Definition of digital currency
Digital currencies are digitally exchanged and stored money that is safeguarded by cryptography and use blockchain technology - or blockchain.
Governments and central banks do not endorse most digital currencies, which are controlled through decentralized networks.
The emergence and rise of digital currencies
Bitcoin was the first known digital currency, created on January 3, 2009, by an unknown individual - or group of persons - known only as Satoshi Nakamoto, who issued a foundation statement titled "Bitcoin: A Peer-to-Peer Electronic Cash System."
It took several years for Bitcoin to attain notable success, as it took until the beginning of 2011 for its value to grow above $1, then gradually increased to tens of thousands of dollars at this time.
Following Bitcoin's success, several other digital currencies arose to try to replicate its success and expand the uses and features of digital currencies, the most notable of which is the Ethereum currency and network, which added the feature of smart contracts, allowing the development of decentralized applications (dApps), which now have the largest total market value after Bitcoin.
Many currencies now have a value of over a thousand dollars, and the overall market value of digital currencies is predicted to be around 2.3 trillion dollars by the end of 2021, making them an important part of the global financial system.
Many digital currencies are used for money transfers today, especially international ones; to provide high traditional transfer fees through banks and financial institutions, in addition to its main advantage of hiding the sender and receiver's identities; and many people buy digital currencies as an investment with the intention of profiting later when their price rises.
How digital currencies work
Most digital currencies use blockchain technology, which involves storing a database of ownership and cash transfers on the devices of network participants, obviating the need for a middleman or a central institution to arrange and execute transactions.
The concept of digital currencies is based on not requiring the use of national currency papers or coins to determine each person's ownership or balance, but rather on recording transactions and transfers between network members and disseminating transfer information and new balances to all network members.
Each currency also has a consensus mechanism for validating and creating new blocks (new copies of the transaction log), the purpose of which is to prevent the same money from being sent more than once, or double-spending, to protect the currency network from hacking, and to create new currencies (or mining), the most popular of which are Proof of Work (PoW), which relies on the need to expend significant total computing power to create blocks, and Prove of Work (Prove of Work), which relies on the need to expend.
Types of digital currencies
Depending on how they operate, there are two types of digital currencies:
- Coins or Coins
They're digital currencies that run on their own blockchain. Bitcoin, Ethereum, and Solana are just a few examples.
- Tokens or Tokens
They are coins that run on other blockchains utilizing smart contracts, such as Uniswab and DeCentraland, which are both Ethereum-based.
In addition to these two types, stable digital currencies, whether or not they are run on their own blockchain, are currencies whose value does not change according to supply and demand, but rather has a fixed value coupled with the value of a national currency, with the goal of making the use of digital currencies more convenient. To make payments and transfers without risk of the currency's value falling or rising as a result of the transaction, such as Tether, USD Coin, and Dai, which are all worth 1 USD.
Controversy over digital currencies
Cryptocurrencies have received a lot of criticism, with the majority of it falling into three categories:
- dummy value
Many economists and influential figures believe that most digital currencies have no real value and are a bubble that will burst sooner or later, causing significant losses to their owners, and they support this view, particularly because digital currencies, unlike national currencies, are created through operations that are unrelated to real economic activity on Earth. Reality prevents it from expanding and contracting in response to the status of the economy.
- Lack of oversight and transparency
Governments are unable to track, capture, or confiscate monies transmitted via digital currencies, making them an excellent medium for criminal transactions and operations including money laundering, drug trafficking, and terrorist financing.
- Energy consumption and e-waste
Especially for currencies that use the proof-of-work mechanism, because mining and the computing power that it requires consumes a massive amount of energy, sometimes equivalent to the consumption of entire countries for one currency, and miners frequently turn to countries with cheap energy prices generated by unsustainable methods (such as coal), in addition to Miners must constantly update their equipment and get rid of old ones, which leads to the generation of significant electronic.