Since the inception of Bitcoin in 2009 and its rise in popularity circa 2017, there has been much confusion as to what the difference between cryptocurrencies and their counterpart, the blockchain, really is. While the two technologies do go hand-in-hand, there are still fundamental differences between them. So what is the difference between cryptocurrencies and blockchains?
Bitcoin, being the very first cryptocurrency in existence, is still often used interchangeably with the term blockchain. This is because its initial presentation to the world was bundled with the use of blockchain as an overall solution to a potential monetary crisis. But now that Bitcoin has gained traction, this has lead to the proliferation of hundreds of other startup companies creating their own cryptocurrencies running on top of blockchains. Even more, industry-leading companies all over the world are beginning to integrate blockchain technology into their business models, but are not using cryptocurrencies in their processes.
So this begs the question: what are the fundamental differences between cryptocurrencies and blockchains if it’s possible to use the latter without the former.
What is a cryptocurrency?
Put simply, a cryptocurrency is nothing more than a digital asset, or a store of value. This is the “currency” aspect of its name. These assets are also digital and cryptographic, meaning that they utilize encryption techniques to make them digitally secure. Cryptocurrencies can also be decentralized assets, meaning they are not controlled by any one entity, such as a government, company, or bank, but are instead distributed and verified over vast computer networks. These unique qualities are what make cryptocurrencies valid tokens for financial transactions. Still, a cryptocurrency needs one more crucial tool to be fully realized: a blockchain.
Cryptocurrency transactions are conducted and recorded over a blockchain, which basically acts as a public ledger. A blockchain is a distributed network of nodes that verify every digital transaction taking place on the network. Once the transaction is recorded, its metadata can be viewed by any computer on the network, thus making it available for public scrutiny. Individual transactions — or “blocks” — on the blockchain are unalterable and anonymous, revealing no personal information about those involved in the transaction. This all adds levels of trust to the network that many centralized entities lack.
You don’t need a cryptocurrency to run a blockchain, however. You just need some sort of asset that needs to be tracked and transferred. Many companies are beginning to optimize their internal processes with blockchain technology because the same features that allow financial transactions to be verified can also be used to track and record company assets and business procedures. These are commonly referred to as “private blockchains,” because they’re mainly used internally. For example, businesses can implement “smart contracts” that automate business deals while also making them unalterable yet visible across the entire network; adding trust among all parties involved.
But it’s not just businesses that are taking on blockchain technology. Even municipalities can benefit from a blockchain. For example, voting systems that utilize blockchain technology are currently being tested around the world, and are providing a more robust and precise solution to forms of voter fraud. The applications for blockchains are multitudinous across many industries.
Another popular analogy for understanding the difference between cryptocurrencies and blockchains is that a blockchain is an underlying operating system while the cryptocurrency is an app built on top of it. This is the guiding principle of the widely known Ethereum blockchain.
So, cryptocurrencies depend on the foundation of blockchains to operate, but blockchains can exist without a cryptocurrency, and can instead be used to transfer other asset types. Businesses and municipalities are increasingly adopting private blockchains to streamline internal procedures. New and potential uses of blockchain technology are being discovered every year.