In this guide, you will get to know about digital currency, how it works, different types with examples.
First I will give you a quick introduction and the history of currency.
Digital currency or cryptocurrency is something that everyone wants to talk about but no one really knows how they work, so I’m going to fix that. So it is Digital Currency explained.
Since man evolved currency has been an important part of our lives. In the caveman era, they used a barter system. The barter system involves goods and services being exchanged among each other.
So now we have a situation of exchanging 8 apples and getting mangos in return which was an inefficient way to trade.
So the barter system fell out of use because it has glaring flaws. These flaws include having people’s requirements coincide.
So that the inefficient barter system did not work, the currency went through a few iterations. First, the gold plated was introduced and later paper currency gained popularity. The 11th century was the impetus for the mass production of paper money in premodern China.
Then in modern civilization, they used paper currency and now we have paper currency along with credit cards and digital wallets like Amazon pay, Paypal, etc.
All the currency was controlled by a centralized body which is banks and governments.
In 2020 during the covid-19 government has printed as much money they need to survive their economy. This leads to inflation, money in your bank is getting devalued when they print more money.
So this is why the future of currency lies in digital currencies.
This was a quick introduction or history about currency and why digital money is so important in today’s world.
Table of Contents
What is Digital Currency?
The development of digital assets and digital currencies rely on strong cryptography or encryption algorithms to make them extremely secure.
The best examples of digital currencies are cryptocurrencies which are Bitcoins, Ethereum, Litecoin, etc.
There are major differences between digital currencies and fiat currency.
The fiat currency can be printed as demand increases so inflation also increases. Also, this is controlled by the government and banks.
The Digital currencies function like tokens with values that fluctuate according to each asset market trends on Behavior.
A digital currency is any currency that is existing Banknotes and coins available in digital form with similar features.
However digital currencies allow us for instantaneous transactions, borderless transfer of ownership like traditional money.
Digital currencies may be used by physical goods and services.
The management of digital currency can be either centralized through Central Bank issuance or decentralized where the control over the money supply can come from various sources of digital currencies, especially Central Bank digital currencies or CBDC are the next steps in practicality and convenience for legal tender on a global scale.
Digital money is also a gateway to Universal Financial inclusion using evidence from its and money app currently up the digital dollar. The dollar is partnering with regional central banks to form the ASU Central Bank.
It will centralize the issuance of digital currencies and make local and Regional cross-border digital payments faster, more affordable, more secure, and convenient.
Examples of Digital Currency
In America, they use the Dollar or in Japan, they use yen. Just like any other currency, digital currency is similar to it but it works on the internet. If there was no internet there would be no digital currency.
The more valuable digital assets or digital currencies are Bitcoin or Ethereum.
So you might have a question in mind what is bitcoin?
Bitcoin is a decentralized digital asset and has not been issued by an institution or a single administrator.
Bitcoin can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries.
How does Digital Currency Works
After knowing what digital currency is, let’s see how digital currency / digital money works.
If we start by thinking about what money is.
Money in modern economies typically takes the form of banknotes and coins and in the vast majority of cases, deposits are held in bank accounts.
These digital records and money balances, essentially they only exist on the computer.
Making payments is a matter of the grading system to make changes to this record sincerely.
So let’s take a very quick example, imagine Joe wants to transfer money to Rogan electronically. Let assume they used different banks in which case the payment goes from Joe’s banks to Rogan’s bank with some central entity.
Typically a central bank and the Bank of England sit at the center of most payment systems in the UK. Just like PayPal which works worldwide. These systems still rely on a trusted central entity.
Most recently digital currencies have emerged which are structurally different from other Innovations.
A key point to note is that digital money is both a payment system and a currency.
The real innovation of digital currencies is decentralized payment systems.
If we go back to the previous example, Joe wants to transfer money to Rogan but this time they are transferring digital money like bitcoin.
This is paid directly from Joe to Rogan, there are no banks involved like any central bank or anything.
Without a central third party, there needs to be a secure way for everyone to agree on changes to the ledger since digital information is easy to change or copy.
Digital currencies overcome this problem by making it possible for a reliable copy of a ledger to be distributed to everybody in the system.
Types of Digital Currency
Types of digital currencies are:
- Cryptocurrency
- Virtual Currency
- Central Bank Digital Currency
Cryptocurrency
Cryptocurrency is a decentralized currency that works on the blockchain. It’s also called a digital asset.
The best cryptocurrency examples are Bitcoin, Ethereum, Litecoin, ripple, etc. Also, facebook’s Libra cryptocurrency is on hold, You can buy a libra cryptocurrency when it gets published on any crypto exchanges.
Virtual Currency
Virtual Currency is a digital representation of a currency. This type of currency is not regulated by any bank or government. Let me give you simple examples
Let’s assume an e-commerce website “ABC”, This site has a virtual currency called ‘ABC coin’. When you buy anything from the ABC site you have to pay them in ‘ABC coin’ because they don’t accept fiat currency.
First, you have to buy an ‘ABC coin’ from them then you can buy anything from that website.
Another best example is Royal Pass in games or any kind of gems. First, you have to buy those gems with your fiat currencies then they will provide you gems.
Central Bank Digital Currency
Central Bank Digital Currency is a digital fiat currency which is more likely centralized currency. It is also called CBDC.
The best example of this is the Chinese digital currencies. Many countries are planning to create their own digital currencies.
Facebook is also trying to create a coin called libra cryptocurrency.
List of Digital Currencies
- Bitcoin
- Ethereum
- Litecoin
- Ripple
- Non-Fungible Token
Where to buy digital currency
Here is some best Digital Currencies or E-Currency Exchanges
- Binance
- Coinbase Pro
- Kraken
- Bitstamp
There are almost 370 exchanges for digital currencies / digital money.
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