Characteristics of crypto currencies
How they differ from the traditional notes and coins
IN traditional fiat currencies, central authorities and banks, control the financial system. However, with bitcoin and other crypto currencies, these transactions can be processed and validated by a distributed and open network that is owned by no-one.
Unlike centralised banking systems, most crypto currencies are decentralised on distributed networks of computers that are spread around the world, also known as nodes.
Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a block chain. The transaction is propagated across the peer-topeer network and is replicated by every node, reaching a large percentage of the nodes within a few seconds.
In a decentralised (Block Chain) network, there is no central server (such as a bank) to validate and legitimise transactions between peers. Rather, every entity within the network is given the responsibility of doing this job. In other words, every peer or user within a network has a list with all transactions to ensure that all transactions are valid and that double spending does not occur.
Limited supply
Fiat currencies (e.g. dollars, euros) have an unlimited supply, as the central banks can issue as much fiat currencies as they want. Central banks often manipulate the value of the countries’ currencies as part of its economic policies. Most countries often manipulate their currency to be inflationary over a period of time. The inflationary nature of fiat currencies would mean a decrease in the value of the currency over time.
Therefore, fiat currency holders might bear the cost of the decrease in value and also face the uncertainty of currency manipulation. On the other hand, most crypto currencies have a limited and pre-determined supply of the crypto currency that is coded into its underlying algorithm when it is created. For example, bitcoin has a maximum supply of 21 million, and once this limit is reached, no new Bitcoin can be mined. Crypto currency intentionally creates scarcity to prevent currency manipulation and the decrease of value over time.
Deflationary
Most of the other major crypto currencies such as ethereuma and monero have infinite supply have pre-defined rules for how many coins will be produced each year. Therefore they are predictable in nature. If these currencies are successful in the long-term, it’s highly unlikely that the rate of production of more currency will result in any sort of inflation. The increasing demand, adoption, and destruction of coins in the form of lost private keys will likely offset any moderate increase in supply due to PoW/PoS mining rewards. Many top crypto currencies such as bitcoin, Lite Coin, and Dash have a maximum supply, making them deflationary by nature. Any increase in the demand or adoption of the crypto currency will cause a corresponding increase in the price.
Irrevocability
Crypto currency transactions are irreversible and immutable. The irreversible and immutable features of crypto currency means that it is impossible for anyone but the owner of the respective private key to move their digital assets and those transactions cannot be changed once it is recorded on the block chain. While it is not impossible to modify the transaction, secure cryptography makes it very difficult for modification, because it requires you to alter most nodes in the block chain. In order to prevent fraudulent transactions (that cannot be reversed), all transactions are transparently recorded on the block chain and open to the public.
Unspecified
Since there is no need for a central authority, users do not need to identify themselves when transacting with crypto currency. When a transaction request is submitted, the decentralised network will check the transaction and verify it and record it on the block chain accordingly. Crypto currencies, like bitcoin, uses a private key and public key system to authenticate these transactions. This means users can create anonymous digital identities and digital wallets to transact on the decentralised system and still be able to securely authenticate their transactions.
Key differentials from traditional notes and coins
Efficient
The use of a peer-to-peer database means that there is no need for a central authority or 3rd party intermediaries to process and validate transactions. Users can transact and exchange crypto currencies directly with each other through the decentralised system, and each transaction can be verified on the block chain. This means that anyone with internet can exchange valuables across the world with the click of a button. Furthermore, the costs of transactions using crypto currencies are much lower than transacting through inter-continental bank transfers. Most crypto currencies have a limited supply coded into its protocol, creating a system of scarcity. For example, bitcoin has a maximum supply of 21 million and once the supply limit is reached, no new bitcoin will be added. This makes the existing bitcoin that is in circulation more attractive and valuable as an asset. As the demand of bitcoin grows, its supply will remain the same, and this causes the value of bitcoin to increase over time, making it deflationary in nature. Users of crypto currency will not need to worry about the reduction in the value of their assets.
Secure
Furthermore, since the transaction is recorded on distributed ledger, this means that there is no single point of vulnerability or failure. Everyone on the network has a copy of the ledger so there is no need for a central system because every transaction can be verified against this ledger. The decentralised ledger is known as the block chain. This makes transactions less susceptible to hacking, bugs and system failure (as compared to a single and centralised system), since information is decentralised on a distributed network. Therefore, the block chain technology that supports crypto currencies makes transactions more secure.
Trustless
Crypto currency, like bitcoin, enables a trustless system of transactions. The decentralised network means that nobody has to trust anybody else in order for the network to work. The block chain can validate any transaction between users. When one user broadcasts a crypto currency transaction, all nodes will receive it and verify if the digital signatures are valid, before recording it on the block chain. If the signatures are invalid, the nodes will discard the transaction. The proofof-work algorithm also incentivises individual nodes in the network to help validate these peer-to-peer transactions.