How Cryptocurrency Comes Into Being

What You'll Learn

1.  
   Are There Any Alternatives to Cryptocurrencies in the Blockchain?
2.  
   What are altcoins?
3.  
   How New Cryptocurrencies Are Created on the Basis of Existing Blockchains

What You'll Learn

1.  
   Distinguish between coins and tokens
2.  
   Understand the advantages and disadvantages of public and private blockchains

Can cryptocurrency exist without blockchain? Can Blockchain Exist Without Cryptocurrency? The answer to both questions is yes. To understand how blockchain and cryptocurrency are related, let's look at some examples of projects that develop one or the other: either blockchain or cryptocurrency.

Cryptocurrency Without Blockchain

In addition to blockchain, there is another technology that can be used to create cryptocurrencies — DAG (directed acyclic graph). Examples of cryptocurrencies built on this technology are IOTA, Constellation, Nano, and others.

Instead of storing data in blocks, nodes are used to work simultaneously and confirm each other's transactions without waiting for blocks to be generated. The DAG system provides scalability, but has its drawbacks for smaller networks that are more vulnerable to hacker attacks.

Schematic representation of how DAG works

Blockchain Without Cryptocurrency

It is used to build distributed databases. On the blockchain, there may be no assets that are commonly referred to as cryptocurrencies. In this case, data, messages, and records of data exchange can be stored in the blockchain.

An important question in this case will be the motivation of network participants: why maintain the network if there is no reward? Therefore, sometimes the maintenance of a blockchain without cryptocurrency is carried out by states that want to create some kind of transparent ledger. For example, to account for real estate transactions.

As we found out, cryptocurrency is important, since it is impossible to build a public blockchain network without economic interest, because the use of equipment and electricity costs money. Blockchain without cryptocurrencies can be used to build private and corporate networks, but in this case, the very advantages of blockchain in comparison with conventional databases are not fully revealed.

These advantages of blockchain have been mentioned in previous lessons: immutability and transparency of data, decentralization, and the resulting security. Such properties are inherent in public blockchains — those in which almost anyone can become a participant. Examples of public blockchains are Bitcoin and Ethereum.

What if...

Let's take a look at the main difference between private and public blockchain networks. Imagine: Bitcoin is not a public network, but a private one. In this case, not everyone can become a miner on a given network. It is necessary to obtain permission to connect mining equipment from other participants or the control center. In this way, there is a decision-making center.

This means that one person will control the transactions. It will be able to prohibit transfers and regulate commissions. Just like in the traditional financial system.

Then there is the question of anonymity. If we need to get permission to connect to the network, then we have to identify ourselves. Thus, in private blockchains, anonymity is impossible by definition. If each participant in the network is fully identified, then the trust between the participants is based on their agreements and reputation.

A public blockchain is a trustless system. Not because there is no trust, but because the system does not need it. In a public blockchain with a large number of participants (in this case, validator participants—those who add transactions to blocks), trust is based on their shared interest in keeping the network in a correct state.

If one of the participants wants to deceive the others and include a transaction in the block by transferring the funds of another participant, then the others simply will not confirm the operation. If the majority is ready to confirm the wrong operation, then the financial value of the assets in the network is lost. If I can transfer someone else's funds to someone else, then others can transfer my funds to themselves.