What You'll Learn
- Are There Any Alternatives to Cryptocurrencies in the Blockchain?
- What are altcoins?
- How New Cryptocurrencies Are Created on the Basis of Existing Blockchains
What You'll Learn
- Distinguish between coins and tokens
- 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.
Classification of cryptocurrencies
There are several thousand different cryptocurrencies in the world. Dozens of new coins and tokens appear every day. There are various aggregators on the Internet where you can see lists of existing cryptocurrencies, an example of such an aggregator is the Coingecko website.
What is the difference between cryptocurrencies? There are many classifications, but the most important is the division into cryptocurrencies with their own blockchain and cryptocurrencies issued on any existing blockchain. It so happened that cryptocurrencies with their own blockchain are called coins, or coins, for example, the same bitcoins (the Bitcoin network has its own blockchain).
Coins (or coins) appear on the blockchain network in the process of its operation. In the case of Bitcoin, new coins arise as a result of the generation of a new block, and these new coins are received by the miner who mined the block. Thus, the number of coins on the network is gradually increasing. Miners can sell their coins, or they can keep them in their wallets and store them, becoming investors.
Altcoins
This was originally the name given to the coins of alternative blockchain networks, which appeared mainly as copies of the Bitcoin blockchain with some differences: Litecoin, Namecoin, and many others. Currently, all cryptocurrencies are called altcoins, except for bitcoin itself.
Tokens
This is a completely different type of crypto asset that has emerged thanks to Ethereum. Tokens are smart contracts that issue these very tokens and record transactions with these particular tokens. Remember our example of betting on the weather? So, Bob or Bob would get a win in the tokens of a network that specializes in such bets.
Tokens cannot be mined as they exist on blockchain networks that already have a major asset. In the Ethereum network, the main asset, as we remember, is called ETH (from the English ether - "ether").
Difference Between Coins and Tokens
If someone wants to issue their own token, it is necessary to create a smart contract, which will spell out: how many tokens can exist, whether new tokens can appear or not, whether the creator of the contract can stop token transfers, and so on.
To place such a smart contract on the Ethereum network, you will need to pay a fee in the form of ETH. Further, all token holders will also pay a fee in ETH when transferring, that is, they will pay with the main coin of the network.
Information about all transfers will be stored on the Ethereum blockchain.
The more different tokens exist on the blockchain and the more transactions are carried out with them, the greater the demand for the main coin of this network. Tokens are issued not only on the basis of Ethereum, there are also other networks: Binance Smart Chain, Cosmos, Solana, Tezos, and others. Such networks with their own blockchain and support for smart contracts are also called Layer 1 networks.
At a glance
- Cryptocurrency can exist without blockchain, and blockchain can exist without cryptocurrency.
- Public blockchains allow users not to worry about the reliability of counterparties.
- Some blockchains (e.g., Ethereum) are the foundation for many cryptocurrencies.
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