Cryptographic digital currencies allow for a new system of robust, transparent, and efficient monetary management.
From a technology perspective, existing monetary systems require paper-based cash or utilizing a private third party service (e.g. Visa, American Express) to support global transactions. From an economic perspective, holders of government issued currencies (e.g. United States Dollar, European Euro) are required to trust centralized authorities that overall monetary valuations will remain stable and that online transfers or holdings cannot be seized.
The advent of cryptographic digital money has leapfrogged over this archaic system by using blockchain technologies to create a new truly person-to-person (Peer-to-peer) environment of money transfer. There is no need for a centralized party to control a cryptocurrency, nor is there any type of restrictions or rules of usage. Cryptocurrencies provide people across the globe with instant, secure, and frictionless money.
Blockchain Money Definition
Cryptographic digital currencies use cryptography and blockchain technologies to provide anybody with an internet connection, with global, nearly-instant, and frictionless money. This is possible by using advanced encryption and blockchain technologies to provide a robust and secure network of money management.
While many believe that bitcoin (BTC) is the first digital currency, this was one of many attempts at the idea. Some examples of these attempts at creating a widely usable digital currency include: E-gold (1996), WebMoney (1998), Liberty Reserve (2006), and Perfect Money (2007. However, the cryptocurrency Bitcoin (2009) as we know it today is the only successful version that changed the entire fintech game. Why was Bitcoin successful where so many others had failed?
Bitcoin was the first to introduce decentralization alongside the digital aspect which gave it a peer-to-peer platform and community to stand on. The open source protocol made it doubly attractive to prospective users, it thwarted apprehensions related to one person monopolizing a new digital currency.
The other main issue digital currency faced is the problem of the double spend. The double-spend happens when someone spends the same currency for two or more transactions effectively spending the same money twice causing for a major accounting error. If a single unit of currency can be spent an infinite amount of times it eliminates scarcity and therefore loses all value.
Bitcoin founder Satoshi Nakamoto wasn’t the first to solve the issue of the double-spend, David Chaum had created a system with blind signatures to prevent double spending. The reason Chaum failed where Satoshi succeeded is because the centralized solution to the double spend requires a trusted third party to verify and in turn creates a single point of failure.
Enter Satoshi Nakamoto in 2009 with decentralization as the first viable solution to the double spend. His blockchain-based currency Bitcoin worked around the need for a trusted third party.
Cryptographic Protocol
The cryptocurrency Satoshi innovated uses a cryptographic protocol known as a “proof-of-work” (PoW) system. This system uses a public ledger now popularly known as a blockchain to valid and store transactions. Not all cryptocurrencies use a PoW many now use Proof-of-Stake which is more energy efficient as it does not require mining. To learn more about this PoW system that serves as the foundational mechanism for Bitcoin making it decentralized and transparent, read more here: cryptocurrency explained.
How Cryptocurrency is Used as Money
There are more than 20 million registered cryptocurrency wallets as of 2017 and the market capitalization of cryptocurrencies shows no signs of slowing down. Cryptocurrency acts effectively as money now. To use cryptocurrency all you need to do is send your digital funds from your wallet to the address of another wallet. The peer-to-peer network will work to validate this transaction and store that verification on the public ledger (anonymously) for all to see. This how cryptocurrency functions as money in the simplest terms.
Understanding Liquidity
What makes cryptocurrency a viable fiat alternative is liquidity. Liquidity is the degree to which an asset can be transacted without affected price stability. Cash is the standard used to determine liquidity currently because it is the most liquid asset. So, liquidity refers to the ability for an asset to be converted into cash. The faster you can turn a cryptocurrency into cash determines how liquid that digital asset is. Higher liquidity makes for a more robust and easy-to-use cryptocurrency. The closer cryptocurrency becomes to having the liquidity of cash, the more widely acceptable it’s use. The more cryptocurrency is used and accepted, the more liquidity it will have. This creates a kind of catch-22 situation for increasing cryptocurrency liquidity.
Why it is Useful for Cryptocurrency to Replace Fiat
We’ve all heard the phrase “cash is king” before. If cash is king, why do we need another king? Or maybe even new king? The Federal Reserve system and centralized banking is deeply flawed, slow, and not as secure as we are led to believe. Here are the ways a high-functioning and widely adopted decentralized digital currency alternative trumps fiat:
Faster
Blockchain technology has the potential to break Visa’s currently held record of about 10,547 transactions per second (tx/s). Speed is the most coveted, attractive feature for any payment platform. Objectively, the faster a blockchain can process a large number of transactions the better. Blockchain, as a technology, has more potential for scalability than Web 2.0 financial services, this makes transacting in cryptocurrency on the blockchain the faster option when compared with fiat. It not only becomes easier to make many small transactions; it is faster to move large amounts of money across the globe as well.
Cheaper
When things become faster they also become cheaper. If you wanted to wire money using fiat you would need to visit your bank branch and tell the teller or execute this action online, both take time and carry big associated flat fees. The reason banks carry such big fees for wire transfers and other transactions is all the overhead involved in running a centralized bank. The transaction has to pass through several hands. To run a bank, you need a physical location, personnel, ATMs, and more. Cryptocurrency eliminates the need for a centralized location and almost all associated personnel. This makes transacting in cryptocurrency a cheaper option when compared with fiat. Through decentralization and a peer-to-peer network transactions become cheaper and faster.
More Secure
Cryptocurrency transactions are inherently more secure than those in a centralized bank. It is always safer to have many things stored in multiple places than one thing in one place under the control of one entity. This is basic risk management. Additionally, cryptocurrency transactions secured by the blockchain use a digital, immutable ledger to record all transactions. This makes using cryptocurrency a private and secure, yet transparent financial action.
A decentralized peer-to-peer network is very difficult to attack in its architecture. The only way to launch a successful attack on a blockchain would be to perform multiple attacks from multiple devices all at once.
Personal wallets of the digital fund holders’ choice add another layer of security when using crypto. You aren’t just relying on the safety of blockchain, you have a hot wallet (the account on an exchange or a web-based wallet) or a cold wallet (software, hardware or paper). Once again, you are not only transacting in a decentralized way from one address to another via smart contract and recorded on the distributed ledger, you are storing decentrally and therefore increasing security.
Private
Identity privacy might be one of the main differences between how a cryptocurrency transaction is performed versus a banking transactions. Cryptocurrency transactions separate your identity from your transaction. While the ultimate private currency can be considered cash, you can only complete a cash transaction physically. Cryptocurrency supports anonymous worldwide commerce and monetary transactions. Every coin platform has a different protocol for how identity is separated out from the blockchain verified transaction and then listed in the public ledger anonymously thereafter. Generally, instead of transacting from one individual to another individual through an account, Paypal, or another payment platform intrinsically linked to your identity, you can send money to wallet addresses that have no identity or personal information attached and available to the public.
As more and more big companies sell our personal information and privacy becomes a commodity versus an inherent right, this aspect of digital currency remains paramount. Different levels of encryption and methods of deploying distributed ledger technology work in tandem to protect cryptocurrency users’ identities.
This can often be a combination of a private key and a public key which is a robust form of cryptography that allows users access to their digital funds and protects against unauthorized access. The public key is created from the private key in such a way that it is improbable for a hacker to reverse engineer in order to ascertain the private key from the public key. The wallet stores the private keys and creates a digital signature to authenticate transactions creating a private transaction user experience.
Use Cases for Cryptocurrency as Money
Low-cost money transfers
Have you ever tried to transfer $1 million dollars before? Well it sounds like a chore to have doesn’t it. Multi-million-dollar cryptocurrency transactions take only a few minutes to process and the fees can stay under a dollar for this international digital funds transfer. When transferring large sums of money through a third-party costs sky rocket and the transaction could talk several days or even longer for international transactions. This is possible the number one use case for cryptocurrency that helps to support the global economy in a revolutionary way.
Rewards Programs
Nearly every credit card, airline, ecommerce platform, and store has a rewards programs to allocate bonuses to their loyal customers. Now instead of using money and physical cards that are easy to lose and expensive to make a distribute, rewards programs can use cryptocurrency. In this way cryptocurrency improves the rewards programs significantly for customers because now they have an asset that can accrue value, rather than keep a physical single-use gift card rotting in their wallet.
Incentivizing Social Media & Gaming Platforms
With cryptocurrency aka “the money of the internet” used to fuel social networks and gaming platforms, it increases engagement and user enjoyment. Decentralized platforms for art, music, gaming, and more open up new cryptocurrency revenue streams that are autonomous without a third-party dictating the terms of distribution to the community. Youtube is an example of a revenue stream for creators that is highly centralized, recreating a digital video streaming platform and using cryptocurrency to pay creators and viewers on a peer-to-peer network
Tokenized Computing Power
Cryptocurrency is used to create a global market for idle computing power. This use of cryptocurrency increases efficiency in two ways: 1) it creates a new revenue stream for processing power owners 2) it puts latent power to work without having to purchase or obtain more power individually eliminating waste. Being able to rent out or borrow a data center uses cryptocurrency to offer a peer-to-peer alternative to cloud providers that operate on a B2C basis using fiat. As computation power leasing becomes a more widely adopted practice the value of the cryptocurrency will increase along with it.
A Viable Alternative to Fiat Money
This is the main use case for cryptocurrency and while it may seem obvious, it is worth remembering and discussing. It is crucial that cryptographic digital alternatives to fiat are implemented to decentralized institutions and return power back to users.
Cryptographic digital currencies allow for a new system of robust, transparent, and efficient monetary management.
