Cryptocurrencies have emerged as a new asset class, aiming to reshape the global financial system. They are not printed bills or pressed coins authorized by institutions like central banks. Instead, cryptocurrencies take on a digital form backed by cryptography.
Blockchains power the decentralized infrastructure of cryptocurrencies. And they are responsible for creating peer-to-peer networks that allow anyone, anywhere, to transfer value pseudonymously.
However, while the scope of cryptocurrency is widening across industries, most market participants are still unaware of its inner workings and real-world impact. It’s time to change that, though.
This beginners guide will go through crucial learning blocks and get you up to speed on cryptocurrency.
How Does Cryptocurrency Work?
Deducing how crypto works can be simplified if we take a real-life scenario. Let’s assume you want to buy a car, say a Mercedes Benz. Normally, you would wire the money to the car dealership using a bank. And when you do that, the money gets subtracted from your account and added to Mercedes’s account. Now, this entire transaction is not visible to anyone outside of the two banks, making them the ultimate middlemen.
And that is where crypto differs. With cryptocurrencies, your transaction with the car dealership would be shared with everyone who is a part of the network. Also, you would use something called a private key to access your crypto wallet and be in total control of your funds.
If done through cryptocurrency, your transaction with Mercedes Benz will be stored in a block. In blockchains, a block is referred to as a shared list of recent transactions. And for a transaction to be added on a block, network participants have to perform a task called mining. Now, the way mining works changes from network to network.
For instance, the Bitcoin network follows a proof-of-work model that requires miners to dedicate computational power to generate new blocks on the blockchain. As thousands of computers compete to verify a block, there’s no single point of failure. This is also why cryptocurrencies running on public blockchains are often considered decentralized.
Where Cryptocurrency Fits in the Real World
While it is too early to define the role of cryptocurrencies in the greater society on a technological and economic level, innovative use-cases are emerging rapidly.
To begin with, cryptocurrencies are gaining immense popularity as a payment method. Enterprises worldwide are beginning to recognize how they can enhance payment channels by integrating cryptocurrencies. Moreover, crypto is also becoming a viable option for everyday transactions.
Another compelling use case of cryptocurrency lies in the investing world. Companies can now raise capital through crowdfunding and distribute fractional ownership as crypto assets. You know what this means, right? It means you can now be a part of early-stage investing deals and place bets on asymmetrical opportunities with no entry barriers.
The gaming industry is also undergoing massive transformation by using cryptocurrencies to offer novel incentive models with play-to-earn economies and NFT marketplaces.
Overall, cryptocurrencies are vital to fueling innovative, blockchain-powered, decentralized financial products with higher capital efficiency and accessibility.
Benefits of Cryptocurrency
While cryptocurrencies enable several innovative use-cases, it is still the fundamental benefits that appeal to the masses as a fiat alternative at this early stage of adoption. Here are a few of them:
Fast Cross-Border Transactions
Cross-border payments have become an integral part of our lives, be it sending money to our loved ones or engaging in global eCommerce. But the legacy financial system doesn’t recognize that. You have to wait for at least three to five “business” days to successfully process a cross-border payment, given the banks operate at total capacity.
Crypto solves this inefficiency. By using a peer-to-peer network, you can avoid intermediaries to make cross-border transactions in almost real-time. Even with high network congestion, cryptocurrency transactions are settled in an hour at most.
Low Transaction Fees
You may decide to wait for a few days to successfully make a cross-border payment via banks. But are you willing to forgo a decent chunk of your money in fees?
We hope not! That’s your hard-earned money. So if financial inclusion is the goal, opting for globally accessible cryptocurrency payments with low fees is the way forward.
Cryptocurrencies run on peer-to-peer networks with no middlemen charging commissions for each transaction. So the cost of transacting cryptos is significantly lower than fiat currencies on traditional banking or FinTech platforms.
Open Markets 24×7
Crypto markets running all the time can cause periods of low liquidity during the weekends, leading to unexpected volatility. However, having a 24×7 market creates a level-playing field and enables access to all market participants globally.
In traditional markets, large investment firms can hedge their positions during off-market hours and do deals with other counterparties. But, for an average backer, those resources and tools aren’t available. In addition, a 24×7 market is better for the price discovery of digital assets.
The Future of Cryptocurrencies
The functionality and usability of cryptocurrencies have increased exponentially over the years. But it is yet to achieve the “Money 2.0” status universally. So, while the road ahead is promising, there are a few kinks to work out concerning regulation and awareness about cryptocurrency markets.
Once regulatory frameworks are in place, innovation and mass adoption will have no limits. And crypto-powered protocols will start co-existing with traditional players rather than unseat them. Finally, cryptocurrencies can pave the way for global financial freedom by providing bank-like features and more without ever needing a bank account.
