Blockchain and cryptocurrencies are now common concepts. People have written and spoken about them extensively in numerous forums, news sites and papers.

Information about blockchain technology is available on various platforms with individual writers and corporations giving their own opinions and assessments on blockchain technology.

In the vast sea of information about blockchain and cryptocurrencies, there exists several misconceptions which demean the true nature of blockchain technology and cryptocurrency.

This article emphasizes the misconceptions surrounding cryptocurrencies, demystifying them and shedding more light on the true nature, use and services of cryptocurrencies thereby providing a sober representation of cryptocurrencies for cryptocurrency investors and the general public to prevent misguided cryptocurrency investment.

Understanding Cryptocurrency

Two of the most common misconceptions about cryptocurrencies is that cryptocurrencies are here to replace fiat and that cryptocurrencies are all the same, which is not the case. A closer analysis of cryptocurrencies reveals, in detail, the differences that exist between the two forms of cryptocurrencies and the purposes they serve.

The basic definition of cryptocurrencies from various sources is ‘a digital medium of exchange that uses cryptography to secure financial transactions, verify transactions and create new units of the currency.’ The majority of cryptocurrencies are created at conception.. A cryptographic signature is created, unique to every cryptocurrency transaction, proving the authenticity of the cryptocurrency.

Cryptocurrencies fall into two major groups; coins and tokens.

Coins

Coins are used for financial exchange and are the cryptocurrency launched during ICOs (hence the term Initial Coin Offering). Coins include cryptocurrencies such as Bitcoin which is solely meant for financial transaction; hence its mention as an alternative mode of payment in several physical and online stores.

Tokens

The other types of cryptocurrencies are tokens. Tokens represent a form of utility, asset or even both and are generally issued in blockchains where a currency use case is not likely. Tokens have market value but are not considered as coins. They are like secondary assets in a blockchain ecosystem which can be traded.

Tokens are sometimes mistaken for shares by some investors. Although they have striking similarities, tokens and shares are fundamentally different. Shares represent the part ownership of a company whereas tokens are a medium of exchange for products, resources and services offered within their platform of origin. Understanding the difference between these two assets will help investors make informed choices.

From the explanation on the types of cryptocurrencies, it is clear that only coins can be used in the place of fiat currencies. Cryptocurrencies like Bitcoin and Ethereum can be used to make purchases across institutions that accept them. They can also be used as a store of wealth as seen in fiat currencies such as the US dollar. This, however, does not mean that they can replace fiat currency as their value is usually pegged to fiat currencies, mostly the US dollar.

Tokens, on the other hand, are meant for in-house purchases. Tokens can be used as mediums of exchange in their own blockchain platforms, as currently seen via the thousands of listed cryptocurrencies. The tokens can be listed in cryptocurrency exchanges where they can also be used as a store of value depending on the transactional boundaries the token has.

Both tokens and coins are run by the distributed ledger technology (which will also be discussed), blockchain. Coins and tokens are both stored in crypto wallets which hold the cryptocurrency. Digital wallets hold public and private keys with the private keys allowing you to transfer the cryptocurrency stored while the public keys enable reception of cryptocurrency from other users.

The explanation above demystifies the error that is all cryptocurrencies are like bitcoin and that they were invented to replace traditional fiat currencies. We have seen that each category of cryptocurrency has its unique purpose based on its platform of origin.

Another common misconception is that cryptocurrencies are free from control. All cryptocurrencies spawn from their underlying blockchain technology which is controlled based on the consensus algorithm determined by the platform creators. Further, cryptocurrencies meet the requirements of fungibility, scarcity, transferability, divisibility, and durability which all require some level of control to be achieved.

Understanding Distributed Ledger Technology (DLT)

Distributed ledger technology is the principle technology behind blockchain. It uses independent computers from any location referred to as nodes to record, share and to synchronize transactions in their respective electronic ledgers. Blockchain uses distributed ledger technology to organize its data into blocks and store them in immutable, append-only mode.

Distributed ledger technology can change our day to day operations. From the definition of DLT, there is ‘synchronization of transactions/data’ and ‘storage of data.’ Synchronization of transactions/data is crucial in the organization of data, especially those transacted in large-scale while the storage of data, done in a distributed fashion as DLT provides, eases record keeping and retrieval. These could potentially change most systems in the world when implemented.

The recording of interactions through blockchain’s model enables the immutable transfer of value without requiring a central entity to verify or coordinate. The value transferred in the case of blockchain is represented by cryptocurrencies which, as aforementioned, can either be coins or tokens. The synchronization and transfer of data, therefore, are supported by, but not reliant on, cryptocurrencies as they are the measure of value in blockchain platforms.

Therefore, from the explanation on cryptocurrencies and the distributed ledger technology, it can be concluded that cryptocurrencies are more than just ‘virtual currencies that no one controls,’ but they act as a supportive mechanism of blockchain technology.

With the rate of development, the continued adoption of blockchain will only continue to increase | Source

To further demonstrate cryptocurrencies as more than ‘virtual coins,’ we will discuss some of the applications made possible through cryptocurrencies.

Process Improvements

In areas such as fintech and banking, cryptocurrencies hold a revolutionary power that has excited the industry. Cryptocurrencies allow for reduced overheads for running such institutions while at the same time allowing for lower transaction rates which can even be reduced to almost nothing depending on the institution.

The benefits of cryptocurrencies are being seen worldwide which has prompted companies such as Circle, PayPal, and Subway among others to integrate cryptocurrency payment and investment options in their applications. Companies such as TMX Global and JP Morgan have even launched their cryptocurrency to aid in their operations. Blockchain applications have the potential to improve the efficiency of shipping significantly; thus the confidence shown by TMX Global.

Other applications of cryptocurrencies can also be seen in open-sourced and decentralized supercomputers as implemented by Golem. Golem uses its Ethereum based GNT token as a store of value on its platform.

Apart from improving the process, the creation and implementation of innovative solutions are also made possible through the use of cryptocurrency supported blockchain technology. Decentralized cloud storage and notary are just some of the examples where cryptocurrencies have been supportive actors in ensuring their success.

Assistive Services

There are platforms such as Aelf that are keen on making d’App development and overall blockchain adoption easier. Aelf introduces features such as scalable nodes, parallel processing, consensus protocol, interoperability and smart contract optimization to streamline d’App operations on its platform. It also has sidechains which help to isolate different d’App operations on its platform allowing for detailed customization of individual d’Apps with minimal expenses and developer resources. The Aelf platform, through these improvements, can run many d’Apps comfortably.

The basis of this is to make decentralization accessible to every responsible party hence improving services through cryptocurrencies and blockchain technology. Users on the Aelf platform can create their own d’Apps which can significantly improve their daily operations and services. Users can also have cryptocurrencies for these platforms which they can use as a store of value or as transactional coins.

Understanding cryptocurrencies and their essence in the blockchain space demystifies the many inconsistencies and misconceptions held by the mainstream media. Informed decisions can, therefore, be made when planning to venture into investing in cryptocurrencies.

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Disclaimer: Please only take this information as my OWN opinion and should not be regarded as financial advice in any situation. Please remember to DYOR before making any decisions.

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This article was originally published on Medium.