Overview of Fiat and Cryptocurrencies: Let’s explore the key differences between the two
Overview of Fiat and Cryptocurrencies: Any effective form of money must act as a medium of exchange, store of value, and unit of account. Both fiat currency and cryptocurrency deliver this utility but are different in several key ways. Their value is the result of user trust; placed in the State and Central Banks for fiat currency, placed in the blockchain system, and validation consensus for cryptocurrency. Fiat currency is centralized — issued and controlled by third parties, while cryptocurrency is decentralized — transactions are peer-to-peer. Cryptocurrencies exist in limited quantities, while fiat currencies can be issued at will. Bitcoin, for example, is limited to 21 million units. This fundamental difference explains the deflationary aspect of cryptocurrencies and the inflationary aspect of fiat currencies. Fiat currency is considered less secure than cryptocurrency. It is indeed sensitive to virtual attacks aimed at collecting banking data. In addition, fiat currency is always vulnerable to theft and robbery.
What is fiat currency?
Commodity money gets its value from its worth, like with precious metals (e.g. gold and silver), salt, or even shells. Fiat money has attributed value because a government declares it legal tender – it has no intrinsic value.
What are cryptocurrencies?
Cryptocurrencies, crypto-currencies, or cryptos are digital currencies designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. While fiat money is subject to inflation and central banks can print more at any time, the leading cryptocurrency Bitcoin has a fixed supply of 21.000.000 units, making it even scarcer than gold.
Fiat currency: Pros and Cons
Fiat currency gives governments greater flexibility to manage their currency, set monetary policy, and stabilize global markets. It also allows for fractional reserve banking, which lets commercial banks multiply the amount of money on hand to meet demand from borrowers.
Government-bound value – relying on government stability. The worst-case scenario is that the value of the fiat currency may completely collapse. High fees and limits – It is ridiculous when banks set daily limits for withdrawing and spending your money.
Cryptocurrencies: Pros and Cons Possible
First of all, crypto-currencies eliminate intermediaries during transactions. The processing time for a money transfer no longer depends on the value date mechanism imposed by the banks. Second, blockchain provides an effective defense against fraud, as ledger entries cannot be changed once processed.
It comes in the form of a database in which you can find the history of exchanges that have been made since it was opened. Moreover, this database is shared by the members of the blockchain without any intermediary. This decentralization makes transactions inviolable. Thanks to this, each member of the network can check the validity of the chain.
However, the system remains vulnerable to certain cases of fraud and hacking such as the 51% attack or the social engineering techniques used by hackers. In the international financial system, economic aberrations persist where a currency loses its value by leaving its national borders.
The Nigerian naira is a perfect example: its value drops by 30% as soon as it leaves Nigeria. Digital currencies, for the most part, are not issued by a nation or state and therefore are not subject to the same geographic fluctuations or political influences.
Cryptocurrency and fiat currency diverge in many aspects, the former having been created by Satoshi Nakamoto in response to the flaws inherent in the latter. Degree of centralization, level of security, inflationary or deflationary aspect. Each has its advantages and disadvantages, and each has its supporters and detractors. Only the future will tell how important cryptocurrencies will be in the global economy compared to fiat currencies, which are the majority today.
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