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Differentiating Digital Currencies and Cryptocurrencies

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Digital currencies and cryptocurrencies are sometimes thought of as one and the same. So here are their key characteristics and key differences you should know.

Digital Currencies

Digital currencies are basically money that are used on the internet.

Digital money exists only in the online realm and in digital form. It really doesn’t have any physical equivalent in the real world. Nonetheless, it has all the characteristics of traditional money. Just like traditional fiat money, you can obtain, transfer or exchange it for another currency.

You can use it to pay for goods and services, such as mobile and internet communication, online stores, and others.

Digital currencies do not have geographical or political border, and this means that transactions might be sent from any place and received at any point in the world.

Essentially, digital accounts and wallets maybe regarded as bank deposits.

Cryptocurrencies

Cryptocurrencies can be considered as a variant of digital currencies.

A cryptocurrency is an asset that you can use as a means of exchanging. It is considered reliable since it’s based on cryptography.

One of cryptography’s main objectives is communications and how to make them secure. It creates and analyzes the algorithms and protocols so no information is changed or interrupted during the conversation by third parties.

Cryptography is a combination of a large number of different sciences, with mathematics as the center. It is math that attaches the severity and reliability to algorithms and protocols.

Cryptocurrencies use blockchain and decentralized ledger. This means that no supervisory authority controls all the actions in the network. This comes at the expense of all the users.

Core Differences

Structure

Digital currencies are centralized. There is a group of people and computers that regulates the state of the transactions in the network.

Cryptocurrencies are decentralized and the regulations are made by the majority of the community.

Anonymity

Digital currencies require user identification. You will have to upload a photo of yourself and some documents issued by public authorities.

Buying, investing, and any other processes with cryptocurrencies do not need or require any of that. Nonetheless, cryptocurrencies are not really fully anonymous.

Even though the addresses don’t contain any confidential information such as name, residential address, etc., each transaction is registered. The senders and the receivers are publicly known. To some extent, all transactions are being tracked.

Transparency

Digital currencies are not transparent. You cannot choose the address of the wallet and see all the money transfers. This information is confidential.

Cryptocurrencies, on the other hand, are transparent. Everyone can see any transactions of any user, since all the revenue streams are placed in a public chain.

Transaction manipulation

Digital currencies have a central authority that deals with issues. It can cancel or freeze transactions upon the request of the participant or authorities or on suspicion of fraud or money-laundering.

Meanwhile, cryptocurrencies are regulated on and by the community. It’s very improbable that the users will approve the changes in the blockchain, even though there were some precedents such as the attack at The DAO.

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Paul Petersen

The author Paul Petersen


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