In the modern world, new technologies are emerging all the time. It can often be hard to keep up with these technologies and to understand how they work and what they are used for. This is particularly true with technologies used for financial transactions, where advanced algorithms and computer networking are increasingly being employed to keep transactions reliable and secure.
Two financial transaction technologies you have probably heard a lot about over the last few years are digital currency and cryptocurrency. So what are these two technologies and what are the differences between them?
Digital currency is basically any currency that exists in a digital form rather than a physical one. Most digital currency is similar to standard physical currency such as coins and banknotes in that it is backed and managed by financial institutions. Transactions are often managed on a client-server basis with a variety of security measures in place to ensure transactions are safe and secure.
In many cases, digital currency may exist in a purely digital form. In others, it may be backed up by some form of physical commodity. Some institutions that have traded in digital currency have also held gold or other precious resources equivalent to the value of their digital currency to ensure that currency has actual real-world value.
Digital currency is not always used for real-world transactions. Many multiplayer video games with a persistent world use some form of digital currency that may be directly or indirectly tradable between players. These currencies are usually used to buy in-game items and may be purchased with fiat currency or earned via gameplay. In some cases these video game currencies may even be able to be traded back into fiat currencies, allowing some players to make a real-world profit from their gameplay.
Cryptocurrency is a type of digital currency that relies on the science of cryptography to encode cryptocurrency transactions. It uses blockchain technology to maintain a history of transactions that allows those transactions to be verified and protected from fraud. This allows cryptocurrency to be portable, decentralized, and secure.
While cryptocurrency is a type of digital currency, the term “digital currency” frequently refers to digital transactions between banks and other established financial institutions such as credit card companies. In this regard digital currency is basically a digital form of fiat currency and is ultimately controlled by the government of the country it is traded in.
The purpose of cryptocurrency is to break away from government and institutional control of currency transactions. It is designed to be a more open way of trading value and goods that is less subject to government oversight and less likely to be co-opted for political ends.
Cryptocurrency offers an alternative to the centralized control of money transactions in order to give the power over those transactions to the public, rather than to governments and banks.
A core problem with cryptocurrency though is that its decentralized nature also makes it extremely volatile. Ideally, cryptocurrency and fiat currency in both physical and digital form should work together to provide alternatives and fallbacks that end up making both types of currency more stable and secure.
In the past, there was less of a need for something like cryptocurrency. There has always been the option of direct barter to provide decentralized transactions, and fiat currencies were much more loosely controlled before computers and networking provided governments and institutions with more direct control over them. Now that they have that direct control there needs to be a way for private citizens to stop that control from becoming oppressive.
Both of these types of currency have their place in the modern world. Each has its pros and cons which are largely offset by the cons and pros of the other. The world needs the stability of fiat currency in digital form, and it needs the freedom from centralized control that cryptocurrency provides. Without one or the other, the risk of either instability or stability that enables oppression rises dramatically.