What Are Digital Currencies And How Do They Work?
Digital currencies are electronic money that aren’t denominated by any national currency, nor are produced by any government-endorsed central banks. These currencies are known as “alternative currencies,” and thus are sometimes called “altcoins.”
Many digital currencies are cryptocurrencies, a type of digital currency that relies on cryptography, as well as a proof-of-work scheme. Essentially, it involves a mathematical process to create the currency at a reasonable rate so that the currency doesn’t become too numerous, and thus, lose its value. Bitcoin was the first cryptocurrency, while many others have followed.
The second-most valuable “altcoin” is known as of writing this is, Ethereum. It shares many similar features to Bitcoin, however it is used as a platform for launching or building other altcoins, decentralized applications, and smart contracts. Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.
The third-most valuable altcoin again as this writing is, XRP and was developed by Ripple labs. Ripple is a real-time gross settlement system, currency exchange and remittance network created by Ripple Labs Inc., a US-based technology company. Ripple is built upon a distributed open source internet protocol, and supports tokens representing fiat currency, cryptocurrency, commodities, or other units of value such as frequent flier miles or mobile minutes. Released in 2012, Ripple purports to enable "secure, instantly and nearly free global financial transactions of any size with no chargebacks."
Ripple is based around a shared public ledger, the XRP Ledger, which uses a consensus process that allows for payments, exchanges and remittance in a distributed process. The network can operate without the Ripple company; among its validators are companies, internet service providers, and the Massachusetts Institute of Technology. The ledger employs the decentralized native cryptocurrency known as XRP, which as of October 2018 was the third largest coin by market capitalization. To find out more about the cryptocurrency market capitalization, you can visit the following websites, coinmarketcap.com and coincheckup.com.
Digital currencies work by mining those currencies on one’s computer via a “mining” software that brings about the currency. This is recorded in the respective network to show such new units of the currency exist. These coins can go into a person’s digital wallet, then be used to complete transactions. The types of transactions include physical items such as books and video games to digital items such as domain name registration and digital salaries for work performed.
As you can see, there are more digital currencies out there than just Bitcoin, and it seems to be that there will probably be more in the future, both based on current digital currencies and even brand new ones.
As the world continues to become more “digitized” in terms of the Internet and e-commerce, digital currencies will continue to gain more prominence and use. While replacing physical currencies is probably unlikely, especially in the near future, having more sites accepting digital currencies and merchants accept and conduct transactions using digital currencies is the new normal.