What is a cryptocurrency?
Though traditional fiat currencies served as the medium of exchange and store of value, there is a need for another medium of exchange due to the drawbacks of national currencies. The fiat currencies are governed by a single centralized authority, either by nationalized banks or governments. When the country undergoes an economic recession, the value of the fiat currencies might drop. This created a need for a decentralized mode of payments and store of wealth, cryptocurrency. It all started with an anonymous man who named himself Satoshi Nakamoto, who’s behind the idea of Bitcoin, the leading cryptocurrency in the blockchain space. The main idea of cryptocurrency is to allow people to have complete control over their assets and ensure transparency and anonymity.
How does cryptocurrency work?
Cryptocurrency is an electronic payment system based on cryptographic proof and not trust. The verified transactions are recorded in a chain of information called the blockchain. Blockchain is a distributed ledger that stores every single transaction made using cryptocurrencies. The copy of the transactions are stored in every node in the blockchain and cannot be altered or tampered with. This is why cryptocurrency transactions are very secured.
The block will be added to the blockchain only if the transactions are validated. Each blockchain has its consensus algorithm to validate. The currencies are transferred in terms of virtual tokens, represented by ledger entries on the blockchain. The word “crypto” stands for the encryption techniques and cryptographic algorithm that keeps the data safe. Cryptocurrency makes the bespoke use of technologies like hashing functions, public-private key pairs, and elliptical curve encryption to offer a secured payment system to the public.
When cryptocurrencies come into the picture, there is no room for traditional financial bodies like banks or other third-party payment processors. The transfer of assets is Peer-to-Peer (P2P), i.e., directly between the two involved parties without any need for trusted parties. The payment system is secured by pairs of private and public keys and consensus mechanisms like Proof of Work (PoW) or Proof of Stake (PoS). With cryptocurrencies, international payments are seamless without any filthy transaction or conversion fee. Cryptocurrency becomes the best way to bring globalization of products and services, making relentless borderless payments. The crypto payment system is upgraded that huge transactions are carried out by just scanning QR codes, in no way inferior to fiat payment systems, and with added security and transparency. Cryptocurrency is widely used for charity purposes as well. A person donating the charities through cryptocurrencies can keep track of their payments. Every single penny is accountable, making the process genuine.
The only major drawback of cryptocurrencies was volatility. Still, it is no more, with the latest concepts like rebasing and deflationary mechanisms and stable coins. Stable coins are nothing but pegging the value of cryptocurrency to real-time assets to keep them steady. Deflationary and rebasing is the elastic supply of assets in the market to increase the demand. When there is more demand for assets, the asset’s work in the asset increases and the value escalates. Cryptocurrencies bring in new concepts like Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs), disrupting the current financial systems.