The Relationship Between Cryptocurrency and Blockchain

The relationship between blockchain and cryptocurrency has been an area of increasing interest over the past few years. For those looking to use cryptocurrency or blockchain technology to transfer, store, and track data, understanding the differences between the two technologies is essential. Though they are related in many ways, blockchain and cryptocurrency should not be confused with one another as they are different. Knowing how to leverage each technology can help individuals make better use of these assets while avoiding pitfalls associated with a lack of knowledge. Those looking to invest in cryptocurrency or leverage blockchain should take the time to learn and understand the nuances of both technologies so that they can make informed decisions when it comes to utilizing these digital assets.

Cryptocurrency: Definition and Use Cases

Cryptocurrency refers to a type of digital asset designed to be used as a medium of exchange, a store of value, and a unit of measure. It is usually underpinned by blockchain technology, the use of advanced cryptography techniques for securing online transactions, and can exist either as a centralized token (one with a centralized issuer such as Bitcoin or Ether) or decentralized tokens (without a single issuer such as Libra or Ripple).

Cryptocurrency is gaining traction around the world, with its use cases ranging from being used to buy goods and services to savings and investments, to trading and speculation. Cryptocurrency is also being utilized in areas of financial inclusion, such as providing access to banking services and other financial products to those who lack traditional banking accounts.

Blockchain Technology: Definition and Use Cases

Blockchain is the underlying technology powering cryptocurrency transactions. It is a secure, tamper-proof, decentralized ledger system that allows for peer-to-peer transactions without the need for a middleman. It is also highly secure, as blockchain technology doesn’t rely on a single central authority or server to control and monitor its operations. Instead, it relies on a distributed network of computers to verify and validate the transactions that take place.

This technology is finding its use cases in many industries outside of cryptocurrency, such as healthcare, supply chain management, and real estate. For example, blockchain can help increase transparency and trust in these sectors by providing immutable records of all transactions securely stored across multiple nodes in a network. Such records can then be used to trace the source of a product, helping to ensure that it is authentic and untampered with.

Still, the relationship between blockchain and cryptocurrency does not end there. Cryptocurrency is actually one of the earliest use cases for blockchain, with Bitcoin being the first digital asset to take advantage of this technology in 2009. To this day, blockchain remains a key technology underlying most cryptocurrency transactions, allowing them to be securely transferred while avoiding double-spending and other fraudulent activities.

The Relationship Between Cryptocurrency and Blockchain: Similarities and Differences

While the two are not the same, blockchain and cryptocurrency do share some similarities. Both are digital assets, designed to be used as mediums of exchange and units of measure. They also both use cryptography for secure online transactions. However, there are notable differences such as blockchain being a distributed ledger system that is used to securely store and transfer data, while cryptocurrency is a digital asset designed to be used as a medium of exchange.

The relationship between blockchain and cryptocurrency is not always easy to understand. Though they share some similarities, they are two distinct technologies with different use cases. Blockchain is the underlying technology that supports cryptocurrency transactions, while cryptocurrency itself is a digital asset designed to be used as a medium of exchange and unit of measure. By understanding their differences, businesses and individuals can make more informed decisions when it comes to utilizing these digital assets.

Chaos in the Private Markets

Innovation typically follows a standard evolutionary path: it starts with excitement, goes on to fever-pitch inflated expectations, then drops down into the trough of disillusionment; if anything is left standing, it goes on to plateau out into competitive jockeying, innovation by pivoting, and then into the boring plateau of productivity and commoditization. Gartner, the technology research and advisory firm, formalized this as the Gartner Hype Cycle.

The crypto markets went through the excitement during the 2009-2017 period, culminating in some feverish inflated expectations (everything on the blockchain) in the next few years. 2022 may be remembered as the trough of disillusionment with the collapse of FTX, the most notorious of all crypto scams.

FTX, the world’s largest cryptocurrency exchange, went from $32B to a freezing 32° F, ushering in a crypto winter. What is worse, if that is possible, are the people—many who should know better—who compared SBF to J. P. Morgan and Warren Buffet. Clearly, the concept of making money by first creating value is an alien concept to these people.

Other high-profile scams, scandals, and “bugs” include Celsius ($4.7B), $2B in various bugs (Nomad, Wormhole, and so on), Day of Defeat, Orfano (which tricked the BBC into covering it not once but twice!), and Quadriga (where the founder apparently died in India).

Buried under the noise of the cryptocurrency chaos is the more serious situation of conflating crypto with digital assets and believing cryptocurrency (and related smart contracts) to be the only financial instrument. Assuming that a small percentage of the ICO scams of 2016-2018 era were motivated by genuine business models, they contributed to the chaos by completely misunderstanding what constitutes a securities instrument and the role of the regulators. 

Compounding the problem was the confusion over smart contracts which were supposed to power these financial instruments. Smart contracts are neither smart nor legal contracts; they are closer to simple stored procedures in traditional databases.

How to come out of this turbulence and chaos into clear and sunny skies? While the efforts to catch the crooks will continue for some time, the immediate fallout is the suspicion of the technology that powers the crypto world. There is confusion around risk, recovery, settlement, and finality of transactions. These problems are not new to blockchain; they were faced by merchants and financial institutions for about half a millennium. Many of the regulations and financial processes today are the result of considerable experimentation on how to protect all the parties involved in financial transactions. The fact that these regulations and processes are onerous and cause friction is no reason to throw them away and move to entirely untested, technology-based solutions. The cure is worse than the disease.

The process of recovery from the chaos starts with a clear understanding of the technology of blockchain, its legitimate use cases, the various types of financial instruments, and methods for managing risk.

That’s a subject for another blog.