Blockchains are sequences of data recorded from cryptocurrency transactions. Cryptocurrencies like Bitcoins and Facebook’s Libra are immutable and highly secured. The technology used to generate digital currencies is known as cryptography. Unlike traditional currencies, cryptocurrencies only exist on the internet and register transaction details over the web. Blockchains are in charge of preserving transactional records, although the system is decentralized.
The way decentralized record-keeping systems work, they voluntarily manage records by solving complex algorithms, in a process known as mining. Mining requires high-performance computers and still takes time to solve the equations. Mining is not done freely. Whenever a successful mine is completed, a few coins are awarded to the miner’s account.
The relevance of Digital Currencies
Cryptocurrencies have significantly affected world currency systems, threatening to eliminate key financial operators such as banks. Governments and financial institutions are therefore apprehensive about the digital currency trend and their legitimacy.
Despite the apprehension and prevalent suspicion on digital currencies, their massive potential is acknowledged by major industries all across the world. It is, therefore, accurate to state that their popularity and adoption is on the rise more so, by the fast-rising modern industries. Digital enterprises specializing in e-commerce, independent FINTECH developers, and the online service sector are all part of this development. Cryptocurrencies are becoming preferential in online transactions due to their flexible application. Today, you can enjoy an esteemed activity like gaming in an online casino with cryptocurrencies or even shop online with your digital crypto wallet.
In this context, we analyze the most significant aspects of digital currencies to evaluate whether traditional currencies stand a chance against the futuristic digital assets.
When it comes to payments, security is of utmost priority. As you might know by now, cryptocurrencies being electronic, have certain weaknesses. This is not unusual as traditional currencies also have drawbacks, perhaps even more.
The highly secure cryptography technology used for the digital coins creates a healthy security system to prevent the duplication and alteration of coins. The blockchains, which act as history preservation systems, compare data with other technologies such as wallets, to ensure senders have adequate funds before sending money, thus preventing frauds.
Firms dealing in cryptocurrencies prioritize security just like banks and other financial institutions would. However, the electronic nature of cryptocurrencies makes them vulnerable to numerous cyber-crime activities such as hacking. Soon when most business activities go online, cryptocurrencies might be more convenient in making payments than fiat money only if advanced security protocols are implemented.
Every business aims to maximize profits and minimize liabilities. Businesses lose vast amounts of money during transactions due to multiple middle parties. However, cryptocurrencies move directly from a particular sender to the intended receiver almost immediately. They also eliminate most charges one would expect in an ordinary transaction. Businesses would, therefore, benefit the most from the technology, and hence more likely to embrace it. Furthermore, the main issue hindering most companies from using the currency is that most institutions are yet to validate its use.
The global accessibility of cryptocurrencies makes them cheaper thus more preferable for international payments. The value of cryptocurrencies is also consistent in different parts of the world.
Bitcoins are the most widespread cryptocurrencies and widely misconstrued as blockchains. However, there exist various cryptocurrencies, which are not as popular and hence used infrequently. Governments and financial institutions are currently in control of the spread. Consequently, their distrust in digital currencies has significantly hindered their adoption. The low spread of these currencies is a significant barrier to electronic payments. This technology is ahead of its time and will take longer to surpass traditional currencies.
Nevertheless, China is a fast-growing economy and is the first nation seeking to legitimize the currency. The coronavirus pandemic has forced governments to seek technological remedies to combat the prevailing crisis. China had to disinfect billions of fiat money, in efforts to interrupt the spread of the virus. The government now plans to launch a Yuan Cryptocurrency, managed by the Chinese government. If the method works for China, other nations will have no choice but to follow suit not to lag their economies.
To fully accept cryptocurrencies as a medium of exchange, people need to be assured of their regulation by reliable oversight bodies. However, the high-end encryption and decentralized nature of the technology leaves minimal gaps for third party intervention. Furthermore, banks are afraid that the currency could take them off the financial grid. Governments are also scared of getting sidelined by technology.
Ordinary people are exposed to risks such as fraud and hacking. The technology blockchains is also enabling illegal activities such as laundering. Nonetheless, the technology is by far very safe, thanks to the high-end security protocols which are yet to be cracked.
Traditionally, the liquidity of fiat money was unmatched. However, expanding technological space has created a modern ecosystem where technology is the primary driver of development. In a world where electronic gadgets are more than the users, and the world is interlinked by internet connection, cryptocurrencies are slowly improving in liquidity.
Physical cash needs to be traded for foreign currency when conducting transacting across borders; cryptocurrencies, on the other hand, are standardized. Although financial service providers such as PayPal allow users to trade currencies via the internet, the process of acquiring and sending a unit on the website is more complicated than using cryptocurrencies. Additionally, their consistent valuation also contributes to their high liquidity.
World governments and regulatory bodies are concerned about the disruption cryptocurrencies will have when realigning financial systems. In Europe, some countries have already begun formulating procedures to control digital currencies. The future of cryptocurrencies is highly dependent on decisions made by governments and regulatory bodies such as the Anti-money Laundering (AML) and Know Your Customer (KYC).
The multiple benefits of digital currencies outdo the bad and are, therefore, inevitable in the future global economy.