Many people are still only beginning to learn about the blockchain industry. The terms blockchain and cryptocurrency are commonly used interchangeably.
Some people tend to think of them as mere synonyms. Even more perplexing for those unfamiliar with the vocabulary of the industry is the way that marketing strategies frequently muddle the terms.
In our earlier articles, we talked about blockchain and defined cryptocurrency. However, there is a key distinction between the two, which you’ll find out as you read this article.
Here is a simple way to think about the difference:
Try to picture yourself in a casino.
You go inside and swap your money for chips. These chips have no real purchasing power outside of the casino where you can use them to gamble.
In this example, the "chips" are digital currency coins, and the "casino" is the blockchain network, which offers an ecosystem of participants, places coins into circulation, and permits transactions with them.
With that in mind, let's discuss the origins of this distinction and why it is so significant.
Blockchain is a distributed ledger technology that keeps track of and links transactions.
To better grasp this idea, think of a blockchain as beads sliding onto a necklace.
For the necklace to be complete, each bead must be strung one after the other. Each of those beads represents a block on a blockchain, and each block is made up of a collection of transactions.
Three parties—the sender, the recipient, and the miner—contribute to the validation of each transaction through a consensus algorithm (like proof of work).
The participants in the transaction are merely the senders and recipients. The network's miners are those who verify transactions.
They are granted the authority to produce the subsequent block and validate the transactions that comprise it if they solve a mathematical problem the fastest. They are compensated with whatever cryptocurrency, such as Bitcoin, is currently being used on that blockchain network.
You'll understand why it's vital if you compare this model to something like Facebook. Early Facebook users and programmers who introduced games and features raised the platform's worth, yet they were never paid for it.
They may have received some financial compensation, but they were unable to benefit from Facebook's advantages. The corporation and its shareholders received the entirety of the rising value.
Coins appreciate in value when more users start using blockchain. And when their worth rises, the creator is more motivated to include new features, and platform developers are more motivated to keep working on it.
Cryptocurrency is the first application built upon blockchain technology.
Most misunderstandings stem from this, unfortunately.
People view Bitcoin and other cryptocurrencies as interchangeable since they were the initial blockchain use cases. Actually, the various cryptocurrencies are merely one use of blockchain technology.
Because of their speculative value, cryptocurrencies have gained widespread attention. For example, many people see Bitcoin as an investment opportunity, especially in light of the price increase from the previous year.
However, there are problems with that theory as well.
A cryptocurrency worth $40,000 could easily and suddenly change to $20,000 or $60,000 if the coin's value is volatile. Thus, when investing in cryptocurrencies, the participant must consider that risk.
There are blockchain platforms without cryptocurrencies – and they might be a preferable option in some situations.
As was mentioned, cryptocurrency is simply an application that runs on top of a blockchain. Without coins, the model is slightly different, but it is still possible to develop a useful platform.
The blockchain technology has a ton of potentially beneficial applications. Here are a few examples of how blockchain technology is being used in both business and daily life.
Lending
On the blockchain, lenders can utilize smart contracts to carry out collateralized loans.
Simply put, smart contracts are blockchain-stored programs that execute when certain conditions are met. The execution of a contract is typically automated so that all parties may be certain of the outcome immediately, without the need for an intermediary or a delay.
A service payment, a margin call, full loan repayment, and collateral release are just a few examples of automatic triggers that can be included into smart contracts that are constructed on the blockchain.
Because loan processing is expedited and costs are reduced as a result, lenders can offer better rates.
Insurance
If smart contracts are implemented on a blockchain, both customers and insurance providers may gain from increased transparency.
Customers would be discouraged from filing duplicate claims for the same event if all claims were recorded on a blockchain. The process for claimants to receive payments can also be accelerated by the use of smart contracts.
Real estate
There is a ton of documentation involved in real estate transactions in order to transfer titles and deeds to new owners after verifying ownership and financial information.
Real estate transactions can be documented using blockchain technology, which can offer a more accessible and safe way to verify and transfer ownership. This can expedite transactions, lessen paperwork, and result in cost savings.
Secure personal information
Using a public ledger, like a blockchain, to store information like your Social Security number, birthdate, and other identifying details may be more secure than using current systems that are more prone to hackers.
Blockchain technology can be used to protect access to identifying information while improving access for those who need it in industries such as travel, healthcare, banking, and education.
Voting
We are one step away from being able to vote using blockchain technology if personal identifying information is stored on a blockchain.
By using blockchain technology, it will be possible to prevent electoral fraud and ensure that no one can vote more than once.
Furthermore, by making voting as easy as pushing a few keys on a smartphone, it can expand voter participation. Additionally, the expense of running an election would significantly drop.
Conclusion
Cryptocurrencies are a component of the blockchain ecosystem, which is the underlying technology. They go hand in hand, and using a blockchain for transactions frequently requires the use of cryptocurrencies. However, without the blockchain, we wouldn't have a way to record and transfer these transactions.
If you want to dig deeper into blockchain and cryptocurrency, you can read our “Blockchain: Why Decentralize?” and “Can Cryptocurrency be Taxed?” blogs.
Want to learn more about the future of technology? Stay tuned for our upcoming blogs where we’ll be discussing Web 3.0!-