The word blockchain and cryptocurrency are often confused with each other. However, both words have very different meanings and are used differently in the crypto space. This article will identify each of these words and explain what they mean in great detail.
What Is Blockchain?
A blockchain is a peer-to-peer ledger system that allows peers to transact among themselves without the interference of a central authority or intermediary. Peer-to-peer networks are built to be decentralized and to ensure complete decentralization, each peer on the peer-to-peer network is tasked with carrying a copy of the ledger.
Each digital transaction on the blockchain is timestamped to prevent tampering with data. The blockchain also solves the problem of double records or transactions by using this technique.
As a result, digital documents created on a blockchain are usually difficult to edit or change. As previously stated, blockchains are used for securing transactions without relying on third parties or intermediaries.
How Do Blockchains Operate?
There are several components to a blockchain. The blockchain depends on all of these components to function effectively. Let us consider some of these components.
In a blockchain, information is stored in blocks. The type of information in a block varies depending on the blockchain you are on. Bitcoin blocks, for example, indicate the Sender, the Receiver, and the number of Bitcoins being transferred.
The first block in a chain of blocks found in a blockchain is called the genesis block. Additionally, new blocks in a chain of blocks created in a blockchain are attached to the previous block.
A blockchain is made up of the hash of a new block and the hash of the previous one. A hash is similar to a fingerprint because it can be used to distinguish one block from another on a blockchain.
Proof of work can be explained with a real illustration.
- Take for example precious metals like gold or silver. These metals can also be used as a medium of money. Hence, gold can be viewed as money because it is very valuable. However, gold is valuable because it is scarce to find and the process of mining new gold from the earth is tedious and can be referred to as hard work or work. This process of mining or work creates new gold.
- Likewise, bitcoin mining creates new bitcoin through hard work done by computers. This hard work or proof of work involves validation of transactions on the bitcoin blockchain. Solving the computational problems of transaction validations is often tedious and requires specialized computers. This added difficulty makes it challenging to tamper with information in a blockchain.
Although, proof-of-work mechanism is more complex than what is explained above, this illustration explains the basic concept behind it.
Distributed Peer-to-Peer Network
As an added layer of security, blockchains use distributed peer-to-peer networks to verify transactions on their network. This system removes data storage from a central party and replaces it with a distributed network of individuals who verify transactions on the network.
New members on the distributed network receive a copy of the blockchain and act as nodes. Computers on the distributed network are called nodes. On a blockchain that uses a distributed peer-to-peer network, all nodes need to verify the creation of a new block. It is not possible to add a block to the blockchain until this process has been completed.
Importance of Blockchains
Blockchain technology has gained popularity due to several reasons. Some of which include:
Resilience: It is often the case that blockchains are duplicated. As a result, blockchains can still be operated in case of massive attacks.
Reliability: Using blockchain, parties can verify the authenticity of transactions. It reduces rates and speeds up transactions by removing double records.
Time reduction: Blockchain technology allows faster trades settlement since it does not require lengthy verification processes.
Fraud prevention: As a monitoring mechanism, blockchain reduces costs for logistics-related industries. Additionally, it is very effective as a fraud prevention mechanism.
Transparency: Anyone can view changes to public blockchains. As a result, transparency is enhanced, and transactions cannot be altered.
What are Cryptocurrencies?
Cryptocurrencies are digital currencies that are accepted as a way to pay for goods and services. Similar to fiat money, digital assets can also be used as a store of value; this means that cryptocurrencies have the potential to increase in value or remain at the same price over time.
Digital currencies differ from physical money in many ways. For example, fiat money is printed as physical notes, while crypto assets are digital. Additionally, nobody controls cryptocurrencies, while fiat money is created and controlled by central banks worldwide. Finally, digital assets are stored in an online crypto wallet, while banknotes can be stored in a bank account, physical wallet, or personal safe.
Currently, there are over 10,000 cryptocurrencies in circulation in the digital space. Some of these digital assets include popular tokens like Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), Solana (SOL), Tether (USDT), Cardano (ADA), Ripple (XRP), and Litecoin (LTC).
How Do Cryptocurrencies Operate?
Most digital currencies are built to function on a blockchain. As a result, these digital currencies are secured using powerful cryptography. Cryptography is a security system used for securing data and communications using codes.
In cryptocurrencies, cryptography ensures that each crypto transaction is secure. It also helps to maintain the independence of digital assets from centralized control. Additionally, the system also helps prevent double-spending and the creation of fake assets.
Blockchain technology is what makes cryptocurrencies transactions possible. As previously stated, a blockchain is a network of many computers worldwide that pool together computing power to validate the network operations.
As previously stated, blockchains are peer-to-peer ledger systems that allow peers to transact among themselves without a central authority. Decentralization is a key feature of these peer-to-peer networks; to ensure complete decentralization each peer on the peer-to-peer network is tasked with carrying a copy of the ledger.
Advantages of Cryptocurrencies
There are several advantages attached to transactions involving cryptocurrencies. In this section we will consider a few of these advantages.
Faster and Cheaper Transactions: Crypto transfers are simpler and more straightforward when compared to transactions involving fiat currencies. The process is quick, simple, and cheap with no agents, commissions, or brokerage fees involved.
Confidential and Secure: Using cryptocurrency is secure, anonymous, and encrypted. It is impossible for anyone to snoop on your financial activities or view your account history, like banks do. The only user who has access to the recent transactions is you.
Access to financial freedom for the unbanked: Cryptocurrencies offer people who have no access to bank accounts the chance to carry out financial transactions using their mobile devices. This is a possibility since crypto traders are not required to provide their personal information before creating a cryptocurrency account.
Fast international trade: By using crypto, users can transfer money from one part of the world to another part in a matter of seconds instead of days. This significantly reduces the wait time attached to previous bank transfers.
Difference Between Blockchains and Cryptocurrencies
Blockchains are very different from cryptocurrencies and function differently from digital assets. In this section of our article, we will consider several differences between these concepts.
|Blockchain is the technology behind most cryptocurrencies||Cryptocurrencies are digital assets that can be used for buying and selling products and services|
|Blockchains are ledgers that are used to keep track of cryptocurrencies||Digital assets are not ledgers but they require ledgers to document their movement.|
|Cryptocurrencies can not exist without blockchains||Blockchains can exist without cryptocurrencies|