What is a Digital Currency?

Digital currencies, also known as e-money, are now more popular than ever. Until recently, digital currency lacked the security to eliminate the need for paper money. However, with the rise of the internet and the advent of blockchain technology, this is no longer the case. Today, digital money is set to change the market forever.

Importantly, digital currencies fill all the uses of traditional forms of money. You can purchase goods or pay for services via these technologically superior financial alternatives. Digital money provides users with instantaneous transactions and more transparency in the market. As such, more countries plan to unveil some form of digital currency in the next couple of years.

What is a Digital Currency?

Unlike their traditional counterparts, digital currencies only exist on the internet. This new form of money is completely intangible, you can't touch or feel it. It only exists in the digital realm. Every aspect of their issuance, transfer, and record-keeping is digital. Consequently, you will need an internet supported device to access these funds.

Advantages of Digital Currency

Digital currencies bring significant advantages to the market. For one, they provide users with a more streamlined alternative. Digital currency payments as both instantaneous and low-cost. Additionally, they introduce a higher level of record-keeping and transparency to the sector.

Peer-to-Peer Transactions

Digital currencies accomplish these tasks via a peer-to-peer transaction protocol. Just like when you hand someone a piece of fiat currency, digital currency requires no intermediaries to function. This reduction of third-parties within the transaction increases efficiency. Additionally, it significantly reduces transaction times and costs.

These advantages really come to light when discussing cross-border payments. If you have ever attempted to send money internationally, you know that the process is time-consuming and involves multiple checks. Additionally, the costs of sending money internationally can be as high as 7 percent according to reports.  In fact, your pricing will depend heavily on your choice of financial institutions.

Also, the international exchange rate can eat up a large percentage of your funds when sending money across borders. Digital currencies can eliminate these fees as many operate in a borderless fashion. Cryptocurrencies such as Ripple's XRP specifically eliminate these concerns for major banking institutions seeking to send funds.

History of Digital Currencies

An American computer scientist by the name of David Chaum is credited with developing the first concept for digital currencies way back in 1983. By 2990, Chaum created a working model of his theory dubbed – DigiCash. The concept was years ahead of its time. Consequently, it never gained the momentum needed to survive in the market.

The first recorded public use of digital currency in a wide-scale emerged in 1996. The currency, known as e-gold secured millions of active users before it was shut down by government officials in 2008. From that point, a myriad of corporate-sponsored digital currencies entered the market.

All of these digital currencies encountered a problem known as “double-spend.” Basically, developers struggled to develop ways to ensure that each digital currency could only be spent one time during transactions. This issue saw resolution with the introduction of the world's first Cryptocurrency – Bitcoin.

Bitcoin (BTC)

Bitcoin marked a change in financial theory within the market. For the first time in history, digital money filled the three primary functions of currency. It was a medium of exchange, a unit of account, and a store of value. Additionally, it was scarce, unduplicable, and portable.

Bitcoin Whitepaper

Importantly, Bitcoin solved the double-spend issue through the integration of timestamped cryptographic blocks. Bitcoin utilizes part of the time stamp in the hashing algorithm of the following block. As such, a hacker would need to redo the entire blockchain to alter it. In this way, Bitcoin became the first immutable and unalterable digital currency in existence.

Bitcoin adoption hit a fevered pitch in 2017. At that time, Bitcoin saw an all-time market value of just under $20,000 per coin. However, the added network usage created major congestion. As such, it highlighted scalability issues within the network. These issues led to the creation of a number of Bitcoin spin-offs. Most famously Bitcoin Cash.

Today, the crypto market has thousands of currencies. Additionally, Bitcoin's scalability concerns are being addressed via an off-chain protocol known as the Lightning Network. This protocol uses private payment channels to eliminate much of the congestion that plagued the network in 2017.

Central Bank Digital Currency (CBDC)

Recognizing the technological advantages of blockchain technology, Central Bankers are now major players in the cryptocurrency space. However, unlike Bitcoin, Central Bank Digital Currency (CBDC) features a centralized distributed ledger technology (DLT). This technology allows the central bankers to issue and control the monetary supply in a manner similar to the current fiat currency system in place.

Today, multiple countries, have plans to issue digital currencies in the coming years. To date, Russia, India, Uruguay, England, and Sweden all announced digital currency initiatives. However, in all these cases, the digital currency is meant to supplement the current fiat currency in the market.

Maybe in the near future, you will see countries take a step away from paper money entirely. Studies have shown that consumers feel confident in the use of fiat alternatives such as debit cards. If public opinion continues to shift in this direction, there is definitely room for further crypto usage.

The Future of Digital Currency

Given the current state of the world, digital currencies are set to explode in the coming year. Today, there is a robust digital infrastructure in place to support the mass adoption of these currencies. Additionally, their development is being catapulted into the spotlight thanks to the Coronavirus pandemic. You can expect to see this trend continue as more people across the world gain access to high-speed internet. For now, digital currencies such as Bitcoin continue to reshape the international communities' definition of money.