Nano Currency: What is a digital currency and how does it work?
The digital world is quickly expanding and touching parts of our lives we never knew would be possible before. As we go deeper into the age of technology, the traditional methods of payment will be challenged with faster, more efficient and better ways to transact called digital currencies.
Defining digital tokens: The currency of the future
Digital tokens have come a long way over the decade. Its earliest forms were first issued to facilitate the movement of fiat currency in the digital world or the electronic exchange of actual money.
Today, digital currency extends to assets that are purely digital like cryptocurrencies. Crypto tokens are created as a means of exchange in the online community. However, what’s interesting about crypto is that it doesn’t represent real money. Its value is based on what people assigned to it and how in demand the coin is on the market.
Meanwhile, digital currency can encompass crypto as well as digital tokens that represent physical assets.
Characteristics of a digital currency
There are plenty of things that make a digital currency different from your other assets. Here’s a list to round it all up:
- As we have mentioned time and time again, digital tokens are currencies that only exist in digital form. It doesn’t have a physical equivalent, but it can represent an actual asset that you have. For example, the money that you are going to use in your bank transfers. Those are the digital manifestation of the actual money you have in your bank.
- Unlike crypto which mostly markets itself as decentralised, digital tokens can either be centralised or decentralised.
Digital tokens in centralised systems like banks have the authority to handle the exchange and distribution of assets. Meanwhile, in decentralised systems like Bitcoin, there is no central authority and all of the transaction information is published in a public ledger that everyone can see.
Different types of digital currencies
Digital currency is the blanket term that is used to describe different types of assets that exist within the electronic realm. To narrow it down, we have listed 3 major types of digital currencies you might encounter below:
cryptocurrencies
Cryptocurrency is one of the most popular types of digital tokens today. Although it is still not as widely accepted as fiat currency, crypto is slowly making its way to the mainstream market.
Since crypto doesn’t have a physical equivalent nor does it represent a physical asset, it is kept secure and accessible through cryptography. Cryptography is a system that controls and manages the creation of different crypto tokens
The main selling point of cryptocurrency and the reason why it is popular with online users today is that it is decentralised. This means that crypto is free from any central authority that limits and lengthens the time it takes for every transaction to be processed.
Every transaction is purely between sender and receiver. There are no third parties that would cause a delay in your exchange.
Another thing that makes cryptocurrency as widely spread as it is today is the fact that it has a high value. Cryptocurrency’s value is highly affected by the demand and supply in the market. Coins like Bitcoin are the most in-demand and yet, there are limited coins in existence. Through this, Bitcoin manages to maintain a fairly high price in the crypto market.
Crypto can also use its volatility as a weapon. By predicting the movement of the market or simply having luck on your side, your investment could turn into thousands in a blink of an eye. But of course, you can also lose it all just as easily so remember not to get too carried away and keep in mind that crypto has a highly volatile value.
Virtual currencies
Virtual currencies are assets that are not regulated by the government or financial sectors. It is mostly controlled by developers or the organizations that run the particular network. For example, a game where you can exchange tokens for new weapons or exclusive character design.
Central bank digital currencies
The central bank digital currencies (CBDC) are regulated digital assets that can be issued by banks or any responsible financial sector. CBDCs are like cryptocurrencies except it was issued by the bank.
There aren’t a lot of CBDC tokens yet, but countries like Sweden, England and Uruguay shared plans to develop their digital tokens or at least a digital form of their currencies.
What makes digital currency popular
Digital currency comes with countless advantages that make it popular in the modern world. Check out this list of advantages that would make you switch up to digital tokens:
Fast transfer and transaction time
Digital currency exchange and transfers are regarded as one of the fastest ways to transact since the assets generally exist in the same electronic realm. Additionally, digital currency transfers rarely require intermediaries, which lessens the amount of time needed to process a transaction.
All of the exchanges within the digital network happen directly between the transacting parties. If there is ever a need for intermediaries, it is only to use their services for the transaction.
Another interesting factor that makes digital currency advantageous is that it can record electronic transactions and record and keep your important data. The chance of losing important information is lessened since there is a record on your online account.
No physical manufacturing required
Unlike traditional currencies that require a physical manufacturing facility to create and distribute assets, digital currency only uses resources online. This lessens the cost to produce money and allocates the resources needed for its physical creation to other important things.
Another important factor that makes digital currency better than traditional tokens is that it is immune to physical deterioration whereas physical bills can soil over time.
Monetary and fiscal policy implementation
The current financial system heavily relies on a series of intermediaries. With the introduction of digital currencies, the government agency can now disburse the assets directly to the citizens, which then simplifies the distribution and production process of money.
Cheaper transaction costs
Since digital currencies enable direct interaction between the sender and the receiver in the transaction process, the cost of digital currency transfers is lowered. By cutting the middlemen from the process, the financial sectors can remove the intermediaries who seek economic rent to process transactions.
Challenges of digital currency
Since digital currencies are still a new concept, they still have lapses that need to be rectified. Here are some of the challenges that digital currency faces today:
Storage and infrastructure issues
Since digital currencies exist in the electronic world, it does not require a physical wallet like your traditional currencies. However, as data, it needs a storage and processing system. You also need to have a constant connection online if you want to access your funds.
You need to have an application or a wallet where you can store your digital assets. You can find a list of different wallet applications online depending on what currency you are using. Most of the time, the agency that created the token itself has an application that you can use to make transactions.
The downside of this is that you need to have sizable memory storage if you want to update and keep the data from your transactions.
Hacking potential
Digital currencies exist in the electronic realm, which makes them susceptible to hacking, especially if you are not careful in storing your information.
Hackers have attempted time and time again to steal digital currencies by cracking the code in the protocol system. The digital currency industry is still trying to remedy the situation by creating tougher security in their applications that requires seed phrases and authentication codes.
Volatile value
Digital currencies are not anchored onto a set standard like government-issued bank notes. For this reason, their value can plummet and soar at an unexpectedly fast rate. This can be hard to get used to if you are new to digital currencies, more specifically crypto.
Some people take advantage of the volatility to buy and sell tokens at the right time. This is how most people make their money from crypto.
What’s ahead of digital currencies?
Digital tokens are still in their early form of development. It still needs to undergo several changes before it can replace fiat from the general market. However, the continuous expansion of technology bodes well with the growth of digital tokens.
Should you invest in digital coins?
The world of technology is progressing fast. It is only a matter of time before everything can be processed digitally. This is a trend you wouldn’t want to be left out on, so if you are looking for a good investment, you should try digital currencies.