In this blog we will understand the difference between cryptocurrency and fiat currency and how cryptocurrency is better than fiat
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There’s this new emerging market of cryptocurrency that’s turning heads everywhere. Now I say new even though this concept has been around for decades, because of its relatively new appearance in our world, where the physical currency has been prevalent for thousands of years.
What exactly is cryptocurrency though? Simply explained, cryptocurrency is a digital currency that can be used to pay for goods and services or exchanged for profit, just like any actual (or fiat) currency. Crypto is distinct not only because of its digital character, but also because Physical money becomes ‘digital’ when it is transacted through banking websites.
The basic differences between fiat and cryptocurrency are as follows:
- Cryptocurrency is a digital asset whose value is derived from its original blockchain, whereas fiat money is legal tender whose value is related to a government-issued currency, such as the US dollar.
- Unlike actual currency, cryptocurrency is based on Blockchain technology, which allows it to keep transaction records on an incorruptible digital ledger. The ledger works as a source of truth and eliminates the need for a trusted third party, such as a bank, due to its incorruptible nature.
- Central banks control the issuance and governance of fiat currency, whereas blockchain protocols, code, and communities control cryptocurrency. To enable “trustless” transactions, fiat currency requires intermediaries, whereas cryptocurrency relies on dispersed and decentralised networks. What this means is that The value of fiat money is intrinsically tied to monetary and fiscal policy decisions made by central authorities, mainly governments and central banks. A central bank simply issues the order for fiat currency to be issued, while The native blockchain of bitcoin provides inherent value since monetary rules are clear and written into the protocol’s core. While cryptocurrencies frequently lack a fiscal policy, it’s vital to note that, rather than a single, central authority, their monetary policies are governed by the protocol’s governance and consensus procedures.
- Except for cash exchanges, all fiat currency transactions take place within the traditional banking system. An intermediary is usually required to facilitate the transfer of payments between two parties, while Cryptocurrency transactions, on the other hand, take place on the blockchain without the need for a centralised intermediary, providing users more independence right away. By using the blockchain protocol’s consensus mechanism, transactions are validated and recorded by a distributed, decentralised network of participants.
All types of money that are effective must serve as a store of value, a medium of exchange, and a unit of account. Money cannot reach scaled utility until these conditions are met.
Although most fiat currencies are trustworthy, there are a few exceptions that are vulnerable to currency inflation and inefficient monetary policy. While there has been a lot of market volatility in the early stages of the cryptocurrency and blockchain ecosystem, the introduction of stablecoins (price-stable digital assets with underlying collateral structures) improves the case for digital currency as a store of value. The ability to link the value of a cryptocurrency to an underlying asset (fiat money, crypto, or a commodity) has given cryptocurrencies a dependable store-of-value function.
Central banks utilise monetary policy to govern the value of fiat money in respect to other currencies. Governments attempt to raise or lower the value of their fiat currency by printing money or altering interest rates for borrowing. Each crypto unit’s worth is determined by current crypto market pricing. Each unit of money must be divisible in order to be a valid unit of account. A fiat dollar, for example, can be divided into quarters, dimes, nickels, and pennies. Because it is digital, cryptocurrency is particularly well adapted to divisibility. BTC, for example, can be divided into as little as one satoshi, or one hundred millionth of a single bitcoin.
Despite a sluggish start nearly a decade ago, cryptocurrencies have now established themselves as a standard in the modern world. People have begun to trust cryptocurrencies for a variety of reasons, including faster growth, faster transactions, decentralisation, and better security. Celebrities, business leaders, and investors have all endorsed them as the next big thing, and rightfully so. Their growth has been so exponential it almost baffles investors and economics.
Money and the structures that support it will continue to evolve, as history has shown. The shape and technology may change from cowrie shells to crypto, but the requirements and usage in terms of value, exchange, and accounting stay the same. While fiat currency remains the most widely used form of currency, cryptocurrencies and the blockchain technology that underpins them could be the next step in the evolution of money.
We hope that you got an idea about what we were trying to say, though it’s debatable I think crypto will be a huge part of our life in the future.
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