Almost everyone is aware of the concept of how traditional money is centralized, and cryptocurrencies are decentralized. If the everyday consumer does not properly understand the meaning of these terms, seeing the benefits of using either one becomes a problem. But first let’s get to know exactly what each of these currencies mean and what powers them.
What is fiat money?
Fiat money refers to a physical currency that lacks intrinsic value but is declared a legal tender by a government. It is only a valid currency solely by virtue of a declaration by a government, hence its operations, unit in circulation and value is backed by a central body—the government. Every government of the world have their own fiat money.
What is cryptocurrency?
Cryptocurrency on the other is a digital currency that uses encryption techniques to create and regulate further generation of units of the currency. It operates independent of any central body. Its operation is backed by the blockchain technology.
Now that we have known what they are and the backing they have, let’s us look at other very important features that differentiate them, and what makes one more beneficial than the other.
- Fiat money and every additional units of it is created on demand. There is no set limit to the number of units that can be made. Whenever the need arises the government makes more of it, as simple as that. This makes its value to depend on demand and supply. As more units are created out of thin air, their value diminishes. The best way to see the flaw in this is this: when things become costly in the market, it is because the currency has depreciated in value.
Cryptocurrencies have a set limit that when reached no further unit will be made. Its value then depends only on supply. This limited amount makes it rare, valuable and precious. No central body controls when and how much is added into circulation. Every user of the currency takes part (by interest) in doing this through a process called mining, or through Initial Coin Offering.
- Since fiat money has a physical form, the central body that controls it can employ virtually anything they want to make it with.
Cryptocurrencies only exist and can only exist in digital form.
- Transactions in fiat money has so many limitations: there is restrictions on the amount to be sent or received at once; there is heavy charge on each transaction and there is no transparency in transaction records (only the government and whatever other third party they employ have access to this record).
Cryptocurrencies are powered by the blockchain technology that acts as a public ledger. Every transaction that occurs is visible to every user of that currency. Everyone know it occurred, how much was transacted and exactly when it occurred. There is little charge on transactions, there is no restrictions on amount that can be sent or received. And there is no third party.
The list of characteristics and differences between these two currencies cannot be exhausted, but the few that have been outlined above certainly gives a clear picture of what each of them have to offer the everyday consumer.