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Digital currencies are referred to as virtual assets encrypted through specific processes. This encryption makes it almost impossible to counterfeit or produce them improperly. Digital currencies typically operate on a distributed digital ledger called a blockchain network. The first question that comes to mind for anyone new to digital currencies is, what exactly is blockchain? And how are our transaction data stored in this network?
In simple terms, a blockchain is an online distributed ledger consisting of interconnected blocks. Network data is stored in various blocks. Due to the chain linkage of information in different blocks, data manipulation is impossible as the information history of each block is also stored in other blocks. In fact, to hack the blockchain, an attacker would need simultaneous access to all blocks and all miner devices, which is almost impossible due to the decentralized nature of the system and the mechanics of blockchain.
Indeed, one of the most important features of digital currencies is their decentralized nature. Decentralization means they are not produced or distributed by any government or specific formal institution, and governmental financial institutions do not oversee their production and distribution processes. To date, decentralization has made it impossible for governments to manipulate or intervene in the production of these digital assets. Since the ownership of miner devices is not exclusively in the hands of any institution, individual, or sovereignty, and since digital currency owners are not identified with official accounts, practically there is no possibility of market manipulation or authoritative pricing in the market. We will further discuss the path humanity took to the use of these digital assets.
Money History
The Path of Money in Human Societies To briefly mention the history of humanity’s use of conventional money or human transactions, we must go back to the beginning of human settlement. When humans began to settle, each person would exchange products obtained from their profession and production for other necessary items with other humans on a barter basis. However, the barter system never fully met even the basic needs of humans. The exchange process was such that, for example, someone who produced wheat would exchange their surplus production for salt, weapons, meat, or any other product with someone else. The main problem with this exchange method was that some products, although needed, did not have a thriving market. To solve this problem, some substances like salt, weapons, and skins, which almost always had necessary customers, became common commodities for trading.
However, human societies were growing larger and larger, settling further apart from each other. This distance and the change in the primary needs of early humans, which had now advanced, significantly hindered the applicability of barter transactions. Transporting goods for exchange with another item was in itself a very costly and laborious matter. Perhaps humans of that era could not even imagine that one day, millions of dollars could be transferred to the farthest points of the earth with just the push of a button in a few seconds.
Bank Empires
The Emergence of Banks and the Challenges They Brought There is ample evidence of the existence of bank drafts from the time of the Assyrians and even from the era of Hammurabi. In fact, major ancient civilizations such as the Iranian, Greek, and Roman civilizations all benefited from some form of banking system, at least a financial system for minting and distributing coins. With the fall of each of these empires, although the extent of their trade significantly reduced, the legacy of their banking system was transferred to the governments and generations that followed. However, the modern banking system as we know it today started from Europe, again from Italy. The first financial institution resembling today’s banks was established in 1157 in Venice, Italy.
The Empowerment of Banks and the Emergence of Centralized Financial Institutions Banking activities took on a better form during the 12th century. In this era, banks primarily took on the responsibility of holding individuals’ assets, transferring them, or granting loans. Despite all the very important advantages that the banking system had, very soon, the challenges of using it also significantly impacted human life. The fact that humans were forced to use the banking system due to scientific progress and heavy and faster exchanges increased the powers of banks as a centralized financial institution gradually to a significant extent.
What is Digital Currency? And How is it Different from Fiat Currencies?
Today, banks have the ability to fully identify your assets. In some cases, banks can even block your assets and prevent you from using them. All these, combined, led to the emergence of a new generation of assets in 2009. In 2009, an anonymous person known as Satoshi Nakamoto announced in a white paper that he had designed a new system that could introduce a type of encrypted digital asset called Bitcoin as a payment system on the blockchain to the world. He introduced the world to cryptocurrencies or digital currencies and challenged the undisputed power of banks and governments in controlling individuals’ assets and money using the decentralized blockchain network and Bitcoin.
Further Familiarization with Digital Currencies Digital currencies are actually digital assets defined based on the encryption system of cryptographic assets. Digital currencies provide users with a very secure online payment option without the intervention of any official institution in the financial sector. “Crypto” refers to various encryption algorithms and techniques that ensure the security of transactions on this digital network.
The core function and main core of Bitcoin and other digital currencies are designed based on blockchain technology. Blockchain is referred to as a set of interconnected blocks that store information online in a distributed ledger. Each block contains a set of transactions independently verified by validators present in the network.
How it work?
Before a new block is confirmed, it must first undergo a verification process. Going through these steps makes it virtually impossible to forge a transaction or the information history existing in the blocks. The data and information of the online blockchain ledger must be jointly reviewed by independent nodes and computers that maintain this data. In fact, both influential factors in the network must agree on the accuracy of this data and its consistency. Financial experts and specialists believe that blockchain technology has the potential to be effectively used in various other areas such as appointment systems or electoral processes. For instance, J.P. Morgan is currently using this technology to reduce financial transaction costs and simplify payment processes.
Different Features of Digital Currencies Each digital currency is produced and distributed to use blockchain technology and develop it for use in a specific area with unique features. For example, Ethereum ETH was designed for validating payments and opening new blocks. With the introduction of the proof-of-stake mechanism to blockchain technology in September 2022, Ethereum also took on the role of stakeholding in the blockchain.
These days, with the use of blockchain technology and, of course, new designs, the digital currency community is rapidly growing. The diversity in this market has greatly increased, making the choice of each for investment purposes much harder for users.
Are Digital Currencies Legal?
Fiat currencies (official currencies of governments) derive their power from government institutions and are also supported by government institutions. For example, each US dollar is directly backed by the US government.
However, digital currencies are only supported by the user community and real individuals. Therefore, defining a law for them will be somewhat challenging. In other words, when the infrastructure used in the structure of digital currencies differs from what has traditionally been prevalent in financial markets, defining a law for them poses a challenge worldwide.
How to Purchase Digital Currencies?
You can visit the Nipoto exchange to buy a reputable digital currency. This exchange provides you with the opportunity for instant buying and selling of various digital currencies. One of the very important features of the Nipoto exchange is the very low commission it charges for digital asset transactions.
Are Digital Currencies a Suitable Option for Investment? Despite the many definitions heard about blockchain and its security advantages, the digital currency market has been accompanied by various abuses. News of different scams, network hacking, software bugs, and severe price fluctuations have led active users in this field to usually introduce investing in the digital currency market as a high-risk investment. However, we should
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