The world today is shifting from traditional wallets to digital wallets -- software-based programs that securely save user payment information. Digital wallets can hold digital currency as well as cryptocurrency.
Digital currency is the electronic form of currency coins and notes that can be stored in a digital wallet. A user can turn digital currency into cash by withdrawing cash from a bank or ATM.
The encrypted form of digital currency is called cryptocurrency. This uses blockchain technology and doesn't depend on financial institutions to verify transactions.
There are also nonfungible tokens (NFTs), one-of-a-kind digital assets that represent real-world items. NFTs are different from digital currency and cryptocurrency.
The following is a closer look at NFTs, cryptocurrency and digital currency and the differences between them.
What are nonfungible tokens?
Nonfungible tokens are unique digital assets representing real-world items, such as photos, music, videos and trading cards. They are managed in a digital ledger and bought and sold online. For example, rather than purchasing an actual photograph to display on a wall, the buyer receives an original digital file. Nearly any digital asset, such as a piece of collectible digital characters, virtual real estate or original social media posts, can be created and purchased as an NFT.
Nonfungible means NFTs aren't mutually interchangeable. Every NFT is different, setting it apart from fungible tokens, such as cryptocurrency, that can be exchanged for one another.
NFTs are attached to specific values with certificates of authenticity, which means that the digital assets can't be exchanged or replaced with one another because each NFT exists on a decentralized digital platform that's based on blockchain technology.
Every transaction on a blockchain is written to a digital ledger, which publicly records each NFT transaction to substantiate who owns the item. Most NFTs exist on the blockchain of the Ethereum cryptocurrency. Like Bitcoin, the Ethereum blockchain creates permanent digital records of every transaction that uses that cryptocurrency. It also creates an indisputable ledger of all the NFT transactions.
The NFT creator keeps the copyright for the item and the right to copy it as many times as they want. Although the creator may create numerous copies of the original, if the buyer of the NFT wants to make copies of the item, they must get permission from the creator -- and each copy is considered a unique NFT.
NFTs are sold in collaboration with auction houses or in NFT marketplaces, such as:
- NBA Top Shot, an online marketplace that runs on the Flow blockchain where users can bid on, purchase and sell digital highlights of NBA players. An NBA Top Shot video featuring LeBron James honoring Kobe Bryant sold for close to $400,000.
- OpenSea, a peer-to-peer marketplace implemented on the Ethereum blockchain for NFTs, virtual collectibles and rare digital items.
- Rarible, an open marketplace secured with the Ethereum blockchain that lets artists and creators issue and sell NFTs.
- SuperRare, a digital art marketplace powered by the Ethereum blockchain where people can buy and sell NFTs from top artists.
- Known Origin, an artist-driven platform that runs on the Ethereum blockchain where digital creators can authenticate, show and sell their collectibles and artwork.
- Decentraland Marketplace, a decentralized virtual reality platform powered by the Ethereum blockchain where users can create, experience and make money on what they build and what they own.
- Arkane Market, a digital collectibles marketplace for general collectors and gamers. Arkane Market is based on the Binance smart chain and the Ethereum and Polygon blockchains.
What is cryptocurrency?
Cryptocurrency is the encrypted form of digital currency that doesn't depend on financial institutions to verify transactions. Cryptocurrency is stored in a digital wallet.
This peer-to-peer system, which works using blockchain technology, enables anyone to send and receive payments. When an individual transfers cryptocurrency, the transactions are recorded in a public ledger.
Several organizations have issued their own cryptocurrencies -- often referred to as tokens -- which allow people to trade specifically for the product or service that a company provides. An individual must exchange real currency for the cryptocurrency to purchase the product or service.
Examples of popular cryptocurrencies include:
- Bitcoin, a cryptocurrency created in 2009. People can buy and sell bitcoin using different currencies in marketplaces called bitcoin exchanges.
- Ethereum, a blockchain-based software platform that enables developers to create smart contracts and distributed applications. The cryptocurrency of the Ethereum network is ether.
- Litecoin, an open source, peer-to-peer cryptocurrency that lets people transact payments without a bank or other third party.
- Tether, a stablecoin whose price is directly tied to the value of the fiat currency it represents, such as the U.S. dollar, the Euro or the yen. This is unlike Bitcoin and Ethereum, whose prices fluctuate considerably.
What is digital currency?
Digital currency is the electronic form of currency coins and bills that can be stored in a digital wallet. A user can turn digital currency into cash by withdrawing cash from a bank or ATM.
Although digital currency doesn't have a physical equivalent in the real world, it does have the same characteristics of traditional money. An individual can obtain, transfer or exchange digital currency for another currency. A person can use digital currency to pay for goods and services. Digital currency transactions can be sent from any location in the world to any other location.
A central bank digital currency (CBDC) is a centralized digital currency that a country's central bank issues and oversees. A CBDC uses a digital token or electronic record to represent the electronic form of a country's fiat currency. Although no country has yet launched a central bank-backed digital currency officially, some central banks, including a group of state-run banks in China, have launched pilot programs and research projects to determine if CBDCs are viable. The United States Federal Reserve is also exploring developing its own digital currency.
The types of digital currency systems are:
- Central bank-backed digital currency system
- Price-stabilized cryptocurrencies, i.e., stablecoins
- Non-stabilized cryptocurrencies, such as Bitcoin
What are the differences between NFTs, cryptocurrency and digital currency?
There are several differences between NFTs, cryptocurrencies and digital currencies.
The main difference is that NFTs, unlike digital currencies and cryptocurrencies, can't be traded or replaced with one another. Every NFT is different, setting it apart from fungible tokens, such as digital currency and cryptocurrency, that can be traded or exchanged for one another with no loss of value.
Digital currencies are centralized, meaning there's group of people and computers regulating the state of the transactions in the network. Cryptocurrencies and NFTs, on the other hand, are decentralized, and most of their respective communities make the regulations.
Also, digital currencies aren't transparent. For example, an individual can't select the address of the wallet and see each money transfer, as this information is confidential. Cryptocurrencies and NFTs, however, are transparent. Any user can see any transactions of another user because every transaction is placed in a public blockchain network.
Basically, a central bank-backed digital currency is electronic cash. Similar to cryptocurrency, such as Bitcoin, a CBDC is data-based and doesn't exist in the real world. Unlike cryptocurrency and NFTs, CBDCs are backed by governments, which means they are more likely to be recognized as money that individuals can use to purchase goods and services.