The term ‘digital currency’ refers to any currency which exists primarily or solely in digital rather than physical form.
In the modern economy most of our money exists in a purely digital form. In the past each monetary unit was tied to the value of a physical asset, usually gold. When the gold standard ended this link was broken. As people started to use cards, bank transfers and other technologies to spend money directly from their balance this trend continued, and most money today does not even exist as notes or coins, but instead exists purely as digital records. Businesses with a banking license can even create this digital money out of thin air, purely through their accounting practices, in order to make loans to their customers. This is known as ‘digital money’. This digital money was the first step towards digital currency, but is not the same thing.
Whereas digital money is a digital representation of a currency which previously existed in physical form, such as Euros or Dollars, digital currency refers to a new type of currency which is natively digital and therefore better able to make the most of what digital technology can offer.
An innovation in distributed consensus cryptography enabled the creation of Bitcoin, and with it heralded an explosion in the creation of digital currencies. Today most digital currency still uses a similar consensus technology to Bitcoin, which is based around the use of a ‘blockchain’. Some, however, use alternative ledger based structures, including Ripple and Maidsafe.