The language of the cryptocurrency world can be confusing. Blockchain and cryptocurrency are words that get used interchangeably by all kinds of people in the industry. It’s confusing for newcomers, but it’s important to understand the differences. A mix up could lead to an embarrassing situation with a friend or colleague, or at the extreme, even the loss of your money on a trade.
Let’s take a look at what ‘blockchain’ and ‘cryptocurrency’ really mean, how they are different from each other, and where exactly all this confusion came from in the first place.
The word blockchain refers to the technology behind cryptocurrencies. It refers to the way the information (or ledger) for a network is set up. Technically, it refers to a chain of sequential blocks that are linked together by clever cryptography in a way that makes it very difficult to forge or modify the data stored on the chain, but easy to check that it is correct.
It’s this ingenious technical design that made decentralized networks possible. Before, networks had to be designed as a centralized system. One where everyone using the network had to trust a central node that controlled all of the data. With blockchain technology, it became possible for people to start building networks that didn’t need a central authority to operate. This is what Satoshi Nakamoto published in his whitepaper: Bitcoin: A peer-to-peer electronic cash system.
Bitcoin was the first every network to launch using blockchain technology. Since then, many more blockchain networks were launched and came to life. Some examples of blockchain networks include Bitcoin, Ethereum, Ripple, Bitcoin Cash, Eos, Litecoin, and NEO.
Not all blockchains operate the same way. Some, like Bitcoin and Ethereum, use a system called Proof of work to cryptographically link the blocks in the chain. In this system, miners compete to solve very difficult cryptographic problems. The winners get to use their solution to link the blocks and receive a reward for doing so. This was the first type of blockchain network, but it’s very energy inefficient. It’s estimated that the amount of power used to secure the Bitcoin blockchain is about the same as the entire power consumption of Switzerland.
Now, other mechanisms for linking the blocks on a blockchain network are being explored. Proof of stake is a newer method that doesn’t require excessive power consumption. Delegated proof of stake is another option that allows for greater speed and scalability.
Cryptocurrency is a currency that’s underpinned by cryptographic technology. Unlike blockchain, cryptocurrency is not a technology itself. Technically, the definition of a cryptocurrency is a specific implementation of a digital currency that meets certain conditions. It’s a currency network that doesn’t require a central authority, where ownership of the currency can be proved using cryptographic techniques.
You can think of cryptocurrency as more of an asset class than a technology or an algorithm. Bitcoin is a cryptocurrency that’s built using blockchain technology.
A blockchain network can have applications other than a cryptocurrency. For example, the Ethereum network can be used for all sorts of decentralized applications. Its native cryptocurrency, Ether, or (ETH), is used as the fuel to power the applications.
All of the networks mentioned above have their own cryptocurrencies. For example, the native cryptocurrency of Ethereum is Ether, Bitcoin is Bitcoin, and Ripple is XRP.
Blockchain: Not Necessarily a Currency
Blockchain is just the method by which a group of users (or nodes) on a network come to a consensus. It’s a way of forming trust between many people over the internet who don’t actually trust each other. A blockchain network shouldn’t necessarily have a cryptocurrency associated with it. Although, the vast majority of them do at the moment, which is where all the confusion comes from.
However, in the future, as blockchain technology evolves, there are endless possibilities for applications outside of digital currency. Some examples include:
- A decentralized voting system, where votes are placed and verified on a blockchain
- Item tracking and supply chain certification, providing verifiability and immutability of information across locations and time
- Decentralized data storage, where data is distributed across many devices, but only able to be pieced together by the owner
- Identity verification, where a record of all relevant documents are stored securely on a blockchain and can’t be changed retrospectively
Cryptocurrency: Not Necessarily Blockchain
An interesting point is that cryptocurrencies aren’t limited to blockchain technology. Most of them are at this point, but it’s certainly possible to have a cryptocurrency that meets all of the criteria of a decentralized, cryptographic digital currency without using a blockchain at all.
One example is IOTA. IOTA is a distributed ledger network, like Bitcoin, but it doesn’t use blockchain technology. It has its own native cryptocurrency, but it isn’t actually a blockchain network at all. It uses something else called The Tangle, a way of operating a distributed ledger without using a chain of blocks. Instead, transactions are linked to each other in the form of a graph called a directed acyclic graph. You can think of The Tangle as a generalized form of a blockchain, with better flexibility.
Proponents of the IOTA network claim that it’s a next-generation decentralized network. As more ideas are thought up and tested, we can expect to see more non-blockchain decentralized networks potting up.
Definitions Will Continue to Evolve
Now you know the true meaning of blockchain and cryptocurrency, their differences, and why one doesn’t always imply the other. However, it’s a good idea to keep educating yourself on the specific terms in the fast-changing crypto industry.
A few years ago in the early days, the term Bitcoin was used to describe all blockchain networks. Now, our vocabulary has evolved and become much more specific. As blockchain technology and cryptocurrencies keep rapidly evolving, and so do the language we use to define them.