Cryptocurrencies as a means of payment

Starmkgunu.co.in – The development of world trade, which has grown rapidly with globalization has an impact on the influence on payment systems. The need arises for speed, comfort and security in financial transactions and hence the search for a reliable and easy payment system for bank customers was born .

Cryptocurrencies as a means of payment: your success depends on a few but important factors

The payment system is a mechanism that includes the agreements used for payment through exchanges between individuals and financial institutions both nationally and globally. The development of purchase and sale transactions that no longer have walls that limit the parties lead to the development of payment instruments .

In this described environment, the emergence of cryptocurrencies offers a solution. It is a digital currency that uses cryptographic technology as security that is difficult to be falsified , where transactions can or must be done online, and each data is encrypted using certain cryptographic algorithms. And the difference of the cryptocurrency with respect to existing currencies is that the cryptocurrency is not issued by the central authority , there is no interference or manipulation by the government.

Like coins and bills

Digital money must be anonymous and tamper-proof. People should be able to use it without the intermediation of banks, in the same way that traditional cash is used outside the banking system. But unlike traditional cash, individuals, and not a central bank, would create these digital currencies. Individuals, and not the government, would benefit from seigniorage .

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The white paper that started bitcoin in 2008 outlined a way to create and operate a decentralized electronic money system. The payment system would not be under the control of a bank or a central authority. Instead, a large number of independent participants would manage it . The document used existing cryptographic techniques of public and private keys to create anonymous and anonymous and secure identifications. With these elements, electronic money could be anonymous and counterfeit proof.

However, serious limitations have been revealed and the success of cryptocurrencies as a means of payment depends on certain factors to be resolved .

The first of all is linked to the cost of operation . The system currently consumes about 53 TWh of electricity per year, figures close to Norway or Argentina. The cost of electricity used to process a single average transaction can power about five households in a high-income country for one day.

 

These electricity costs are likely to increase

How the miners’ profits remain higher, more computing power is being added to the network, increasing the puzzle’s difficulty. People who use the network to transfer bitcoins do not experience these costs directly, because miners are paid primarily through seigniorage rather than fees. But the costs in terms of electricity use, and the consequent burden on the environment, are real and must be borne in mind.

Another issue to mention is that the power of computers has become more concentrated . Some companies have installed enormous computing capacity in large dedicated factories, using specialized chips. Their exploitation of economies of scale leads to the concentration of market power . The downside to this issue is that the concentration of computing power makes the network more vulnerable to malicious attacks . Even without attacks, if the market becomes an oligopoly, miners could manipulate transaction fees, refuse to process certain types of transactions, or deny service to users.

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But the biggest problem comes from the side of the operation itself

There is a lack of scalability of the payment system. The addition of new blocks is limited to one every 10 minutes and each block to a maximum size of 1 MB. The average number of transactions that can be included in a block of this size is 2,000. In its current form, the bitcoin payment network can only process three transactions per second . In contrast, credit card companies process thousands of transactions per second. This limitation makes it impossible for bitcoin, with this technology , to replace large-scale digital payment systems.

Most of the debates in the cryptocurrency community revolve around mechanisms to make trusted intermediaries superfluous. But another important question is to know if cryptocurrencies fulfill the traditional functions of money. And that is another of the big questions, do cryptocurrencies function as money?

Our money is useful because it can serve as a medium of exchange

A unit of account, and a store of value. Like other forms of electronic money, cryptocurrencies have advantages over physical products such as gold or banknotes: easier to store and transfer over long distances . However, some inherent drawbacks of cryptocurrencies make them less optimal than legal tender in most countries.

The most important drawback is the volatility of purchasing power, that is, its exchange rate with respect to the legal tender. This volatility of purchasing power makes it very risky to accept them as a medium of exchange . It also makes them suboptimal as a store of value, as there is no guarantee that their value will not drop to zero.

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