In the traditional financial system, people rely on fiat money as a means of exchange. Its value is determined by collective perception rather than being backed by a precious metal or commodity. Essentially, it’s just paper with authority conferred by a central bank or government. On the flip side, cryptocurrency, a virtual currency used in peer-to-peer economic systems for transactions, operates without centralized control.
At the helm of the cryptocurrency realm stands Bitcoin. It emerged in 2009, created by the enigmatic figure, Satoshi Nakamoto. Early digital currencies suffered from the issue of double spending, where users could spend the same units multiple times. Bitcoin resolved this with a consensus mechanism called proof of work (PoW).
When the government needs to fulfill its monetary policy or fund operations, it simply prints more cash to push its agenda. On the contrary, cryptocurrencies operate based on their respective pre-programmed algorithms that determine how new crypto units are created and issued. In addition, the crypto networks are maintained by a network of computers or participants known as nodes. They are also responsible for processing transactions in a cryptocurrency network. This lack of a central authority regulating cryptocurrency makes them decentralized.
Why are Cryptocurrencies Trustless and Permissionless?
In the traditional sense, when sending money to a friend or family, the bank confirms the validity of your transaction. It acts as the trusted intermediary overseeing the trade. Cryptocurrency eliminates the need for a trusted party so that a transaction is only between two parties – the sender and the recipient. The parties do not have to know or trust each other for a successful transaction.
In the case that you sent money to the wrong recipient, you can reverse the transaction through your bank or service provider. This is not the case in cryptocurrencies. Once a crypto transaction is processed, it is permanently recorded in the blockchain network, rendering it immutable and irreversible.
Assuming that you are traveling to another country, you have to convert your local currency to the currency of your destination. Cryptocurrencies, however, are permissionless, usable worldwide without conversion. Yet, they’re highly volatile, prone to significant value swings in a short time. However, they are considered to be a highly volatile asset class, i.e., their value can significantly fluctuate over a short period.