolutionary features of cryptocurrencies that we are all aware of – transparency, immutability, decentralized – are a direct effect of the ground-breaking innovation of blockchain technology.

Prior to the creation of Bitcoin and blockchain, digital currencies were easy to hack and replicated. Blockchain is considered a revolutionary innovation as it solved the long-standing issues of centralized digital coins in the past, by facilitating a common record of truth between all participants in the network.

There is no central authority that manages the records or 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 transaction that occurs using a cryptocurrency involves two main parties:

Sender and Receiver: Users that send cryptocurrencies to each other
Miners: Individuals in the network that validates and secures the transaction

Miners have an important role in securing the network; they validate transactions by using cryptographic techniques and get rewarded in the native coin for their work.

On a greater scale of things, the blockchain itself is the infrastructure that supports the cryptocurrencies within the network.

There are many applications of blockchain technology, not just being a medium of exchange as with the case of Bitcoin.

Applications of Blockchain Technology

There are numerous use cases for blockchain technology that can be used to positively impact our lives. Here is a look at some blockchain applications:

Smart Contracts: A ground-breaking functionality of blockchain technology is that it allows for the creation of smart contracts. Smart contracts are self-automated, programmable contracts in the digital world. This eliminates the third-party the third parties that are required for traditional contracts and automates the entire process thereby streamlining the workflow 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 sensitive data such as your personal identity, there are numerous risks that must be considered to ensure that one’s identity does not fall into the hands of a bad actor. Blockchain offers a wide range of solutions when it comes to authenticating one’s identity in an immutable, secure, and irrefutable manner.
Supply Chain: Blockchain can streamline the entire supply chain that is accustomed to legacy systems that are slow, inefficient, and largely a manual process. The ability to proactively provide digitally permanent, auditable, and transparent records for all stakeholders within the system would provide a great deal of efficiency and accountability. Imagine if you could have the ability to track your ordered goods transparently from the start of the process until the time where you receive them.

There are many more use cases of blockchain technology that can disrupt the status quo. As long as there is data, a blockchain is equipped to handle and streamline the entire workflow process.

Read also: Disrupting Finance: How Blockchain Can Streamline Capital Markets

Summary

The term cryptocurrency vs blockchain technology has often been conflated but they are distinct concepts that are often misunderstood by many.

Blockchains are the underlying technology that serves as the fundamental infrastructure for cryptocurrencies to operate on, while cryptocurrencies are the representation of value that can be transferred from one party to another.

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