In the article, we will study all about the topic “what is a digital currency ?”. Also, we will talk about meaning of digital currency, blockchain technology, Bitcoin, fiat currency, cryptocurrencies, etc.
This is a non physical form of currency. It is mostly in a digital form.
Meaning of a Digital Currency
Users can use digital currencies to purchase goods and services just like the fiat currency. They can serve in the absence of fiat money.
However, they have special features that overcomes that of the fiat currency. Some of those features are faster rate of transactions, lower transaction fees, more transparency, and the capability of being decentralized.
They have been in existence right from the time internet was invented. In the past, a sample of digital currency was made, its name was DigiCash. It was not possible to avoid double spending and it is an issue that is difficult to manage.
Bitcoin, built on blockchain technology, was the first digital asset to carry out three functions at a time. They served as a medium of exchange, a unit for accounting and a storage medium too. It also solved the issue of double spend through a blockchain technology. It created an unchanging record of each transaction. No cryptocurrency did all this before bitcoin.
There has been a whooping amount of protocols in the crypto market. Bitcoin cannot be measured on a scale, so new cryptocurrencies are introduced to solve such problems. In recent times, the most important financial improvements is termed digital currency.
Libra was one of the digital currency projects that gained publicity and much brought much arguments. Diem stablecoin of Facebook is has replaced Libra. Regulators have closely examined the stablecoin. The little difficulties experienced at the central bank has told Facebook to reconsider its plans forcefully.
Central banks have also adopted the idea of blockchain technology. They are creating their own digital currency but it will operate on the basis of centralization. They will have the potentials to manage the flow of funds as it does in an established economy.
Elaboration on Digital Currency
Digital currency is a form of currency that cannot exist in any physical form. You can address it as a digital money, electronic money, electronic currency, or cybercash.Jon
- Due to the nature of digital currencies, they can only be accessed with computers or mobile phones.
- They are usually cheap in terms of trading methods. Middlemen are not needed at all.
- All the cryptocurrencies can serve as digital currencies, but not all digital currencies can do the work of cryptocurrencies.
- They help reduce cost of transactions and improve the free flow of funds.
- On the other hand, they are prone to cyber attacks and its volatility is high.
The Knowledge of Digital Currency
Digital currencies are only available in digital forms. All the operations concerning them are done with computers or electronic wallets connected to the internet. On the hand, physical currencies can be seen and felt at the same time. Examples are banknotes and minted coins. Transaction of physical currencies is only done when users are in possession of these funds.
Some of the online communities, such as gaming sites, gambling portals, or social networks restricts the use of digital currencies.
Digital currencies also ensures smooth and fast transactions across the globe. Let’s take a look at an instance on real life basis. With connection to a single node, a person located in the United States can pay someone in a different location in digital currency form.
Features Associated with Digital Currencies
- Digital currencies are non-tangible, they don’t exist in a physical form.
- Digital currencies are centralized in terms of fiat currency, they are controlled by third parties. decentralized. Also they are decentralized in terms of cryptocurrency.
- Digital currencies exhibits transfer of value. How is this done? Read further. A network token can increase the chances of survival of players in virtual games. Note that buying and selling is different from value transfer.
Different Types of Digital Currencies in Existence
Generally, there are three different types of currencies in existence. They include:
The Concept of Cryptocurrencies
Cryptocurrencies secures and validates transactions through a process called cryptography. This process is also in charge of the creation of cryptocurrencies. According to the law in use, cryptocurrencies might come with or without regulations. The common examples are Bitcoin, Ethereum, Litecoin, etc. However, Bitcoin is the most popular cryptocurrency. In the crypto market, Ethereum and Bitcoin are at the top in terms of worth.
The fact that cryptocurrencies like bitcoin, exist in a non-physical form and lacks regulations makes it a virtual currency.
The Concept of Virtual Currencies
In the idea of virtual currencies, different stakeholders are in charge of its operations. They are also not regulated but can be controlled by a specific network setting. For instance, a gaming network token is controlled and created by developers.
The Concept of Central Bank Digital Currencies
Central bank digital currencies (CBDCs) are those digital currencies offered and managed by the central bank of a country. Meanwhile, the can serve as alternatives to the traditional fiat currencies. Real currency exists in both digital and physical form while the CBDC only takes the former. Countries like England, Sweden, and Uruguay are part of nations that wants to establish their own real currencies.
Advantages of Digital Currencies
1. Faster transaction and transfer rates
The time taken to carry out each transaction is relatively small because of the absence of middlemen. This also makes the transaction costs small in amount. In comparison, it is much better than the method that makes use of Intermediaries. There’s also room for transparency and good record keeping.
2. Digital production and immunity to physical defects
Digital currencies lack production of physical manufacturing facilities. That is to say, the are immune to physical defects associated with physical currencies.
3. Easy financial policy execution
In our current era, it is mostly the central bank and other financial institutions that makes money circulation possible. However, the CBDCs can assist in making direct payments to citizens of a country. They also consider the need for physical production an important factor. Together with distribution of funds from one place to another thereby making production and distribution very easy.
4. Less cost of transactions
They allow users to communicate directly within a particular network. Once the establish a similar network, a customer can directly make payments to a shopkeeper. Although, if the network is not the same, the cost is not as high as that of a fiat currency. Their operations are cheaper because they don’t involve third parties.
Disadvantages of Digital Currencies
1. Lack of storage facilities and infrastructure
Digital currencies need an online wallet with high security. This will enable one to store it safely. Electronic devices an internet connection is also important. Finding a perfect match to the above requirements becomes an issue.
2. Prone to cyber attacks
They are usually prone to cyber attacks because of their digital nature. Hackers can access your portfolio through an online wallet. They can also restrict a user from accessing his holdings. They are working very to prevent this kind of incidence from repeating itself.
3. High Volatility
Digital currencies are highly volatile in the trading market. For example, the actions of some crypto whales can cause fluctuations in the market. Meanwhile, other digital funds have undergone same price route. Let’s apply this to real life situation. There’s an online gaming platform that makes use of Linden dollars, they used the same route in its developing times.
What is Digital Currency ?
It is an electronic method of payment. We cannot touch them just like dollars or coins. The operate through electronic devices.
What are the various forms of Digital Currency ?
The digital currency can exist in three forms, namely: cryptocurrency form, central bank digital currency form and stablecoin form. They design it to serve a lot of different purposes.
What are the advantages of Digital Currency ?
The digital currency facilitates financial transactions. However, the carry out regulations that involve money. This is because, the eliminate third parties. Nobody can censor the transfer of funds in the crypto blockchain.
What are the disadvantages of Digital Currency ?
There are difficulties in the use of digital currencies. Let’s take a look at the rundown
- They are prone to cyber attacks.
- Destruction of financial equipment can affect the economy of a country.
- CBDCs trace the private details of users, thereby invading their privacy.
Along the long run, digital currency has been beneficial by making transactions easier and faster. However, the build it on blockchain technology. This is the major focus in the financial space. There’s also a disadvantage which are attacks from hackers and invasion of privacy. We expect to see more of it’s positive impact in the future because this is just a starting phase.