The 21st century has seen some revolutionary innovations and cryptocurrencies are one of them. This decentralized solution offers people an alternative way to use their money. It established a decentralized way of storing information and ended the role of any central government.
It makes individuals the sole owners of their money. Although it has been around for over a decade, many still don't understand it very well. So, let's delve into it and explore its wonderful aspects.
A simple definition of cryptocurrency
Cryptocurrency It is a digital form of money that does not require any centralized body for its governance. It presents people with a single distributed ledger that shares ownership with everyone and not a few. To own and use cryptocurrencies, it is also necessary to have a cryptocurrency wallet. They buy and sell these digital assets with the help of a crypto exchange.
Cryptocurrencies are fungible, making their value the same even if they are sold or bought. However, it is possible to find non-fungible tokens that defy this particular rule. Cryptocurrencies are not managed by the government, but are subject to taxes. Furthermore, in the coming years, central bank digital currency (CBDC) will hit the markets. Unlike the original cryptocurrencies, these assets will be centralized.
So, let's delve into reality and see how cryptocurrencies running on blockchain work.
Creation and operation of cryptocurrencies
The first and only cryptocurrency ever created is Bitcoin. Many cryptocurrencies can be seen today including Ethereum, Ripple, Monero, etc. However, the only cryptocurrency that is created with a mining process is Bitcoin. In the mining process, coders better known as miners solve mathematical equations to create new cryptocurrencies. This particular mechanism is called proof-of-work consensus mechanism.
The other cryptocurrencies like Ethereum are created using a proof-of-stake consensus mechanism. In this system, it is not necessary to solve equations. They need to stake coins and create new ones by validating transactions. The mining process requires specific hardware that is quite expensive. It also consumes a lot of energy and makes it an expensive undertaking.
On the other hand, creating coins with a PoS mechanism is quite profitable. Historically, both consensus mechanisms have proven their worth. Both have pros and cons as well as lucrative aspects.
Why should we opt for cryptocurrencies instead of fiat money?
Cryptocurrencies have some notable advantages that are hard to ignore. Therefore, its demand is growing by leaps and bounds.
Promotes transparency: Managed by a group, the blockchain network has a much higher level of transparency than centralized money.
Maintains anonymity: Distributed ledger offers unmatched anonymity when it comes to keeping details inaccessible to third parties.
Makes transactions cheaper: Cryptocurrency users do not have to deal with intermediaries to execute transactions. It makes transactions much cheaper and faster.
Democratic in nature: Cryptocurrency challenges the hegemony of powerful organizations and governments. Establish a fair system where everyone has the same rights to information.
Cryptocurrency is changing and empowering the world. It may never uproot the centralized system, but it will become a possible alternative to it. Therefore, knowing it and investing in it are prudent decisions.
