What Is Digital Currency & How Does It Work?

What is Digital Currency?

Digital currency (or digital money) is any method of payment that is entirely electronic. Unlike coins or dollar bills, digital cash is not visible to the naked eye. It is transferred and accounted for via online platforms. The cryptocurrencies Bitcoin, Ethereum, GanderCoin etc. are well-known forms of digital currency. 

GanderCoin was launched as the first Indian digital currency. It offers multiple features with a user-friendly interface. With that, it makes themselves accessible to everyone whether he/she is an experienced or inexperienced trader. And now because of its accessibility, it has become popular and known as the best Indian crypto coin.

Types of Digital Currencies

1. Cryptocurrencies/Virtual currencies: Cryptocurrencies are digital currencies that rely on cryptography to safeguard and verify network transactions.  As cryptocurrencies run on blockchain technology. In addition, cryptography is utilised to regulate and control the generation of such currencies. Some popular cryptocurrencies include Bitcoin and Ethereum. Cryptocurrencies may or may not be regulated depending on the jurisdiction.

On the other hand, Virtual currencies are unregulated digital currencies that are governed by developers or a founding organization made up of different stakeholders. Virtual currencies too can use cryptography in its network. A defined network protocol can also regulate virtual currency algorithmically. A gaming network token, for example, is an example of virtual money whose economics are created and controlled by developers.

2. CBCDs: Central bank digital currencies (CBDCs) are currencies that are regulated and issued by a country's central bank. A CBDC can be used to supplement or replace regular fiat currency. In contrast to fiat currency, which exists in both physical and digital forms, a CBDC only exists in digital form, for example, E-rupee.

How Digital Currency Works?

Digital currencies work on three basic technologies that empower digital currencies:

1. Decentralization: One of the fundamental principles of cryptocurrency is decentralization. Unlike traditional currencies, which are issued and regulated by governments and central banks, cryptocurrencies operate on a decentralized network of computers. This network is known as the blockchain. Blockchain is a distributed ledger that records all transactions across the network.
   
   

2. Blockchain Technology: At the heart of every cryptocurrency is blockchain technology. A blockchain is a series of blocks, each of which contains the history of transactions. Here, one block equals one transaction. These blocks are linked in chronological order forming a transparent and immutable record of all transactions. Firstly, security is ensured by this technology, and more crucially, fraud is prevented.
   
   

3. Cryptography: The term "cryptocurrency" derives from the use of cryptographic techniques to secure transactions and control the creation of new units. Transactions are verified and authorized using public and private keys. Public keys act as an address where cryptocurrency can be sent, while private keys are secret codes that give you access to your holdings.

How do Transactions work?

• A user initiates a cryptocurrency transaction by establishing a digital signature using their private key.
  
  

• The transaction is then broadcast to the blockchain's network of cryptocurrency nodes, where network nodes (computers) validate it.
  
  

• The transaction is added to a block and added to the blockchain once it is confirmed.
  
  

• Through mining, the network agrees with the transaction's authenticity. To validate transactions, miners must solve challenging mathematical riddles; in exchange, they are rewarded with newly minted cryptocurrency (the exact method depends on the cryptocurrency). Once the transaction is complete, the user receives the cryptocurrency in their wallet.

Advantages of Digital Currencies

• Virtual currencies don't require costly production or physical storage.
  
  

• Virtual currency technology speeds up transactions and does away with regional restrictions.
  
  

• Decentralized virtual currencies have the potential to remove middlemen from financial transactions and create a direct line of communication between the two parties involved.
  
  

• It is possible to program virtual currencies to carry out automatic transactions. For instance, without the need for human interaction, smart contracts on the Bitcoin, Gandercoin, Ethereum, etc blockchain can retain and release funds in escrow accounts.

• Virtual currencies are electronic stores of value that can be used to give value to a variety of items, such as artwork and gaming tokens.

Disadvantages of Digital Currencies

• Hackers find virtual currency to be appealing targets. Numerous instances of blockchain network hacking for cryptocurrencies—a type of virtual money—have been reported.
  
  

• Virtual currencies do not require production or physical storage, but there are other related expenditures. Users of cryptocurrencies, for instance, must keep them in digital wallets. There are custodial fees associated with cryptocurrencies at trading exchanges.
  
  

• Scams involving virtual currencies are possible. In reality, some initial coin offers (ICOs), which gained popularity following a spike in cryptocurrency prices, were frauds in which private developers offered unvalued tokens for fictitious networks. It was not possible to exchange the tokens for cash.
  
  

• Since unregulated virtual currencies are typically not regulated by financial institutions and are instead produced by private businesses, investors do not have legal recourse against them.
  
  

• Cryptocurrencies and other virtual currencies traded on exchanges are susceptible to sharp price fluctuations.

The first-ever cryptocurrency Bitcoin, whose arrival in 2017 created a boom worldwide. Every government and organization has been paying attention to it. El Salvador, a small Latin American nation, was the first country to accept Bitcoin as cash currency. El Salvador’s president, Nayib Bukele, said in May 2021 that Bitcoin will be accepted as legal tender. 

Conclusion

The innovative invention of cryptocurrency has the power to alter the way we think about money and banking. With the use of blockchain technology and cryptographic principles, it is decentralized and offers security, transparency, and accessibility to users all over the world. Even if you are an investor, trader, or just simply curious about cryptocurrencies, it's important to understand how they are operated and work.

Written By- Manmeet Kaur