Cryptocurrencies are not just a niche method for payment anymore. Even though the crypto market is still speculative, many people are realizing the importance of these digital assets. Apart from being a good investment option, it can also revolutionize society. Let us have a deeper look at cryptocurrencies and their potential.
What is cryptocurrency?
Cryptocurrencies are digital tokens or coins that possess value and do not rely on any central authority for their value. While fiat currencies rely on government and banks, cryptocurrencies depend upon blockchain technology, public ledger, and cryptography for ownership verification. With a stable internet connection, people are allowed to send cryptocurrencies to each other with a minimal fee without seizing funds or dangers related to censorship.
The most important benefit of cryptocurrency is that it allows the transaction of value with no dependence on a bank or government. When Bitcoin was launched, its whitepaper stated that its main aim was to make peer-to-peer money completely rooted in the internet without any intermediaries.
After Bitcoin came to the market in 2009, more functionalities are getting added to the cryptocurrencies with innovations like smart contracts. With the Ethereum blockchain, many conventional financial services such as lending, borrowing, and trading can be automated.
How does cryptocurrency work?
Each cryptocurrency is unique in its working method. However, all of them depend on automated consensus mechanisms for the validation of transactions. In the initial days, the proof-of-work (PoW) of Bitcoin was the only cryptocurrency consensus mechanism. While using PoW, miners have to make use of their computing power to deal with complex puzzles that reward miners with the chance of validating a new transaction. The miners will be rewarded transaction fees or BTC by the Bitcoin PoW blockchain.
After PoW, other innovative consensus mechanisms like proof-of-stake (PoS) emerged. In PoS, the network participants have to lock the native digital token of the blockchain on-chain in order to validate transactions. If you can stake more tokens, you get more chances to add new blocks and get rewards.
Why is cryptocurrency important?
Many people do not have access to their banks and some people do not have trust in their leaders. Such people may rely on cryptocurrencies with no worries of confiscation or censorship. Decentralization is the main factor behind the significance of cryptocurrencies. It allows users to interact with digital money without relying on governments or local institutions. Thus, they are an ideal financial tool for the whole population, especially for people in authoritarian or under-developed financial environments.
What are the advantages of cryptocurrencies?
With the power of blockchain and the internet, cryptocurrencies are offering unique opportunities in the financial sector. Here are some of the benefits of cryptocurrencies apart from making payments.
- People can take part in the crypto market with just a mobile phone and a stable internet connection, giving more financial freedom to people.
- As cryptocurrencies do not have censorship, people can send funds without convincing anybody.
- With private keys, people have complete ownership of their tokens and coins.
- Cryptocurrencies offer more privacy as they allow pseudonymous transactions.
- Crypto transactions are transparent and immutable.