The dynamic nature of technology results in new inventions and innovations daily. The fintech world, in particular, has seen more than its fair share of disruptions in the recent past. The birth and growth of cryptocurrency is one such creation. It has increasingly become a significant defining aspect in this domain.
Cryptocurrencies are encrypted digital currencies destined for a predicted era of cashless transactions. Bitcoin was the first innovation in this line. Ever since its introduction, almost 900 other virtual currencies have come into existence. Some of the most successful virtual currencies to date apart from Bitcoin include Ethereum, Ripple, Litecoin, and Dash. Bitcoin and Ethereum have market capitalization figures above $65 billion and $25 billion respectively.
Each of these currencies offers a solution to a problem in the legacy frameworks. Any new coin’s success depends on how well it addresses its target problem. This implies that there can be no limit to the generation of new currencies. For as long as problems and loopholes emerge, there will always be a new innovation to handle them.
The Unique Advantages of Cryptography and The Digital Currency
There are some notable benefits that set digital currency apart from regular or fiat currency. Encryption or cryptography is the most outstanding common factor for all digital currencies. This is an advanced security system that limits access to sensitive transaction information. They use a system of private and public keys to secure transactions. This allows only the intended parties to access sensitive information. These transactions are very difficult to fake and once they are confirmed they cannot be reversed.
Decentralization
A single central government entity generates and manages fiat currency. But the industry offers unlimited access to all. There are no third parties monitoring activity. Transactions are open-source and based on P2P networks. This means that no bank or government can interfere with or affect in any way these currencies.
Fast Settlements
The fact that there are no central bodies monitoring transactions really simplifies everything. You waste no time waiting for approval of funds to become available. Sensitive accounts that usually need a lawyer’s oversight are also simplified. This is because they feature automated smart contracts.
Cost Effectiveness
There are no transaction fees on transactions. This is because there is no oversight authority needed. Further, interest rates and exchange rates do not govern the currency’s use. This saves the users significant expense. It also makes this a viable alternative to fiat currency.
Problems Facing Virtual Currencies
Looking at all these benefits one might wonder why virtual currency has not replaced its fiat predecessors. According to TechCrunch, “So the question is, why do the prices change so much in the first place? It comes down to supply and demand: Most cryptocurrencies have only a fixed total supply, and yet demand for the coins is uncertain and constantly fluctuating thanks to speculation.” In other words, the major factor of hampering the mass adoption of cryptocurrencies is price volatility.
Lack of Security
The fact that confirmed virtual currency transactions are irreversible is a major issue. It means that if at all hackers access your account and transfer funds, there is no way to get them back. Once they are gone, they are gone. There is no central entity to investigate these incidences and to take action against a scammer.
Limited Scalability
When the industry launches a new coin, it is impossible to predict what the market reception will be. Bitcoin is a fine example in this regard. The platform started out with a few dozen users but has now grown to hold over 10 million. The number of transactions per minute is much higher than the platform can handle. The flaw limiting its processing speed is built deep in its design and structure. This makes it very hard to make the necessary adjustments.
Liquidity Problems
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To date, over 900 cryptocurrencies hold more than $137 billion in total market capitalization. The tender’s liquidity is quite limited. At times, reserves run out before a transaction runs its course. This could change the original transaction value by a considerable amount. This at times reduces viability as it too costly to complete a deal.
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Unprecedented Growth and Proposed Solutions
The number of altcoins launched daily, and the user influx are taking a toll on the platforms. The structure is not set to handle this level of growth explosion. The different currencies might also be incompatible. This forces users to operate several wallets to carry out transactions.
Cryptocurrencies are crucial players in the financial revolution. But in order to contribute to the ongoing financial revolution, there is need for solutions to address the previously mentioned challenges. In this particular scenario, the Fintech industry has identified this growing need and made interesting proposals.
Payment Processing Platforms
These are smart payment platforms loaded with convenient features for digital currency users. They enable easy conversion within the virtual coin framework and offer high protective measures. Orio.io is one such platform. It makes it possible to use and convert the different currencies within the framework.
It has some patent-pending innovations that if realized could offer a welcome absolution. One benefit is the Zero Volatility Reserve, which guarantees stable value for its token. It has also taken advantage of the Shapeshift concept to enhance liquidity. In case of a currency shortage, this concept makes it possible to cover deficit using any other altcoin. The model is also designed to handle expansion as it can handle over a million transactions per second.
The wallet is designed to enable transactions even with merchants who do not accept virtual money. And its security system uses Artificial Intelligence technology to trace and restore stolen funds to the original owner.
Segregated Witness (SegWit) and Bitcoin Unlimited
These proposals introduced in 2015 were both aimed at solving the scalability issue. The main reason why blockchain transactions are big and take up a lot of space is the signature data each one carries. SegWit therefore offers to handle the scalability issue by separating this data from the transaction block. This would free up about 65 percent of space and allow for higher flexibility.
Bitcoin Unlimited on the other hand, proposed that the one-megabyte limit be removed. Instead, transaction sizes would be determined by consensus. These two concepts got a split reception from industry enthusiasts. While both solutions hold merit they are only short-term measures.
Asset-Backed Tokens
The main reason behind digital currency volatility is that there are no stringent regulations. Asset-backed tokens offer some stability. Their value is linked to physical assets, blue chip shares, fiat currency and precious metals. LAToken is one such example. It trades in blue chip companies’ tokenized shares like Apple and Amazon as well as commodities and real estate.
Goldmint is yet another example using gold to stabilize its token value. Every token is equivalent to an ounce of gold. It can therefore be used as a financial tool for making payments, purchasing actual gold or hedging gold investment funds.
Cryptocurency Management Solution Required to Shape the Industry’s Future
Digital currency as a whole and the technology behind it is set for great heights. Despite the challenges facing the domain, it holds serious significance for the future of the financial industry. For as long as the wheels of change keep on turning, solutions will be propelled to address the crippling factors effectively. When that is realized the world will be a lot closer to the predicted cashless era as it so anticipates in the very near future.