While everyone has heard about crypto, many don’t fully understand how it works or what the underlying blockchain technology is all about. If you are one of those that don’t quite follow, we don’t blame you. Because the concept is complicated and the terrain intimidating. But not to worry, because we are in the business of making things simple.
What is a blockchain?
Blockchains are distributed ledgers used by a network of computers. By “distributed,” we mean public to all participants of the network. So anyone on the network can add to or view it. In other words, blockchains store a record of all transactional data.
The data is secured through cryptography. Network participants compete with each other—in one way or the other—and the winner gets to verify a block of data. Post verification, the blocks are connected to all previous transactions through a chain-like structure. This chain of blocks containing transactional information is the blockchain.
Because of their chain-like form, which ensures that each change is captured, blockchains are very difficult to tamper with. These blockchains, therefore, make security, transparency, and decentralization possible.
What is cryptocurrency?
A cryptocurrency is a virtual digital asset. Units of cryptocurrency are called coins or tokens. Cryptocurrencies can be traded or held in wallets. They are usually associated with specific projects. So MANA, for instance, is associated with the decentralized gaming metaverse project Decentraland.
Some popular cryptocurrencies available in the market are Bitcoin (BTC), Ethereum (ETH, Polygon (MATIC), and Tether (USDT). Bitcoin is the world’s largest cryptocurrency by market cap. All other cryptos take their lead from Bitcoin and are, therefore, called altcoins.
How blockchain and crypto are related
Blockchains and crypto are some of the 21st century’s most significant innovations. Some use the terms interchangeably, but that’s not quite right. They are interconnected concepts that support each other, but they are two different things.
To elaborate, cryptocurrency is a type of digital or virtual asset that uses cryptography for security. It is decentralized—meaning it is not controlled by any single entity, like a government or bank. On the other hand, blockchain is a distributed database that maintains a growing list of records, which is secured and linked using cryptography. Crypto and blockchain are, therefore, wholly different things. So how are they connected?
Well, crypto transactions are verified in a decentralized manner due to blockchains. Each crypto transaction is recorded on the blockchain. All transactions are verified and preserved in batches called blocks. When a new block is verified, it is connected to all previous blocks, forming the chain-like ledger called the blockchain.
While blockchain technology is the foundation of most cryptocurrencies, the emergence of crypto has, in turn, fueled the further growth of blockchain technology. Crypto has successfully demonstrated how useful blockchain technology could be by using it to create a secure, transparent, and decentralized system for conducting financial transactions. It has made the advantages of blockchains—such as the reduced risk of fraud and user anonymity—apparent. It has thus become the flagbearer of blockchain technology.
Crypto and blockchain together represent the promise of a secure and transparent financial system. They are reshaping how we imagine financial transactions, institutions, and our own future.
The difference between blockchain and cryptocurrency
If you’ve understood the similarities between blockchains and cryptos, the differences should be obvious too. But just to be clear, here’s a list of differences:
- Basic nature: Crypto is just the most well-known application built on blockchain technology. They are completely different, although deeply intertwined. In contrast, blockchain is a storage technology for saving data on decentralized networks. Cryptocurrency is a medium of exchange. A blockchain and its underlying technology can be used for storing different types of applications beyond cryptocurrency.
- Transactional Value: One of the most striking differences between blockchain and crypto is in relation to their transactional value. Crypto is meant to be used in transactions, whereas blockchain is the technology that facilitates those transactions. However, blockchain has several use cases, and its versatile nature exceeds the borders of the financial sector. Blockchain technology is employed to maintain records in governance, retail, and healthcare, whereas crypto has limited use.
- Transparency: In the case of blockchains, transparency refers to the fact that the ledger of transactions is publicly available for all network participants to view. So, any of these participants may verify the details of transactions. Crypto, on the other hand, shields the identities of the individuals or entities involved in the transactions. So while transparency is limited in the use case of crypto, it is not so with blockchains.
What are the use cases of blockchains apart from crypto?
Crypto is to blockchain technology what french fries are in relation to deep frying. Blockchain technology is like the method of deep frying, and cryptocurrencies are like french fries. You could deep fry many things, but arguably, one of the most loved dishes is the potato-based dish. Crypto is like that—one of blockchain technology’s best products.
Deep frying, on the other hand, can be used to create other culinary delights. Like samosas or vadas. Similarly, blockchain technology has many potential uses beyond the realm of cryptocurrency.
Let’s look at some of them:
- Banking: In the world of traditional finance, blockchains are used quite differently from crypto. Several governments around the world are experimenting with Central Bank Digital Currencies (CBDCs) built on the blockchain. With the development of such CBDCs, a bank could use blockchain technology to record and verify customer transactions while reinforcing the use of fiat currencies. The technology will simply help reduce the risk of fraud and make the financial system more efficient.
- Medical sector: Blockchain technology is being adopted by the medical sector to create secure and decentralized systems for the storing and sharing of medical records. This use case is still in its nascent stage. But, if successful, it could help improve the accuracy and accessibility of medical records while protecting the privacy of patients.
- Supply chain management: Another use of blockchains is in relation to the management of supply chains. Blockchain technology makes supply chains more efficient by helping track the movement of goods. It also improves the transparency of supply chains by detecting and preventing issues such as counterfeiting.
- Identity management: Blockchain could be used to create secure and decentralized systems that verify the identities of individuals or organizations.
What the future holds for both
Both crypto and blockchain are still in a nascent stage. They have been in existence for just over a decade now, and their full potential is yet to be explored. But the good news is that they are increasingly becoming mainstream.
Startups and traditional institutions are increasingly seizing the moment when it comes to blockchain technology. And with venture capital tapping into the scene, the technology’s evolution can only speed up. According to a KPMG report released in September 2022, venture capital firms poured $14.2 billion into crypto in the first half of this year alone. If that’s not promising, then we don’t know what is.