Digital Currencies (Part 1)
Digital Currency is the latest way of exchanging for services or goods. They are enabled using blockchain tech, which helps it work out all the nitty-gritty involved in securing it cryptographically and do all the complex math under the hood, which is precisely what we will be looking at in this series. Once I’m done sharing this knowledge with you all, I’ll leave it in your hands to decide if digital currencies will be massive or just a passing trend.
In the beginning, when there wasn’t money available as a medium of exchange, people used the barter system to exchange stuff; for example, If I had plenty of apples and I wanted an orange. I would find someone with orange and exchange it, but what if the person I was sharing the apple with wanted a mango instead? It was one of the shortcomings of such a system, and that's why we moved on to something easy to carry around and would never lose value over time. If we didn’t sell apples within a month or so, they would all go bad, right? So we started using coins as a means of buying and selling stuff. So far, so good. But let’s say if I did not have any of these coins today, knowing that I’ll have them tomorrow but still wanted to buy those oranges (Damn, I love oranges). It's what leads to the credit system, which, as we know today. But the problem here is that you have to trust that the person will repay the loan.
So basically, merchants do take a risk whenever accepting credit as payment. But because we have the banks, what happens is money is immediately sent to the merchant, and there’s a promise in place that you will pay what you own to the credit card company/bank. But once again, we are at risk of compromising the credit card number and other info attached to it, which is what it all takes to make the payment. But we have learned to live with the risk associated with them. We believe that the banks are doing all in their reach, keeping the security and maintaining the financial system's integrity.
Digital currencies or famously known as cryptocurrencies (we will soon come to as why they are called cryptocurrencies), have another way of making this exchange. This process doesn’t rely on a bank or central authority's trust because it uses specific mathematical algorithms to work it out without any external involvement. Also, because of this very same reason, it's hard to control them single-handedly. No rules can be changed by a government acting in the interest of bankers, which is what people argue happened in the 2008 financial crisis.
Let's approach the next section and if none of the above made any sense, then let’s move on with only one takeaway that is “Money is built on trust” which is how cryptocurrencies work.
Alas, that's all for part1 in this series. We will take a closer look at cryptocurrencies and their intricacies in the following parts. I hope you enjoyed this byte-sized read. Stay tuned!!