So far we have been talking about different types of cryptocurrencies, but we have not stopped to analyze what this new type of “digital money” is about and what is the difference it has with traditional money or “fiat money” which is what that has made them take the boom they have today and what is what generates so much confidence in this type of digital transactions. Then we will go a little deeper into these issues.
- 1 What are cryptocurrencies?
- 2 How does a cryptocurrency arise?
- 3 Main differences of cryptocurrencies with fiat money
- 4 They do not require a central authority or entity
- 5 The system itself defines whether new units can be created
- 6 The system only executes transactions on one unit at a time
- 7 The fiat money can be printed in infinite quantities
What are cryptocurrencies?
According to Wikipedia, a cryptocurrency is “a digital exchange medium that uses strong cryptography to secure financial transactions, control the creation of additional units and verify the transfer of assets.” In other words, it is a digital way of doing traditional financial operations. , no longer controlled by banks but by their own investors or owners.
We can also talk about cryptocurrencies as digital payment alternatives that have arisen in order to respond to the growing need for new ways to make financial transactions with greater freedom and greater security than traditional banking operations, where you can also operate with complete freedom regarding the use of the same, without the need to go through the authorization of third parties or intermediaries.
How does a cryptocurrency arise?
The first known cryptocurrency is bitcoin, which is why the term cryptocurrency is often not used but the term bitcoin is used, especially among the less expert in the matter. All cryptocurrencies to start operating require financing and this is based, originally, on fiat money that is then converted into money from the same cryptocurrencies.
In the previous article titled What are the ICO of cryptocurrencies? We talk about this one that is one of the main financing methods for the emergence of new cryptocurrencies and that consists in a kind of crowdfounding where investors interested in the project contribute small amounts of money that form the final amount that will be covered by all the technical and development expenses involved in the process of the birth of a new cryptocurrency.
Main differences of cryptocurrencies with fiat money
The fiat money is the money that we are used to handle traditionally, it works with banking entities as intermediaries for any transaction and it is these same entities but at the level of the country, who are responsible for its issuance and distribution. Likewise, the value of this money is not backed by any physical asset but rather is based on the confidence of the people in the banking operators and in that that ticket they receive or that card they hold in their hands has a value represented by the number it has printed. This money has many differences with respect to cryptocurrencies and we present them here.
To control its operation or the flow of money in transactions with cryptocurrencies, entities or persons that approve or reject transactions are not used, on the contrary, it is what is known as a “distributed consensus” in which all the people who have participation in the blockchain have decision-making power over the transactions that occur in it.
The system itself defines whether new units can be created
Unlike fiat money, it is the states that give an order to central banks to issue more bills, with cryptocurrencies that does not happen. In the case of cryptocurrencies to add a new token or link to the chain of transactions and that it is valid, it is the system and its members who approve or reject this operation and give the right to those involved in the process to make use of the same.
The system only executes transactions on one unit at a time
That is, if someone tries to make more than one transaction on the same block of cryptocurrencies, only one of them will be made, since, unlike fiat money, no more than one transaction can be made at the same time on the same asset. That is, a user could not be buying crypto currencies and at the same time pay with them some other asset without the first purchase transaction having been approved.
The fiat money can be printed in infinite quantities
According to the countries’ currency emission regulations, fiat money, also known as fiat money, can be printed according to the country’s own needs and according to the ability to pay, while cryptocurrencies are finite, that is, there is a number limited that can be mined and when you reach that limit, you will no longer be able to mine. In the case of bitcoin, the maximum amount that can be mined is 21 million.
What do you think about this topic? Did you know the differences between fiat money and cryptocurrencies?
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