The potential digital currency holds in this era of rapid technological advancement is limitless. Although almost everyone has heard of the term, not all of us are aware of how big of an influence it can be in the financial space and how relevant it is in shaping the world economy in the future.
This article aims to provide a glimpse into the future of digital currency and its impact on different spheres of society, including technology, finance, governance, and social empowerment.
What is digital currency?
Digital currencies are currencies that do not have a physical form but exist only in electronic form. Unlike physical currencies, they can only be accessed with an electronic device like a computer or mobile phone, but they have similar utilities.
They can be used to purchase goods or services and offer seamless transactions in real time. A digital currency makes use of cryptography for activities like controlling the creation of new units, securing financial transactions, and verifying the transfer of new units.
Though they often operate on decentralized networks, digital currencies can be centralized as well. Decentralized networks are based on blockchain technology that offers privacy, security, and accurate recording of every single transaction, and allow peer-to-peer transactions without getting monitored by authorities or intermediaries.
Centralized currencies, on the other hand, are usually under the surveillance of an authority, like the central bank or the government. While decentralized currencies offer complete anonymity, centralized ones will be closely monitored, mostly when the transactions cross a certain amount and become suspicious.
Types of digital currency
Digital currencies are of various types and each of them comes with its own unique functions, features, and underlying technology. Let’s see about some of the popular ones.
Cryptocurrencies
Bitcoin, the most popular digital currency is a cryptocurrency. These currencies operate on decentralized networks based on blockchain technology.
Blockchain acts as a distributed, immutable ledger that manages the transactions and issuance of new units.
Cryptocurrencies offer pseudonymity and security, while ensuring transparency of transactions and are featured with limited supply that maintains the value over time.
Stablecoins
Stablecoins have their value pegged to a stable asset like fiat currency. Ideally, they maintain a 1:1 ratio with the pegged asset and are less vulnerable to price fluctuations.
Crypto collateralization, fiat collateralization, and algorithmic stabilization are some of the mechanisms they use to peg the value and each of them differs in terms of stability, decentralization, and transparency.
Also, they operate within regulatory frameworks to avoid legal issues and maintain trust.
CBDC
Central Bank Digital Currencies are the result of the governments’ curiosity about how national digital currencies overseen by an authority might work.
They are basically fiat currencies in electronic format but with certain features of cryptocurrency and stablecoins.
They are issued and regulated by a central bank and operate on authorized blockchain networks. Digital Dollar and Digital Euro are two of the examples of CBDCs.
Future possibilities of Digital currency
Digital currencies are starting to become an integral part of our financial system, capable of shaping the future of the world economy and beyond. They could greatly influence,
Transaction Costs
They can reduce transaction costs such as fees for currency conversion, international transfers, and intermediaries, that are typically associated with traditional banking systems.
This will make the transactions more efficient and affordable to the common population.
Financial Inclusion
The highly inclusive space a digital currency platform provides could work in favor of the unbank and underserved population of society.
This will give them access to financial services at a low cost, empowering them to participate in the global economy.
Cross-Border Payments
Digital currencies make up for the delays and inefficiencies of the traditional banking system in international transactions.
They can provide seamless, secure, and faster transactions across borders at a comparatively lower cost.
Cryptocurrency vs Digital Currency
Bitcoin was the first cryptocurrency that was created by a group called Satoshi Nakamoto in 2009. Even though cryptocurrencies are only a subcategory of digital currencies, this was the beginning and inspiration to every digital currency that came after, The success of Bitcoin caused the emergence of thousands of cryptocurrencies, known as altcoins, alternatives to Bitcoin.
Cryptocurrencies like Bitcoin and Ethereum, the most well-known among altcoins, operate on a decentralized platform, serving various purposes including smart contracts, peer-to-peer transactions, and decentralized finance (DeFi) applications.
Digital currency, on the other hand, refers to any kind of currency that is stored and transacted electronically, including cryptocurrencies. Digital currencies even include fiat currencies in electronic format, like CBCDs.
Although they opt for a decentralized network in most cases, when fiat currencies are involved, it is impossible to maintain a decentralized system and thus includes centralized ones that are monitored by an authority.
Conclusion
The future of digital currency is full of possibilities that could revolutionize the world economy. At the same time, it shows a certain level of uncertainty with the governments’ approach toward decentralized digital currencies.
However, with continued collaboration and innovation, we can hopefully overcome those challenges and unlock their full potential to create a more inclusive and empowering global digital economy.
