Sometimes, people use the terms digital currencies and cryptocurrencies interchangeably. While each term is related to the other, they’re far from one in the same. It’s important to understand both the similarities and distinctions between these two concepts. Cryptocurrencies and digital currencies alike may see explosive growth in the near future. By then, each term could become ubiquitous in our daily lives.
Here’s a quick overview of these terms and how they’re related:
What Is A Digital Currency?
In simple terms, a digital currency is an online-only form of currency. Such currencies work like traditional currencies, except they don’t exist in paper or physical form. Holders can send and receive funds from other accounts. Likewise, they can make purchases and complete transactions whenever necessary. These currencies come with more traditional protections because they’re centralized. No digital currency is burdened by political borders or geography.
Digital currencies mostly work like physical US Dollars or Euros.
What Is A Cryptocurrency?
On the other hand, a cryptocurrency is a type of digital currency with the goal of securing the exchange process. Each cryptocurrency is based upon a form of cryptography. A combination of Blockchain technology and a decentralized ledger ensures transactions are completed without exchanging personal information. Also, cryptography helps prevent transmitted information from being modified or spoofed. No single person or entity controls a cryptocurrency.
The Similarities and Differences Between The Two
Structure and transparency are perhaps the most important distinctions between digital and cryptocurrencies. The latter should be completely decentralized, and the former is centralized in nature. Therefore, an entity or collection of entities controls a digital currency. Overseers of a digital currency can process and modify transactions, or settle disputes between users. No one can see the transactions processed through a digital currency. However, a user can expect to provide personal information here without anonymity.
A cryptocurrency thrives on decentralization and anonymity. Everyone holding a cryptocurrency is involved in its management. In fact, the community itself essentially regulates the currency. Users can remain anonymous while sending and receiving funds. Anyone can access the ledger of transactions, but no personal information can be gleaned from the ledger. When everything runs smoothly, the system is close to perfect for handling exchanges. If something goes wrong, though, no entity is available to settle disputes or rectify problems.
Where are both of these concepts headed in the future?
Currently, both cryptocurrencies and digital currencies come with their own benefits and disadvantages. Digital currencies are centralized, mostly secured, and more widely accepted. Cryptocurrencies rely upon a decentralized, secure structure in order to prioritize anonymity. For the time being, these two concepts remain someone separated with distinct differences.
Digital currencies and a cryptocurrency or two may soon converge to some degree. For instance, some banks continue to test Blockchain technology for their networks while remaining a centralized setup. Either way, users need to know the explicit differences between a digital currency and a cryptocurrency. Such separations matter and misinformation could lead to plenty of problems for ordinary users.