Cryptocurrencies have grown in popularity as a form of digital currency. Back in the day, in 2009, Bitcoin was the first cryptocurrency. But, first, we will define cryptocurrency and blockchain technology for those unaware to understand whether cryptos use blockchain.
Usually, blockchain and cryptocurrencies are used interchangeably. But only some cryptocurrencies need to use blockchain technology.
Bitcoin brought blockchain technology to the public’s attention as an early participant in the Distributed Ledger Technology (DLT) sector. Bitcoin has publicly declared blockchain to be its operational underpinning.
This event marked the start of blockchain technology. Since then, other competitors have used blockchain infrastructure to implement their business models. As a result, blockchain has become a common noun. However, blockchain is only one piece of the DLT puzzle.
Blockchain can’t handle simultaneous transactions and has hefty transaction costs. This led to another technology called DAG (Directed Acyclic Graph). A Blockchain certification course can give you a fair share of ideas about cryptocurrencies and the features of blockchain.
What is Cryptocurrency?
As the name suggests, cryptocurrency is a digital currency that may be used to make purchases online rather than with actual money. It ensures that all online transactions are safe using a distributed digital ledger protected by advanced encryption.
It’s utterly digital money that operates on the blockchain network. It serves as a decentralized exchange, verifying and processing transactions through encryption.
What is Blockchain technology?
Blockchain technology uses a distributed public ledger to record business dealings between two parties in a transparent, permanent, and easily auditable fashion. Furthermore, it is possible to automate several functions in the ledger itself.
It is not built on a centralized server. Since blockchain data is stored centrally on the network rather than at any one organization, it is accessible to the general public at all times. Encryption and public and private keys maintain a blockchain’s virtual security. By avoiding going through a financial institution, a blockchain facilitates the secure transfer of funds directly between users.
Difference between Bitcoin and Blockchain
So, the topic’s main crux is whether all cryptocurrencies use blockchain. So, the answer is no; not all cryptos are blockchain-based. However, it took some time for people to realize that blockchain might be used for more than only Bitcoin and other cryptocurrencies. So, let’s highlight some of the significant differences between the two.
- Bitcoin is digital money, whereas blockchain is a decentralized ledger of transactions.
- Blockchain is the technology behind Bitcoin but has numerous other applications.
- Bitcoin emphasizes privacy, whereas blockchain prioritizes transparency.
- Blockchain must adhere to rigorous Know Your Customer regulations before it can be used in specific industries. For example, banking.
- While Bitcoin is intended to transfer money between users, blockchain technology may transfer any number of things, such as a record of ownership or even just a piece of information.
Is Blockchain required for Cryptocurrency?
For the first few years after bitcoin was launched, blockchain technology was the underlying novelty of bitcoin. But it soon all changed with the official launch of IOTA.
In place of blockchain, IOTA uses a Directed Acyclic Graph as its distributed ledger (DAG). Based on a directed acyclic graph, the Tangle method is the consensus mechanism behind the IOTA protocol.
When a trader makes a purchase, they must verify two random purchases. These two will have independently authenticated transactions. The outcome is not a distributed ledger but a continuous flow of discrete transactions.
Many non-blockchain protocols quickly followed IOTA’s lead after its introduction. Most of them developed consensus algorithms to thwart double-spending assaults on the network. For example, Nano and Byteball are different protocols besides IOTA that use DAGs.
DAG versus Blockchain
Like blockchain, DAG is a distributed ledger in which many nodes validate transactions. To be recorded on the network, a new transaction must get confirmation from at least two previous transactions.
A distributed network of double-verified transactions is created as additional transactions are submitted, confirmed, and entered.
However, DAG does not rely on miners to verify transactions as the blockchain architecture does. Therefore, eliminating the need for miners to validate a transaction significantly speeds up the process. This is achieved by having two “parent transactions” prove the validity of a later transaction.
Furthermore, if there are no miners, there are no miners’ fees, thus assisting in the maintenance of low transaction costs. This low-fee structure paves the way for another useful DAG feature, the capability to execute microtransactions.
Disadvantages of DAG
The main advantage of the DAG is the elimination of miners and fees associated with mining. There are a few disadvantages to this technology as well.
Since it is a relatively new technology, there are security issues. Due to this, the performance is not guaranteed as the network has yet to be tested on a macro scale. DAG-based cryptocurrencies have been around for a while, but they have a ways to go before mainstream adoption. This raises questions regarding their potential growth and the future incentives for users to use them.
The fact that DAGs are not entirely decentralized is one of their potential drawbacks. All DAG-based protocols have common characteristics that point to their centralized origins. Many people think that DAGs can only be used as a temporary fix to get the network going again, but whether they can develop independently is still up for debate.
DAG is a worthy adversary to blockchain since it attempts to fix the problems that have been found with blockchain. We anticipate further competitors to emerge; nonetheless, it may be premature to predict DAG’s ultimate success. New concepts and frameworks will compete for the forefront in an industry as dynamic and forward-thinking as this. It’s still being determined if blockchain will maintain its dominant position or whether DAG will eventually overtake it.