Why Is Important To Know The Difference Between Cryptocurrencies And Non-Cryptocurrencies?
Dr. Pavel Kravchenko, Cryptographer and PhD in information security has decided to share his knowledge about cryptocurrencies and non-crypto assets. He believes it is important to understand the difference between these two terms.
Cryptocurrencies VS Non-Cryptocurrencies
According to Mr. Kravchenko, a cryptocurrency is defined by three keywords: independent digital currency. But, the main point of these three words, is independence. But how is it possible to achieve that? It needs to comply with these processes:
- Issuance: New coins must be issued according to the algorithm that’s based on the determined upfront monetary policy.
- Transaction Validation: Anyone can participate in the transaction validation process.
- Data Storing: The system is opened for everyone that wants to use it without registrations or permissions.
- Audit: It is possible for everyone to synchronize with other nodes and verify the accuracy of the transaction history.
- Governance: the decisions are taken by discussions in forums and no specific person should have the right to decide by itself.
Some of the points mentioned before can only be achieved only if there is a sufficiently big and open community. For example, if you decide to copy the entire Bitcoin code, it will not be a cryptocurrency because it will not have a fairly big and open community around it.
So, it is decentralization the main attribute of a cryptocurrency, without that it is no more independent. Bitcoin, Litecoin and Monero are good examples of cryptocurrencies, says Kravchenko. All of them are decentralized and make them independent.
After analysing XRP, he said that transaction validation is not decentralized (there is a small number of parties that can validate them), but the emission process is totally centralized. The creators are in full control of how the coins are issued and distributed.
XRP, is not a cryptocurrency then. Which does not mean that this is something bad. It means that XRP is another product and service, that works good in what it does, but it cannot be taken as a cryptocurrency.
What Are Tokens?
Tokens are never currencies. Mr. Kravchenko compares them with the dollar when it was used during the gold standard times. It was the token used related to a certain amount of gold. Nowadays, this does not work in this way anymore.
In this case, it is possible to have a better description because it is a much narrower term. A cryptographic token is an accounting unit that is used to represent digital balance in a certain asset.
He explains about that:
“Cryptocurrency coin is a cryptographic token, but it’s never the other way around, meaning that not all cryptographic tokens are cryptocurrencies.”
For example, a cryptographic token can not only represent some digital independent currency, but it can also be backed by something physical or digital like stocks.
There are different kinds of digital assets in the market but it is important to distinguish between cryptographic tokens, auditable digital currencies, cryptocurrencies, non auditable digital currencies, and complementary digital currencies.
Non auditable digital currencies are related to a centralized payment service that allows users to send and receive payments. It is not possible to verify the database, but users trust the service.
Complementary digital currencies are the same thing but the safety mechanism implies the use of cryptography.
It is difficult to distinguish what is a cryptocurrency and what it is not. And this article tried to show these differences between digital assets.
“At the same time, it’s important to be objective and understand that cryptocurrencies are only the part of the game, because there’s the blockchain technology that is applicable for both: open (public) and private (corporate) systems,” commented Kravchenko.