People often say that digital currency is a cryptocurrency. But this is only a rash conclusion. The notion is misleading, therefore not true. When an institution or a government, like China’s digital Yaun, Facebook’s Libra, shows interest in digital currency, people applaud them for vying into cryptocurrency. There are significant differences between digital currency and cryptocurrency.
All cryptocurrency is a digital currency, but all digital currency is not a cryptocurrency. It will look complicated at this level, but this article will explain the differences between cryptocurrency and digital currency.
The world needs transformation, and the financial sector is not left behind. One of the transformation efforts in finance is the invention of digital currencies and cryptocurrencies. David Chaum introduced digital currency in his research paper in 1983. He then launched DigiCash, the first electronic cash company, in 1990, in Amsterdam.
Although the company filed for bankruptcy in 1998, digital currencies had since then endured. Cryptocurrency, on the other hand, became famous in 2008 when Satoshi, a pseudo-anonymous entity, released his Bitcoin whitepaper.
One similarity between digital currency and cryptocurrency is the domain of usage – online. Both are for online transactions and have a community. Another misconception about cryptocurrency is about its technology. People assume that all cryptocurrency is an application of blockchain, but they are not.
Cryptocurrency uses cryptography to achieve anonymity, reliability, and a peer to peer transaction, however, other distributed ledger technologies, like Hashgraph, Directed Acyclic Graph, DAG, Holochain, etc, employ cryptography to bring the same solution that blockchain is bringing. Nonetheless, the scope of this article is limited to the difference between cryptocurrency and digital currency.
Digital currency and cryptocurrency: what are they?
According to Wikipedia, digital currency is digital money stored in a distributed database on the Internet, in an electronic computer database, within digital files or a stored-value card. While cryptocurrency was cited as a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a digital ledger or computerized database using strong cryptography to secure transaction record entries, to control the creation of additional digital coin records, and to verify the transfer of coin ownership.
Simply put, digital currency is a digital representation of cash. At the same time, cryptocurrency is a kind of digital currency that uses strong cryptography to ensure user security, privacy, and a transparent peer to peer system.
Differences between digital currency and cryptocurrency
Although cryptocurrency is an example of digital currency, you will find the difference between digital current and cryptocurrency below.
The digital currency operates on a distributed database, while cryptocurrency operates in a decentralized distributed database, called distributed ledger technology, DLT.
Centralization and decentralization
In digital currency, the intermediary determines a lot about the currency and transactions, but cryptocurrency is consensus-based, as it is community-driven.
Due to the centralization principle of digital currency, it is an instrument of the state.
To use digital currency, you need an intermediary you must trust, but you do not require such intermediary in cryptocurrency. Digital currency is designed to receive and send money based on trust, whereas cryptocurrency is fully trustless because you can verify transactions and records of the address.
Digital currencies include cryptocurrencies, virtual currency, central bank digital currencies, e-cash, etc. However, all digital currencies are not cryptocurrencies as they are a subset of digital currency. Basically, the differences between digital currency and cryptocurrency are in cryptography, security, and consensus.
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