With the advancement of technology, cryptocurrencies are slowly becoming the go-to payment method around the globe.
There are many ways to describe what cryptocurrency is, but by far the simplest one is that it is a new form of digital money without a central entity. To make digital cash sort of feasible, you will need a payment system with accounts, balances, and transactions. However, one problem that payment networks usually run into and try to prevent is double-spending, or, an individual who spends the same amount of money twice. To achieve this, a central authority or body usually keeps track of all transactions and balances.
The way cryptocurrency avoids this problem is by removing the human part of the equation - the person who keeps track of everything. In other words, there is no person who is responsible for this. Every part of the network needs to meet and fulfil this function. Every single one of them has to have a list of all transactions on-hand at all times to see if future transactions are valid.
Cryptocurrencies can also be classified as a series of limited entries in a database that needs to meet specific conditions before it can be changed. Today’s current monetary system can also be described in the same way. Money in your account can only be accessed under specific conditions (your debit/credit card serves as the condition). Confirming transactions is an important part of the cryptocurrency industry. If something remains unconfirmed, it remains open which can then be forged or falsified. However, when a transaction is coded or recorded on the blockchain, this cannot be altered.
Peers (or more famously known as miners) can confirm transactions. They take note of the transactions, pass them if they are legitimate, and spread them around the network. Once a transaction is confirmed, every single node or part of the system adds it to its database which then becomes part of the blockchain.
Cryptocurrency has its name based on the secure cryptography process that is used to ensure the transaction-recording part of the system is secure at all times. Cryptocurrencies are, in essence, based off of cryptography. They aren’t kept secure by people or by trust, but by math.
Properties of Cryptocurrency
Despite some cryptocurrencies sharing a few common properties, they still differ in one way or another. Some may place more emphasis on security and privacy while others focus on the actual process, increasing its speed. Below are some common characteristics of cryptocurrencies:
- Transactions cannot be reversed - when bitcoins are sent, you can’t get them back (unless the recipient returns them). This makes crimes such as fraud difficult to commit unlike in credit cards where people make a transaction and contact their credit card company to undo the transaction.
- Decentralized - there’s no central authority or body controlling cryptocurrency which essentially means that governments can’t take them from you.
- Low cost - compared to bank transfers, the fees one pays are way lower.
- Speedy - as soon as the payment is approved, the money sent can be received within minutes.
- Secure and transparent - since all information is stored on the blockchain, it’s impossible to be tricked about the funds they have. This is because cryptocurrency funds are locked in a ‘public key cryptography system’ with the owner of it being the only person who can send cryptocurrency.
- Pseudonymous - neither transactions nor accounts are connected to real, personal identities despite being able to analyze the transaction.
- Store of value - most cryptocurrencies have a limited supply of coins that can be mined or created at any given time. Due to this, there is little to no risks for inflation unlike with fiat currencies where bills can be printed at any time.
How are cryptocurrencies used?
There are merchants or establishments that accept cryptocurrencies directly. Despite some having very high prices, they can be broken down into very small components. As an example, Bitcoin can be broken down to 0.00000001 of one bitcoin.
Some have created ATMs where one can use fiat currencies to purchase bitcoin and sell them for cash. Some have also created debit cards where you can directly exchange cryptocurrency into fiat currency. Some cryptocurrencies have a specific use which are used to pay for services on a certain network.
Benefits of Cryptocurrency
With the continuous applications of cryptocurrency slowly making themselves known, its uses are also becoming more vast mainly because of the unique properties it brings into a transaction. Here are some of those advantages:
- Preventing Fraud and Identity Theft - cryptocurrencies cannot be counterfeited while the ledger prevents double-spending. For merchants, this eliminates the problem of an expensive chargeback. Additionally, sensitive personal information is given during a credit card transaction. With cryptocurrency, this type of information can be restricted up to a certain extent. This is because credit cards operate by pulling money out of your account while with cryptocurrency, you are the one who sort of ‘delivers’ the funds to the recipient. The only thing you are sending is the exact amount needed and nothing else.
- Lower fees - third parties and other parties involved in transactions making use of fiat currencies often include costly transaction fees and other service charge fees. Cryptocurrency eliminates this because there is no middleman.
- Accessibility - the cryptocurrency market is accessible by anyone with an internet connection. This is more than those that have access to a credit/debit card. This makes it easier for literally anyone, especially those in developing countries, to obtain, trade, and make transactions with cryptocurrency since it is not bound by geography.
Types of Cryptocurrency
Over the past few years, a few cryptocurrencies have stood out among the rest. Some of those are:
- Bitcoin (BTC) - created back in 2009, it is the most widely used cryptocurrency and paved the way for other cryptocurrencies. It currently has the highest market value.
- Litecoin (LTC) - a peer-to-peer, open-source software project that is known for fast transactions. It’s viewed as a testing grounds for new features that could be implemented in other cryptocurrencies soon.
- Ripple (XRP) - a centralized digital payment protocol that is used mainly for currency exchange and debt settlement.
Words: Carlos Corpus