Skip to content

Do All Cryptocurrencies Use Blockchain? Types of Blockchain

  • by

In the following paragraphs, we will explore several pertinent themes relating to Blockchain and cryptocurrencies, ranging from the variants of the technology and how secure it is. 

Do All Cryptocurrencies Use Blockchain?

Cryptocurrencies can employ alternative technologies apart from the blockchain. Blockchain was invented to instantiate Bitcoin, the first-ever cryptocurrency. However, there are equally effective alternative technologies such as Tangle and Hashgraph. These are already being leveraged by some cryptocurrencies.

Which Cryptocurrency does not use Blockchain?

Most cryptocurrencies employ blockchain technology. Bitcoin inspired the development of technology. But, there are a few examples that do not. Ripple and IOTA are examples of cryptocurrencies that do not run on Blockchain.

Ripple

Ripple uses a network of distributed consensus ledger systems. It employs a network of validating servers and its tokens are called XRP.

It is a payment settling, currency exchange, and remittance system for banks and payment networks.

Many major banks use Ripple’s technology. It does not use the blockchain mining approach to validate transactions. Instead, it employs a distributed consensus mechanism in which participating nodes conduct polls to verify the authenticity of transactions.

IOTA

It leverages an alternative technology known as “Tangle.” It is backed by a German non-profit and was developed by several technology companies. The idea is that it would outperform Bitcoin.

Its tokens can be employed the way other cryptocurrencies are used. However, it is mainly for connected devices.

Can Bitcoin exist without Blockchain?

Blockchain is the underlying technology on which Bitcoin was built. It is what enables Bitcoin, therefore, Bitcoin cannot exist without Blockchain. It inspired the development of technology.

It is similar to comparing Google and the Internet. The Internet is the underlying technology, while Google is a service, an application whose existence depends on the Internet.

But there is a difference, is that blockchain was invented to give birth to Bitcoin. Therefore, the blockchain is indispensable to Bitcoin, at least in its present form.

The open, distributed, and decentralized nature of Blockchain is integral to the proper functioning of Bitcoin.

These features make the cryptocurrency reliable, anonymous, and accessible to all parties without the mediation of any central administrator.

The creation, record-keeping, and transfers that are essential to Bitcoin rely on the innovative database and network capabilities of Blockchain.

Managing currencies is a huge challenge. Therefore, managing a digital currency such as Bitcoin is even more challenging. Blockchain is helpful in this regard because it enables keeping track of all the vital information in a permanent ledger.

There is accurate tracking of all transactions and the creation of new coins. The cost of the whole process is reduced. And, it offers a high level of transparency.

 Bitcoin cannot exist without Blockchain. 

What’s the difference between Blockchain and Bitcoin?

Blockchain is the underlying technology Bitcoin and some other cryptocurrencies are built upon. Blockchain is an open, distributed, decentralized ledger, while Bitcoin is a digital currency.

It was originally developed for Bitcoin. Therefore, Bitcoin exemplifies the first practical application of Blockchain. However, they differ.

A blockchain is essentially a database and a network. It differs from traditional databases in the sense that it is decentralized, open, and distributed.

Decentralized because there is no single, central authority that is in charge of maintaining the database. Read about decentralized domains.

The data in the database is distributed (shared) across the network. Such that the representation of the data on all the nodes on the network is identical.

It also differs from traditional networks which often employ a client-server paradigm

The integrity of the data is maintained through user consensus. Blockchain is secure because sophisticated cryptography is employed.

It is a transformative innovation that is effective as a tool for disintermediation.

Bitcoin is a cryptocurrency, a digital currency, a peer-to-peer electronic payments system that obviates the need for a middle-man such as a bank or the government.

Cryptocurrencies exist in the form of tokens or “coins” that exist in a distributed and decentralized ledger.

It facilitates the anonymous transfer of the digital currency Bitcoin. It is the first instantiation of Blockchain technology.

However, it is not the only digital currency that leverages Blockchain technology.

Read: Do All Cryptocurrencies Work The Same? 

We can think of Blockchain as the operating system and Bitcoin as one of the applications that run on it.

Can Blockchain be hacked?

It was heralded as an unhackable technology at its inception. However, the reality is that Blockchain can be hacked and has been hacked a couple of times. Hackers have exploited security holes in cryptocurrency and smart contracts.

Some of the vulnerabilities are believed to be inherent in the system. Since 2017, hackers have stolen almost $2 billion worth of cryptocurrency from exchanges.

 This is the figure that has been revealed to the public. Perhaps, it is a lot more. The following are examples of cases where such breaches have occurred.

In the first month of 2019, the security team at Coinbase, a cryptocurrency exchange noticed something unusual. An attacker had initiated a “double-spend” on Ethereum Classic.

This refers to a scenario where the same currency can be spent twice.

Over half of the network’s computing capability had been secured and it was used to rewrite transaction history!

This is known as a 51% attack because over half of the network has been compromised.

The value of the double-spend was $1.1 million. Coinbase reported that no money was stolen.

However, another exchange Gate.io lost $200,000. Interestingly, half of the fund was returned the day after.

One of the features of Blockchain that makes it highly attractive to hackers and hence susceptible to security breaches is that fraudulent transactions once recorded cannot be reversed, as it is feasible in the traditional financial system.

What are the types of Blockchain?

There are four different types of Blockchain. They are Public Blockchain, Private Blockchain, Federated Blockchain, and Hybrid Blockchain.

Public Blockchain

It employs permission-less distributed ledger technology and allows anyone with an internet connection to do transactions on it.

There’s no central authority and each node has copies of the updated copy of the ledger.

Bitcoin, the very first cryptocurrency that was released leverages a public blockchain.

Transaction verification is done through consensus through mechanisms such as proof of work, proof of stake, and others.

Participating nodes are required to do the heavy lifting for the blockchain to work.

Private Blockchain

It employs permission-based distributed ledger technology and restricts access to the network only to authorized participants. Naturally, it has an authority that controls it.

As its name implies, it offers privacy. As such, it’s ideal for organizations who want to control access to data on the blockchain.

 It is faster and more power-efficient because there are fewer participants.

Examples include Corda, Hyperledger Fabric, and Multichain.

Federated Blockchain

This is also known as a consortium blockchain. It is implemented where features of both public and private blockchain are required.

Some facets are made public, while others remain private.

Preset nodes control the consensus procedure which is decentralized but unlike in a purely public blockchain, it is not open to all nodes.

Federated blockchains are managed by more than one organization (hence they are alternatively referred to as consortium blockchains).

IBM Food Trust, Marco Polo, and Energy Web Foundation are examples of Federated Blockchains.

Hybrid Blockchain

A hybrid blockchain is a combination of a private and a public blockchain. It encompasses the best features of both. Data can be kept open or hidden as desired.

Essentially, the privacy benefits of a permissioned network are combined with the transparency advantage of a permission-less network.

It is a case of having the best of both worlds. 

How does private Blockchain work?

Private blockchains restrict access to the data and other assets in the network. They are not ideal for public goods/services that everybody ought to have access to. Therefore, they are better employed as invitation-only networks.

It is governed by a central body and participating parties need permission before they can read, write, or audit the blockchain.

It can have multiple layers of data access. Therefore, confidentiality is high in private blockchains. They can easily be scaled and are ideal for the corporate sector.

 A group of banks, for example, could employ a private blockchain to handle interbank settlements and transfers to their customers.  

Final thoughts

In the article, we explored pertinent issues around blockchain technology.

We discovered that there are some cryptocurrencies such as Ripple and IOTA that do not rely on blockchain technology to function.

We looked at the different types of blockchains. They are public, private, federated, and hybrid.

We learned how private blockchains work. The difference between Bitcoin and Blockchain was also looked at.

Blockchain is the technology developed to instantiate Bitcoin, the first-ever cryptocurrency.

But, Blockchain has many applications beyond being used for cryptocurrencies.

We also considered a vital issue: How secure blockchains are. It turns out that contrary to the notion that was prevalent at the inception of the technology that it is unhackable, the reality is that it can be hacked.