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Why are cryptocurrencies better than fiat money?

First, let's understand why we need money. In the modern economic model, money serves several crucial functions for the global economy:

  1. Medium of exchange, payments, and settlements: money is used to purchase goods and services, settle transactions among various participants in the economy, repay debts, and distribute salaries and other income.
  2. Unit of value measurement: money allows us to assess the value of goods and services in a universally understandable equivalent.
  3. Store of value: money can be saved and used in the future to purchase goods and services.

So, what about cryptocurrencies?

At the moment, cryptocurrencies cannot fully replace fiat money. Out of the three main functions of money, bitcoin, for example, currently excels primarily as an asset for accumulation and speculation.

Cryptocurrencies show promising results in payments, although they still have a long way to go in that direction. However, if Bitcoin becomes more economically stable, it could lead to a significant increase in the number of companies willing to accept it as payment.

However, for bitcoin to replace the dollar as an international measure of value, it needs to become much more stable and predictable. Currently, the high volatility makes bitcoin unsuitable for use as an international measure of value.

But why does everyone talk about cryptocurrencies?

Cryptocurrencies have long attracted attention as a means of transferring funds without intermediaries or government intervention.

To transfer fiat money, we rely on intermediaries such as banks or payment systems, which record transaction information in their centralized ledgers and potentially have the ability to reverse a transaction or freeze an account.

In cryptocurrency networks, however, transactions are conducted directly and recorded in a decentralized ledger called the blockchain. Information about each transaction is stored on all devices connected to the network and is available for anyone to view. Furthermore, no one can reverse a completed transaction or alter the chain of transfers.

In essence, the cryptocurrency system provides each user with the opportunity to be their own bank, and governments or corporations no longer have exclusive rights to mint new coins or access users' accounts.

Another distinctive feature of many cryptocurrencies has become increasingly popular over the past year and a half amid the economic crisis and soaring inflation worldwide. Unlike fiat currencies, most tokens have a deliberately limited or controlled quantity. This fact eliminates the possibility of issuing additional currency and protects its value from long-term inflationary effects.

One of the main advantages of deflationary cryptocurrencies is that they protect investors from the loss of value in their investments. With the inflation of the dollar, its purchasing power decreases, resulting in damage to those who hold their money in dollars. In contrast, during deflation, the value of the asset gradually increases, allowing investors to preserve and even increase their savings.

Furthermore, due to their supranational nature, cryptocurrencies appear more advantageous for cross-border transactions. Cryptocurrencies allow for sending money worldwide with minimal fixed fees, unlike transfers through banks and payment systems, which can be very high due to checks and bureaucracy.

Additionally, cryptocurrencies can provide a good level of anonymity while maintaining full transparency of the economy and transactions of specific individuals or public institutions. Cryptocurrencies enable the sending and receiving of money without revealing one's identity, which can be useful for those who want to maintain the confidentiality of their financial operations. However, under certain conditions, public figures can disclose the ownership of specific wallets and their financial assets, enabling analysts, journalists, and investigators worldwide to monitor the integrity of transactions in real-time.

Interestingly, the financial barrier to entry for investing in cryptocurrencies is much lower than entering the traditional stock market.

Thanks to their advantages, cryptocurrencies have the potential to become an alternative to conventional money, but solving numerous problems and creating the necessary conditions for their broader use will be necessary. Currently, cryptocurrencies do not have sufficient conditions that would allow them to fully replace fiat money.

What are the existing problems?

In order for cryptocurrencies to replace the existing fiat financial system, certain changes need to be made in various areas.

First and foremost, a convenient and secure tool for storing and using cryptocurrencies needs to be created. Currently, many users encounter problems when working with cryptocurrency wallets, such as complexity of use, lack of security, and high fees. To address these issues, improvements in wallet technology and the creation of new services are necessary to ensure user convenience and protection against theft.

Although cryptocurrency wallets have been increasingly integrated into our lives, making their way onto smartphones alongside banking applications, and most importantly, becoming much more convenient than traditional mobile banking. And for residents in some regions of the world, it is easier and more accessible to have a cryptocurrency wallet than to use banking services.

Secondly, it is necessary to address the scalability issues of cryptocurrency networks. Currently, cryptocurrency networks cannot process a large number of transactions simultaneously, leading to delays and high fees. To solve this problem, new consensus algorithms need to be developed and network performance needs to be improved.

For example, one possible solution is increasing the block capacity. This involves increasing the maximum size of a block that can be added to the blockchain. In August 2017, the block capacity of Bitcoin was effectively increased from 1 MB to 2 MB by implementing SegWit.

Another way to speed up and reduce transaction costs is by utilizing second-layer solutions. This entails creating parallel networks that can process transactions off the main blockchain. Examples include the Lightning Network for Bitcoin or Plasma for Ethereum.

Furthermore, network optimizations can be implemented, such as improving transaction routing algorithms or reducing the time required for transaction verification. Changes in the consensus algorithm used in the blockchain network can also contribute to faster transactions. For instance, transitioning from "Proof-of-Work" to "Proof-of-Stake" eliminates the need for complex and time-consuming mathematical operations.

In some cases, "sharding" is possible, which involves dividing the blockchain into multiple parallel side chains. This allows for simultaneous transaction processing in different chains, reducing the load on the main blockchain and increasing its throughput. Additionally, side chains can be optimized for specific types of transactions or applications, improving their efficiency and performance. However, developers need to ensure that the side chains are connected to the main blockchain and have security mechanisms in place to avoid potential attacks or data loss.

Thirdly, it is essential to establish a legal framework for cryptocurrency operations. Currently, many countries lack clear legislation regarding cryptocurrencies, leading to uncertainty and risks for users. Rules and laws need to be created to protect user rights and prevent illegal activities.

While some economically advanced countries have already enacted laws regulating cryptocurrency usage, most others are still in the ongoing process of studying this matter. For example, Japan was one of the first countries to start regulating cryptocurrencies. In 2017, it passed a law on payment services that recognized Bitcoin and other cryptocurrencies as legal payment methods. In the United States, cryptocurrency is also regulated at the federal level. Switzerland is considered one of the most crypto-friendly countries in the world. In 2018, it passed the "Blockchain Act," recognizing blockchain technology and cryptocurrency as legitimate financial instruments.

Fourthly, it is necessary to increase the level of awareness among users about cryptocurrencies and their possibilities. Many people still do not understand what a cryptocurrency is and how to use it.

To address this issue, it is important to carry out informational work and provide education to users.

Additionally, to popularize cryptocurrencies, it is necessary to create new financial instruments such as futures, international exchanges, and payment gateways. Making bitcoin and major cryptocurrencies more user-friendly and secure may involve the development of legislation that ensures user rights protection and prevents illegal activities.

Lastly, conditions need to be created for widespread use of cryptocurrencies in various areas. Currently, cryptocurrencies are mainly used for speculative purposes, but they can be useful in other areas such as international trade, micro-payments, and charity. To achieve this, new services and products that utilize cryptocurrencies need to be developed.

What is the end result?

In the foreseeable future, fiat money is unlikely to disappear from our lives, as it would mean states giving up their own currency sovereignty. However, the advantages of blockchain over the traditional financial system are undeniable.

The crypto community still has a long way to go before the replacement of fiat with cryptocurrencies becomes possible. However, overall, in order for bitcoin to replace the dollar as the world's main reserve currency, it needs to become a more stable and predictable asset, which is achievable over time.

If all the issues mentioned by us are addressed, cryptocurrencies can gradually become a viable alternative to the fiat financial system. However, this process may take a long time and will require significant efforts from developers, users, and policymakers worldwide.

© – , updated 08/04/2023
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