As mankind continues to evolve, our means of exchanging value continue to evolve. From the barter system of 6,000 BC Until the current use of fiat money, mankind has been on a continuous path to create more efficient methods of exchange. Factors such as convenience, availability, stability and sustainability have played a crucial role in the development of the exchange methods.
What is fiat money?
Fiat money is essentially paper money that is covered solely by the government’s word and central bank regulations. It has become the world’s preferred exchange method at the expense of other methods such as commodity currencies and bartering. This was due to its convenience, the relative stability of its value, and also because it is under government control. Fiat currencies gained importance in part in the 20th century as governments tried to protect their economies from the worst effects of natural fluctuations in the business cycle.
Fiat money is legal tender whose value is based on the issuing government and not on physical assets. So, Its value is as good as that of the issuing government. Corrupt politicians and irresponsible governments are guilty of printing too much money to cover their mistakes. This leads to an endless cycle of inflation or, worse, a recession.. In 2019, Zimbabwe struggled with over 300% hyperinflation after a long period of political unrest.
As the world became increasingly digital in the 21st century, the need for secure digitized payment became inevitable. Banks and other financial institutions continued to use various digital payment methods. The blockchain breakthrough finally came in 2008 when Satoshi Nakamoto published a white paper on Bitcoin (BTC), the first and most popular modern cryptocurrency.
As a decentralized medium of exchange, the elimination of third parties and central banks is undoubtedly the most significant advantage of cryptocurrency. Unlike fiat currencies, blockchain technology is a public book and is strictly regulated through a process called mining. This ensures that all the money in circulation is booked, which promotes transparency and accountability in the technology.
The replacement of fiat currencies with cryptocurrencies
Cryptocurrencies outperform fiat currency when it comes to processing fast, reliable and efficient exchange media, especially in a digitized world. However, Technology has to overcome some major hurdles to become more popular than traditional Fiat coins. Here are some reasons why launching cryptocurrencies is complicated:
Governments and regulators are some of the many obstacles cryptocurrencies face when trying to become a globally accepted medium of exchange. The introduction of distributed general ledger technology is complicated because it is independent of governments and traditional banking systems. In addition, politicians and governments can shape economies by controlling money in circulation. As a result, by creating hostile policies and deterring the use of cryptocurrencies, governments can maintain an upper limit on their use and ultimately guarantee the flow of fiat money.
Twitter recently suffered what could be the worst attack since its inception. Celebrities, billionaires and several cryptocurrency exchanges have been targeted and hacked. L.Hackers wrote various messages asking people to send Bitcoin to a wallet address for double the amount, and around $ 120,000 in BTC was lost in the scam.
While Bitcoin’s involvement in the scam doesn’t tell a quarter of the story, its use in fraud, fraud, and some dark internet activity has deterred Bitcoin’s popularity.
Bitcoin mining and energy consumption
As mentioned above, Bitcoin transactions are checked through a unique process called mining. Transactions in the distributed general ledger are confirmed by Bitcoin miners and saved as “information blocks”. However, mining is a complex and energy consuming process that requires a lot of energy. The University of Cambridge estimates that Bitcoin consumes 0.21% of the world’s electricity, an amount close to the total electricity consumption of countries like Romania, Bangladesh and Israel.
With many mining companies around the world trying to expand their operations to prepare for a future with cryptocurrencies, the big question remains: How sustainable is this long-term energy consumption process?
Originally designed to process seven transactions per second, blockchain technology is now facing a major scalability problem. While the Bitcoin developers’ sole intent was to prevent hackers from manipulating the technology, transaction capacity simply cannot account for the massive use of the blockchain.
This would be further complicated by the rise of industries and investors who want to adopt the technology. Although cryptocurrency experts have discussed over the years whether to increase the block size or use an exponential scaling approach, it remains to be seen whether and how the scalability problem can be solved.
While the blockchain technology market is expected to be worth over $ 39 billion by 2025, its widespread adoption and eventual replacement of fiat currencies can be massive. Cryptocurrencies certainly have a long way to go, and investors can sit back and watch the technology evolve.
The views, thoughts and opinions expressed here are only those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.