Difference between Digital Currencies and Cryptocurrencies, Explained
What’s the difference between cryptocurrencies and digital currencies if they both serve the same purposes? Let’s understand everything step-by-step.
Introduction
Nowadays, we have several ways of making payments throughout the Internet. Every method of payment has its own type of currency. Some of them use digital currencies and some of them apply cryptocurrencies. But what’s the difference between this two, if they both serve the same purposes? Let’s understand everything step-by-step.
Digital currency
Money that is used on the Internet is known as Digital currency. This type of currency doesn’t have it’s commensurate in the real world and subsists only in digital form. Still, it has all the features that traditional currencies have. So, you can make transactions with it, swap it for other currencies and simply obtain it. Just like you do with fiat money, you can use digital currency to purchase items and pay for services. This kind of currencies doesn’t have any political or geographical boundaries, this means that you can make a transaction from anywhere in the world and the other side will receive it no matter where he/she is. You can consider digital wallets and account like bank deposits.
Cryptocurrency
A variety of digital currency is called cryptocurrency. Based on cryptography, cryptocurrency is used as a means of exchange. The cryptography is what makes this type of currencies safe. Cryptography’s first subject is to make really secure communication. It makes and analyzes protocols and algorithms so no data can be modified or interrupted when third parties communicate with each other. Mathematics is a base of cryptography. And that’s exactly what connects severity and security to protocols and algorithms. Cryptocurrencies use blockchains and decentralized ledgers to operate. This indicates that there’s no authority that controls the actions of the network.
Main variations between cryptocurrencies and digital currencies
We’ve already learned, that cryptocurrency is just a type of digital currency, but still, there are some important differences between this two. Transparency: Cryptocurrencies are transparent and digital currencies are not. So in the case of cryptocurrencies, everyone can see any transaction that was made in the chain. And in the case of digital currencies, you are not able to choose an address of the wallet and see all transactions that were made. Actually, you are not able to see anything except your own transactions, because all other data is confidential. Structure: This is one of the main differences. Cryptocurrencies are decentralized. What does it mean? It means that there’s no community that makes regulations in the system. And digital currencies, on the contrary, are centralized and there’s a group of system members and machines that regulates transactions in the system. Anonymity: To use digital currencies you have to provide some private information, some documents and a photo of yourself. Cryptocurrencies do not need this information. Still, cryptocurrencies are not totally anonymous. Your address doesn’t imply any information like your name, location and so on but the transactions you made are registered on the ledger and senders and receivers are open to the public. Legal features: Most digital currencies have a judicial framework in the majority of currencies. But cryptocurrencies don’t have official status in countries for now. Manipulations with transactions: As digital currencies have the regulating authority it can either cancel or freeze the transaction in some cases. Cryptocurrencies are regulated by the community and everyone must agree to freeze one transaction, which is very unlikely to happen.
Is a centralization advantage or disadvantage?
As we already mentioned above, digital currencies have a centralized system. There’s a group of people, that makes decisions about some issues in the network and controls all the transactions. The greatest advantage of this is that if you make a mistake in a transaction, you can write to the support and they will find a solution for it. In a decentralized system, this is impossible. But the one thing that worries most of us is that the centralized system collects a lot of private information about us and if one day the system is hacked our data will be in unknown’s hands. As the decentralized system doesn’t have this type of information, we’re mot concerned about this.
Combining the advantages of both
There’s a statistics that 2 billion people in the world don’t have access to banks, on the other hand approximately 5 billion people use mobile phones and this is a rapidly growing number. So, here’s what perfect payment system looks like: it’s implemented in a mobile phone, has benefits of cryptocurrencies like security, transparency and is centralized like simple digital money. Centralization will give a regulating body, which will be responsible for some actions in the system and will be able to control and prevent some fraud actions. Actually, there’s an example of such service and it’s known as Telcoin. The main concept of this project is to combine the world banking system with mobile corporations. The banking system of this project has a combination of digital currency and a new cryptocurrency, which is going to offer different services, like prepaid credit, mobile money, etc.