Digital currencies: Everything you need to know

Digital currencies more commonly known as cryptocurrencies are digital analogs to the normal paper currency we use in daily life. Cryptocurrencies like Bitcoin, Ethereum, Litecoin, and many other digital currencies offer new business opportunities, investment opportunities, and global transactions. Well, I’m going to walk you through the essential facts so you can understand what all the hype is about. Whether you’re looking to invest or just want to learn more about this virtual money revolution, you’ve come to the right place!

WHAT IS SO SPECIAL ABOUT DIGITAL CURRENCIES?

There is a high chance that even if you aren’t using these digital currencies every day you are frequently hearing about them. The developers and other people involved in making crypto the new form of local currency mostly use the phrase ‘cryptocurrencies and blockchain are going to eliminate the middleman’.  That is the claim, These services tend to remove the middlemen so that more power can be given to the consumer and provider.

1. Decentralization

Cryptocurrencies being completely decentralized take away the authority from a single entity, crypto and blockchain records are fungible; new data can be added but no data can be removed, all data that is under verification is available to the network of computers or nodes working on it and the data already validated or published is published in a public domain that anyone can read. It can’t be tempered. For example From websites such as Bscscan.com, and blockchain.com you can see all the new transactions being done, all this data is available to everyone and Untemperable.

CONSUMER/PROVIDER/MIDDLEMEN?

We just read about these three words, these words that are pretty simple and have a similar context in terms of crypto.

For example, YouTube is a widely known and used platform that allows everyone to post video content then allows everyone to watch that content and collects the data of the person watching or consuming the data sells it to advertisers, makes money, and shares it with creators.

So that is our middleman process where YouTube is the middleman, the person making the content is the provider and the person only watching is the consumer.

Cryptocurrencies want to disrupt these middlemen so that whatever money is being made all goes to either the consumer or the provider,  there is no central entity in charge of the data or profits.

HOW DO THESE CURRENCIES WORK?

THE ENTIRE PROCESS CAN BE BROKEN INTO PARTS:

1. Let’s say person A wants to share some bitcoins with person B.
2. Once the user enters the relevant information for the transaction,  the transaction is broadcast to the network of nodes. Nodes store unconfirmed transactions in their memory pool and check whether these are valid.
3. These transactions are stored in a singular record system like a ledger, known as a blockchain.
4. Blockchain comprises several blocks each record resonates with each record. This record contains information such as; Transaction information; Sender \ receiver info etc.

Hash

1. Now hashes are like fingerprints and their use case is simple; to provide uniqueness, each block has a unique hash for that particular information and if any person changes that info they will also change the hash.

2. Previous hash;  just to add another layer of security previous hashe information is stored on this block and the previous block would contain the previous block’s hash etc.

3. Once the transaction records are complete and propagated across the network.
4. Miners compete with each other to validate this transaction, They do this by verifying if the data is correct, the hashes of the previous and the current block match and are correct, In this pool, thousands of nodes are competing, and the computer that completes this tedious process first is rewarded with a newly generated bitcoin as the transaction completes and the block gets added to the blockchain, as a rough estimate thousands of new blocks are generated every single day

Current usage of Crypto Currencies

Currently, crypto is being used in three ways; Commodity, asset, and currency.

1. Commodity

Cryptocurrencies are being used as commodities that can be traded to and fro and people can make money by doing so, just like oil and gold.

Currently, Binance, Coinbase, and other similar services allow us to trade crypto as a commodity.

2. Assets

Assets are those ownerships that offer long-term value, some people hold on to currencies believing they will give them long-term returns

3. Currency

Currently, only one country in the world allows its citizens to use crypto as a proper currency. That is El Salvador 🇸🇻, El Salvador accepted BTC as a legal tender in 2021.

Pros of Digital Currencies

1. Be your own bank! You control your money, no middleman is needed. Empowering.
2. Transact anytime, anywhere. All you need is an internet connection to access and send money. Convenient.  
3. Added financial privacy. Your personal info isn’t attached to transactions like with credit cards. More anonymity.
4. Super secure transactions. Encryption and blockchain make hacking way more difficult. Safety first!
5. Lower fees than traditional systems for sending money abroad. Save those bucks!
6. Can’t be manipulated as easily by governments. You’re in control.

Cons of Digital Currencies

1. Extreme volatility! Values fluctuate wildly from day to day. Hold on tight.
2. Still not widely accepted by merchants. Can’t spend it everywhere (yet).
3. Complicated tech. Wallets, keys, security – lots to learn for beginners.
4. Various transaction fees apply. Not always free to send and exchange.
5. Fewer consumer protections. No refunds for bad purchases for example. Use caution.
6. Environmentally taxing. Bitcoin mining uses massive amounts of energy. 

Future of Crypto Currencies as a legal tender

In the future, digital currencies may be used as tokens to buy and sell services based on demand, much like real-world currency. Unlike physical currencies, they would not be controlled by a single authority, but rather by all holders of the currency, who would have equal rights to vote and make decisions. This would benefit everyone in the system, not just the elite.

Cryptocurrencies Regulation

Cryptocurrencies are decentralized and untraceable, making them a potential tool for illegal activities such as money laundering, terror financing, and ransomware attacks. Governments around the world are hesitant to accept them as legal tender due to these concerns.

For example, in 2020, 4000 crores of Indian rupees were laundered out of India through crypto, and in the recent ransomware attack on the USA’s largest oil pipeline, the ransom amount was asked in bitcoins since it can’t be traced.

Conclusion

In conclusion, we covered what digital currencies are, how they work, their evolution, major players like Bitcoin and Ethereum, the pros and cons, and some key tips if you decide to buy in. While there’s still lots more to explore, hopefully, this gave you a solid overview so you can now participate in conversations about this game-changing virtual money.

FAQ’S