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How cryptocurrency is different from fiat currency?

Nowadays, people start believing that cryptocurrencies are the future, but now the question is how cryptocurrency is different from fiat currency?

How is cryptocurrency different from fiat currency? 

Any valuable kind of money must serve as a medium of commerce, a store of value, and a unit of account. Fiat money and cryptocurrencies provide this benefit, but they vary in several important ways. Fiat money is legal cash with a value related to a government-issued currency, such as the U.S. dollar. At the same time, cryptocurrency is a digital asset with a value derived from its original blockchain.

Central banks issue and manage fiat money, while blockchain protocols, code, and communities govern cryptocurrency. Fiat money distribution necessitates the use of middlemen, while cryptocurrency depends on dispersed and decentralized networks to facilitate “trustless” transactions.

Money is a prerequisite for every financial transaction and is a globally recognized value symbol. Cultures denoted money in animals such as cows, goats, and camels throughout history.

Then, everything from cowrie shells to salt was used as money, eventually giving way to the more known form of precious metal currency. Today, fiat money – government-issued legal currency with no inherent value – is the most prevalent kind of money. Paper notes and coins are the only forms of money that many people have ever known.

However, as history has proven, money develops, and the next stage of its evolution is upon us. The introduction of blockchain technology and cryptocurrencies in the recent decade represents a real upgrade to the world’s monetary and value systems. Digital currencies such as bitcoin (BTC) and ether (ETH), based on decentralized blockchain networks, are not controlled by a single political entity and provide tremendous prospects for financial inclusion globally.

The Utility of Money

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 usefulness until these conditions are met.

All types of money must function as a store of value. As a result, there must be broad trust that money will preserve its worth. For example, if a corporation sends a $100 invoice to a client, it must be sure that the $100 will have the same (or nearly the same) value 30 days later. When there is no value stability, there is no motivation to use anything as money since the danger of devaluation is too great.

Although most fiat currencies are trustworthy, several outliers are vulnerable to currency inflation and inefficient monetary policy. And although the cryptocurrency and blockchain ecosystem has seen substantial market volatility, the introduction of stable coins (price-stable digital assets with underlying collateral structures) enhances the use case of digital money as a store of value. Cryptocurrencies have gained a dependable store-of-value feature by tying bitcoin value to an underlying asset (fiat money, crypto, or a commodity).

 

Money must be a generally recognized form of payment as a medium of trade. Both parties must share a sense of value in a transaction. Consider the following scenario: someone offers to pay their babysitter with Monopoly money. The babysitter would not take Monopoly money as payment since it has no apparent worth (outside of the setting of a Monopoly game).

 

Similarly, when Bitcoin was initially launched in 2009, many people were apprehensive about embracing it as a means of payment. The fast development and adoption of digital currency markets, on the other hand, demonstrates the increasing acceptability of cryptocurrencies on both an individual and institutional level. PayPal, for example, started allowing U.S. account users the opportunity to trade specific cryptocurrencies — Bitcoin, Ethereum, Bitcoin Cash, and Litecoin to begin — in Fall 2020, with plans to expand this service to select foreign markets in the first half of 2021. While fiat money remains the primary means of transaction, bitcoin is rapidly gaining popularity as more individuals see the value of digital assets. ( How cryptocurrency is different from fiat currency? )

 

Money must be able to price financial transactions by efficiently denominating the worth of various items and services across the economy about each other to operate as a unit of account. A $500 mattress, for example, is more valuable than a $20 hat.

 

Monetary policy by central banks is used to govern the value of each currency in respect to another in the case of fiat currency. Governments attempt to boost or reduce the value of their fiat currency by printing money or altering interest rates for borrowing. The current crypto market values determine the value of each crypto unit.

 

Each unit of money must be divisible to be a legitimate unit of account. A fiat dollar, for example, maybe divided into quarters, dimes, nickels, and pennies. Because it is digital, cryptocurrency lends itself exceptionally well to divisibility. BTC, for example, is divided into units as little as one satoshi or one hundred millionth of a single bitcoin. ( How cryptocurrency is different from fiat currency? )

Aside from these characteristics, money must be long-lasting, portable, consistent, restricted in quantity, and universally acknowledged. The fiat money we use today fits all of these characteristics, resulting in its widespread adoption.

Issuance and Governance

One of the most common criticisms against fiat money is that it lacks inherent value instead of receiving perceivable value from its position as legal currency. The value of fiat money is intrinsically tied to monetary and fiscal policy choices made by central authorities, mainly governments and central banks. A central bank merely issues the order for fiat money to be published.

On the other hand, Cryptocurrency derives inherent value from its original blockchain, where monetary regulations are clear and encoded into the protocol’s core. While cryptocurrencies often lack fiscal policy, it is vital to realize that their economic policies are subject to the protocol’s governance and consensus procedures rather than a single central authority.

The Exchange of Value

Transactions using fiat money, except cash exchanges, occur inside the conventional banking system. Most of the time, an intermediary is required to enable funds between two parties. People who buy goods using credit cards or financial services applications via payment technology providers such as Visa or PayPal. People who want to send money to relatives in another nation use wire transfer companies like Western Union to make the transfer possible.

On the other hand, transactions using bitcoin take place through blockchain without the need for a centralized middleman, immediately providing system users greater flexibility. The blockchain protocol’s consensus mechanism validates and records transactions via a distributed, decentralized network of participants.