Cryptocurrency immediately comes to mind whenever the word blockchain is said. Contrary to common perception, they are not the same and are not frequently used interchangeably. Blockchain technology is used by cryptocurrencies, a sort of digital currency.
One of the most important developments linked with blockchain technology is cryptocurrencies. Cryptocurrencies are digital forms of money that are secured by blockchain technology, allowing for secure and efficient monetary transactions.
What is the difference between cryptocurrencies and blockchain technology? And how do they work together?
To know more about how cryptocurrency and blockchain work together, let’s dive into the definition of cryptocurrencies, blockchain technology, and how they work below.
What are Cryptocurrencies?
One article from PWC showed that cryptocurrency is a digital or virtual currency that uses cryptography for security and operates independently of a central bank. It is a decentralised form of cash that can be exchanged and transferred online without intermediaries like banks.
Cryptocurrencies are typically built on blockchain technology, a decentralised ledger that records and verifies transactions.
To better understand cryptocurrency, let's use an analogy.
Imagine a group of friends who love to play poker. They often meet up to play, and each person brings their own set of chips to the game. The chips are used as a form of currency, with each chip representing a certain value, and they are traded between the players as bets are placed and the game progresses.
Bitcoin, Ethereum, Litecoin, and Ripple are examples of cryptocurrencies.
How do Cryptocurrencies work?
Cryptocurrencies operate independently without the need for a central bank. Hence the government or any other central regulatory authority has no control over cryptocurrencies. As a concept, it uses several brands or types of coins, Bitcoin is the leading player operating outside of the banking system.
1. Mining
Cryptocurrencies are generated through a process known as "mining," which is entirely digital. This procedure is complex. In short, miners get paid with bitcoins in exchange for using specialised computer systems to solve specific mathematical puzzles.
A person could mine one bitcoin in an ideal environment in about ten minutes, but it typically takes about thirty days in the real world.
2. Purchasing
Users can buy or sell cryptocurrencies from brokers, exchanges, and individual currency owners.
After being purchased, you can keep cryptocurrency in digital wallets. You may know the term "hot" or "cold" digital wallets. A hot wallet is connected to the internet, which makes transactions simple but leaves it vulnerable to fraud and theft. Cold storage, on the other hand, is safer but makes transactions more challenging.
3. Transaction
Only using a smartphone are you able to transfer cryptocurrencies like Bitcoins between digital wallets. Then you have the option to do some action below:
- Spend it on products or services
- Sell them
- Exchange them for cash
The simplest way to make purchases with Bitcoin is through debit-card-style transactions, where you can make cash withdrawals just like at an ATM. Through banking accounts or peer-to-peer transactions, it is also possible to convert cryptocurrencies to cash.
What is Blockchain technology?
Blockchain is a peer-to-peer decentralised ledger system that works without a middleman third party, making the records of any digital asset transparent and immutable, according to Blockchain-council.
The public’s attention gets to blockchain technology for its scalable capacity to eliminate fraud and hazards.
To understand how blockchain works, let's use an analogy.
Imagine a group of friends at a picnic who decide to play a game of telephone. One person whispers a message to the person next to them, who then whispers it to the person next to them, and so on. By the time the message reaches the last person in the circle, it has often been distorted beyond recognition.
Just like the game of the telephone, blockchain technology relies on a network of participants to verify the validity of each transaction. This is known as a consensus mechanism, which ensures that all participants agree on the state of the ledger.
How does Blockchain technology work?
While blockchain is still primarily used to record and store transactions for cryptocurrencies like Bitcoin, its proponents are developing and testing alternative uses for blockchain. Here is how blockchain works, according to Synopsys.
1. Money transfers and payment
Blockchain for money transfers and payment processing. Banking transfer fees may be reduced (or eliminated) and transactions performed through a blockchain may be finalised quickly.
2. Monitoring the supply chain
Businesses might use blockchain to swiftly identify bottlenecks in their supply chains, locate products in real time, and monitor how well they operate from a quality-control viewpoint as they move from manufacturers to retailers.
3. Digital ID and data sharing
To assist people to manage their digital identities and give them control over who has access to their data, Microsoft is testing blockchain technology. Blockchain can act as a middleman to safely move and store commercial data between industries.
4. IoT Network Management
Blockchain technology has the potential to be used to build a decentralised database that guarantees the preservation of music rights and rewards musicians with transparent and real-time royalties. Blockchain might also similarly benefit open-source programmers.
How do cryptocurrencies and blockchain work together?
As we mentioned before, a blockchain is a decentralised ledger of all transactions on a network. When a user sends or receives cryptocurrency, that transaction is added to the blockchain as a new block.
Each block contains a record of the transaction and a unique identifier, known as a hash. The hash serves as a digital fingerprint for the block, making it virtually impossible to alter the data in the block without changing the hash as well.
Here are how cryptocurrencies and blockchain work together:
1. To facilitate transfer and exchange
Although conventional banking procedures are time-consuming, the financial sector wants to make transfers and swaps simple. Blockchain transactions are quick, easy, and secure.
Additionally, they provide users with the convenience of conducting business directly with one another and do away with the necessity for intermediaries like banks. Further, it promotes openness and security because every transaction is documented and finalised.
2. Cybersecurity
Blockchain technology is decentralised, thus a hacker cannot focus on a single point. Blockchains are the most secure storage because of the distributed contents. It is also easy to find changes that were made without permission.
3. NFTs
Because of their uniqueness, NFTs (Non-fungible Tokens) are rapidly rising in popularity. They represent possession of a resource. Currency can be anything, either a piece of art or a digital object like coins. They routinely work in the metaverse and as a result, they are also created using blockchain technology.
4. Smart Contracts
Smart contracts are transparent, self-executing, and secure. They were introduced by the most recent blockchain technologies.
These smart contracts keep track of the terms of the agreement, and they automatically carry out as soon as the parties meet their obligations. As a result, they can serve a variety of functions, which can drastically reduce business expenses.
Wrapping Up
It is obvious that blockchain technology and cryptocurrencies are connected. Blockchain and cryptocurrencies can coexist, but they work together to enhance the efficiency, safety, and security of transactions.
Blockchain offers users a secure payment platform while helping in preventing fraud and corruption by decentralising data. Furthermore, by allowing parties to create contract terms in a secure manner, the usage of smart contracts improves confidence between parties.
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