First things first, cryptocurrencies run on a technology called Blockchain. Therefore, it is imperative to understand what blockchain is before we discuss cryptocurrencies and their characteristics.
Blockchain Technology
Blockchain is the technology upon which cryptocurrency transactions are built. It is a distributed ledger made up of digitally recorded and encrypted data in the form of blocks, which when connected via the distributed network of computers storing the blocks, form the blockchain.
The ledger operates by consensus by the members as it is not under anyone’s control. This is because it is decentralized and distributed across a network of computers. Here lies the main difference compared to a traditional transaction ledger. It is worth noting that in a blockchain, all parties have a copy of the ledger and can confirm in real-time the status of the transaction.
Blockchain technology is interesting as it promotes transparency, trust and certainty. Miners must validate transactions therefore, the block becomes blockchain only when miners validate it and by doing that all the data and information remain on the ledger and cannot be erased or changed.
Another example which proves that when blockchain technology is used correctly it can have great results is when used for elections. The election results will not be able to be altered or hacked, which is vital for developing countries and places where political corruption thrives. This technology increase transparency without compromising voter’s privacy.
Besides, blockchain innovation helps to challenge instances of fraud. Blockchain allows insurers to share books without revealing their books to each other. A cross-reference can, therefore, be made that decreases the likelihood of fraudsters exploiting ignorant individuals.
Cryptocurrencies
Traditional currencies and cryptocurrencies are meant to have the same properties to a large extend. They both serve as a unit of account, medium of exchange and store of value. While it is noticed that they are mostly used as a medium of exchange, cryptocurrencies are used as a store of value more effectively or widely because of the price fluctuation which attracts investors. People and investors from countries like Turkey and Argentina, where there is instability in local currencies, tend to exchange their money to cryptocurrencies.
At the same time, there are certain differences between them. Cryptocurrency’s main characteristic is that is not physical, and its transactional properties differ, too. The transactions are irreversible, used with pseudonymous, fast and global, secure and permissionless. As a cryptocurrency is a cryptographic protocol it makes transactions safe and hard to fake. The main purpose is to displace the need for banks and trusts institutions, and it can achieve that as it eliminates the need for banks to confirm a valid transaction. However, this is subject to current and future regulations which will be discussed later.
A cryptocurrency is made – or rather mined – by miners. A miner can be everyone since the decentralized network has no authority to delegate this task. In simple words, miners get rewards – cryptocurrencies – by solving a cryptographic puzzle. It is important to highlight that as the puzzle gets harder the energy consumed by the miners’ computers increases so do the costs. Thus, a cryptocurrency is still a currency but as it is built on cryptography it is protected by math rather than by trust or by people. This is a good reason why people show trust in them with all this corruption and especially after the last economic crisis.
Why Cryptocurrencies are – considered to be – good
A cryptocurrency’s most significant characteristic is that it is not regulated by any central authority. Central banks, historically, proved to have the power to control inflation and print money whenever it was deemed necessary to “help” the economy, however, cryptocurrencies cannot be created out of thin air. Therefore, this difference is very interesting as the blockchain’s decentralized nature theoretically makes cryptocurrency immune to the old ways of public control and interference.
Cryptocurrencies make any transactions simpler to carry out because transfers are made by using public and private keys for safety and privacy reasons. These transfers can be made with low charges, enabling customers to avoid the high charges that traditional financial institutions are charging.
An example where cryptocurrencies can be used for good is in developing countries. Statistics show that there are 2 billion people who do not have a bank account and 5 billion people that do not have a legal title for their real estate properties. Therefore, cryptocurrencies and blockchain technology can revolutionise land in many countries. Cryptocurrencies, in essence, protect people’s wealth from unstable countries and corrupt governments.
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