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Can cryptocurrencies replace fiat money?

Cryptocurrencies become more and more relevant in our daily lives. We get bombarded with articles of “Bitcoin’s new high” combined with a picture of rockets taking off. Numerous people see cryptocurrencies as an investment and either hold their coins or do daily trades.

In order to have a better understanding of this speculation, an understanding of fiat money is required. So what is fiat money? Fiat money refers to money / currency which is not back up by any physical commodity like gold and it is fully controlled by every country’s government. The purpose of money is to serve as a measure of unit, meaning it helps set a value to items or services, since everyone is using the same currency and usually there is a direct relation between the effort and the price. Currently, cryptocurrencies and mainly Bitcoin which is the most “famous” one, have really big fluctuations just like the stock market, but just a little bit crazier.

One great example on the impact of these fluctuations is the bitcoin pizza incidence, where in 2010 somebody paid 10.000 Bitcoins to get 2 Papa John’s pizzas, having a price of around 400 million dollars today. This prevents people from using cryptocurrencies for their daily transactions, managing it as an investment.

Another issue which is something people usually ignore is the performance of most cryptocurrencies, and the number of transactions they perform every second. Bitcoin which is a slow coin performs around 5 transactions per second, which is extremely slow, comparing it with Visa which can perform more than 65.000 transactions per second. Of course there are faster cryptocurrencies like Ripple which can perform around 1.500 transactions per second, while both EOS and Ripple say that they can reach same transaction speed as Visa soon.

MethodTransactions per secondNoteSource
Visa65.000+Visa statement of 2019link
Bitcoin~5Trans/sec is based on trans/monthlink
Ripple1.500Based on XRP websitelink
EOS~30.000Current highest is ~4.000 trans/seclink

Cryptocurrencies are not controlled by a central organisation and this can have both negative and positive effects. Time has shown that people do not like big organisations while they love to be in control of their actions. At the same time, it is known that human mistakes have cost billions of dollars to people. An example is a bug found on a smart contract library Parity, which allowed unauthorised users to cancel contracts of other users, resulting in “deletion” of around 300 million worth of Ethereum. Ethereum was firstly affected by the great DAO hack in 2016, when one third of its funds were stolen, which was around 3.6 million coins. This resulted to the creation of a new hard fork and the split of Ethereum into Ethereum and Ethereum Classic. This split is an indication that a system which is decentralised is not so decentralised in the end. Finally, having an organisation controlling those transactions adds in my opinion an extra layer of trust, since even if the process for a mistake is annoying and tiring, it offers an assurance of control.

Cryptocurrencies have a lot of advantages over typical bank payments, like being 24/7 online without any delay for public holidays or weekend. Every transaction happens in order like instructed and this is where the use of smart contracts come in place. Additionally, cryptocurrencies have lower rates compared to typical bank rates for transactions, bypassing any geopolitical limitations set by each country.

I don’t believe that the system is currently ready to transition into a community where all transactions happen with cryptocurrencies, but I believe that in about 10-15 years it should be possible, since like it’s shown in multiple occasions, cryptography can be a gateway for a non government controlled system in form of every transaction.

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