What is a Currency?
A currency mainly functions as a medium of exchange, a unit of account and a store of value.
Before the advent of currency as we know it, what we had in place was the barter system which was the earliest stage at which transactions were made. But, for this system to be successful, there needs to be a double coincidence of wants. Meaning that both parties have to agree to sell and buy each commodity.
If Mr A had a basket of apples but needed shoes. He would need to find someone who wants his apples and has a pair of shoes to exchange it for. This was the major challenge with trade by barter.
An improvement on this was “primitive money”, which referred to items that people placed some amount of value on like animal skin, cowry shell, cattle and elephant tusks. The primary challenge with primitive money was that some of them were so large that it was difficult to carry them about and use them as a means of exchange.
The point here is that new forms of money are improvements on older forms of money and cryptocurrency seeks to do the same.
6 Important Features Every Cryptocurrency Should Have
So, why did we have to talk about currency as a whole if our aim was to identify what a cryptocurrency was? Well, cryptocurrency/digital currency functions just the way other currencies function. The difference is that it is not backed by any government. Cryptocurrencies are also virtual which means that the only place they exist is on the internet.
Although there are different types of cryptocurrencies, we will use the first cryptocurrency, Bitcoin, as our benchmark to map out what every cryptocurrency should have.
1. Elimination of a Central Party
This is the most distinctive feature between fiat (your local currency) and cryptocurrency. For fiat, the government and financial institutions give it the value it has. You can use a piece of paper to carry out transactions because the government has placed some value on that piece of paper.
Cryptocurrencies, on the other hand, are peer-to-peer. Creation of additional units is regulated by the blockchain and this eliminates control by a central party.
Cryptocurrency only exists online. Bitcoin, for example, operates on a peer-to-peer basis which means, unlike fiat, it does not exist in paper or coins.
3. Single Spending
Cryptocurrencies can only be spent once. It’s not possible to spend one bitcoin or one ethereum twice or thrice with various users in an attempt to purchase an item.
Cryptocurrency transactions cannot be reversed. When a transaction occurs on the cryptocurrency network, it is recorded on the blockchain. For it to be reversed, it would mean that most nodes (think of these as computers) in the blockchain need be altered. This is an impossible feat to accomplish.
Transactions are done anonymously on the cryptocurrency network. Because there is no central authority, there is no need for users to identify themselves. Bitcoin uses private and public keys to authenticate transactions.
6. Near Instant Transaction
Cryptocurrency transactions happen very fast irrespective of distance. This is why it is raising the standard for how money is sent across borders.
One thing to keep in mind is the fact that cryptocurrency is not a Ponzi or get-rich-quick scheme. It is a transparent system that was created to revolutionise the financial system. So, before you stamp any coin as a cryptocurrency, step back and ask yourself if it possesses all the features that a cryptocurrency should have before you dive in.