In an era where AI and Web3 are making fast transitions into every part of life, it is impossible to remain impervious to cryptocurrencies.
Cryptocurrencies are the primary byproduct of blockchains and they are an integral part of the governance model. This article talks about cryptocurrencies and their inherent risk and advantages.
What is a Cryptocurrency?
A cryptocurrency is a digitally encrypted form of money or medium of exchange. It is based on blockchain or a distributed ledger and it can represent the transfer of value. Blockchains are open-sourced projects that exist in the form of nodes or decentralized projects.
It means that blockchains do not need to rely on the traditional banking system to authenticate transaction records. Blockchains can host data in the form of copied fragments across various nodes.
At the same time, blockchains adopt consensus mechanisms to verify transactions such as Proof-of-work, Proof-of-Stake, Proof-of-History, Proof-of-Spacetime, and others. Cryptocurrencies are encrypted and fungible assets. Their total amount can be capped or infinite. Cryptocurrencies are used as trading instruments.
Advantages of Cryptocurrencies
Cryptocurrencies have attempted to rewrite the financial infrastructure. Here are some of the most prominent and noteworthy benefits:
One of the most prominent utility of blockchains is tokenization. Blockchains can incentivize digital tasks that were not earning their creators as much direct income before. Take, for example, Filecoin which is built on top of the IPFS.
The decentralized space-sharing option now allows users to earn more money by lending spare storage space. At the same time, businesses can tokenize their assets using various blockchains and earn token revenues or engage in fractional sales or purchases of products.
Traditional banking services are still largely inaccessible to a major portion of the population in developing countries. Meanwhile, there are some areas where trust in a centralized and government-backed payment system is waning.
Under these circumstances, cryptocurrencies bring financial inclusion to the unbanked masses. On the other hand, it also provides a banking alternative.
The state controls everything based on its hegemony over money. In every modern and democratic nation, people at large have limited options when it comes to taking control of their financial freedom.
Cryptocurrencies are a substitute market where investors can exercise greater financial autonomy over their holdings in comparison to the traditional banking system.
Cryptocurrencies are often criticized for being volatile. However, the rule of high-risk investment also promises high returns for investors. It also serves as another means for asset allocation when the bonds and stock markets are not producing expected returns.
Blockchains are more secure in comparison to centralized banking networks. Therefore, many Central banks are experimenting to create CBDCs based on the blockchain infrastructure.
Since blockchains are secured with encryption technology it is almost impossible to replicate or manipulate transaction records present on the digital ledger. At the same time, they form a stronger front against hacks and exploits since they do not have a single point of failure.
Blockchains are open-sourced and permissioned networks. All participants of the blockchain can read the transaction record and authenticate them. At the same time, the consensus models usually authenticate data based on a democratic agreement between the nodes.
Meanwhile, blockchains employ a governance token voting system whereby participants are informed about new proposals and asked for their opinions.
Cryptocurrencies serve as a hedge against inflation. Fiat currency value devolves over time since its supply continues to increase. At the same time, regular increment in inflation is considered to be a prerequisite for a flourishing economy.
It means that over time the purchasing power of fiat currency holders continues to decrease by two folds.
However, conversion to cryptocurrencies can protect investors from losing the value of their asset ownership and serve as a hedge against inflation at the same time.
Risks Associated with Cryptocurrencies
Some of the most visible and important risks associated with cryptocurrencies are listed as under:
- Cryptocurrencies can face regulatory uncertainty and scrutiny.
- Crypto prices are volatile and they are often classified as high-risk assets.
- Storing cryptocurrencies entails keeping private keys secure which can be a hassle for investors and losing the private key can lead to the permanent loss of their holdings.
- Crypto projects can suffer from technical exploits and hack attacks that can lower network integrity.
Cryptocurrencies are based on blockchains and blockchains are getting ingrained in every profession and sector. Cryptocurrencies are yet to become as popular as social media, e-commerce, and internet access but the continued adoption of the technology is increasing its everyday utility at a rapid pace.