The finance industry is evolving before our eyes. Cryptocurrency is changing how we complete transactions, how we transfer funds, and how we move money around the world.
It’s becoming the best investment class of all time, with humongous gains in just a few months or years. And it’s becoming more and more popular every single day.
But how does cryptocurrency work? It’s powered by a digital ledger, which records all transactions that take place with a particular cryptocurrency.
But how does data entry work when it comes to a digital ledger? And how does digital accounting empower a decentralized financial system? Keep reading to find out how these ledgers work and why it’s important.
What Is Cryptocurrency?
Before you can understand what a digital ledger is, you need to know why it exists in the first place. It’s all about cryptocurrencies and the financial systems built on the blockchain.
Bitcoin is the first cryptocurrency. Back in 2009, the first batch of bitcoin was mined and released into circulation. Bitcoin, and all other cryptocurrencies, are digital currencies that are native to the internet.
They are extremely efficient to transfer to other people. But why are they different from traditional currencies like the US dollar and the Euro? Because they are decentralized.
Traditional currencies require a centralized party to facilitate and very each transaction before its completed. Every debit card, credit card, and banking transaction has to go through the banking system, where a centralized party verifies the transaction and keeps a bit of the money for themselves.
That means a centralized party can view all of your transactions, see what you do with your money, and can even block transactions on your behalf if they don’t like what they are seeing.
But with cryptocurrency, there isn’t a centralized authority that maintains or governs the currency. It’s decentralized. It’s not run or owned by any particular government, business, organization, or individual.
Rather, it is powered by a global community of users in a trustless system. And it all works due to a digital ledger that verifies the transactions.
What Is a Digital Ledger?
So what is a digital ledger? Another name for it is “blockchain.” It records all of the transactions that happen with a particular cryptocurrency.
The digital ledger is available to view by anyone. It’s a public ledger that anyone can double-check to ensure legitimacy. With traditional currencies, the only people who can look into the ledger of transactions are the bank or the government.
But the open network of the digital ledger is also what makes the cryptocurrency so secure. Cryptocurrencies rely on nodes to maintain the ledger.
Nodes are individual computers that download the blockchain software. They review all cryptocurrency transactions and make sure they are accurate compared to the list of transactions that other nodes are running. Each node needs to ensure they have an identical copy of the ledger.
Thousands and thousands of individual nodes, all around the world, run by both businesses and individuals, are running the software and verifying the transactions.
With this setup, there is no individual party that can corrupt the ledger. Nobody can add faulty transactions to allow fraud or double-spending.
Benefits of a Distributed Ledger
So why is a digital ledger, in the form of a blockchain, so beneficial? Because it’s decentralized. It allows a cryptocurrency to exist and function without the use of a traditional bank.
There aren’t any credit card processors required to facilitate transactions, like Visa. That means no middleman is required to send funds from one person to another. And that means you don’t need to pay fees to large corporations in exchange for using their products.
There are transaction fees, however, which are paid to the nodes who are keeping the network secure.
This decentralization means that the government cannot control a cryptocurrency. They can’t print new cryptocurrency to devalue it. And they can’t ban it or prevent people from using it unless they were to ban the internet as a whole.
Digital ledgers, which are maintained by a community of people around the globe, help people in every country manage their finances without relying on a central bank or large corporation.
Cryptocurrency has a wide array of uses. It started out as a peer-to-peer virtual currency. You can send money to anyone directly.
But it has evolved to become an investment class in and of itself. Most people who purchase crypto are doing so to speculate, hoping to sell once the price increases. Many people are looking to hold long-term, as a method to beat inflation and hopefully other investment classes like the stock market.
Not only can you experience price appreciation, but there are also many ways to earn interest on your crypto holdings, from staking to lending
There are also more and more places you can use crypto to make purchases. This includes in-person retailers and online stores.
If you want to purchase NFTs, you’ll need to use cryptocurrency to do so.
Along with cryptocurrencies, a digital ledger powers the NFT industry. NFTs, or non-fungible tokens, are similar to cryptocurrencies. They are tokens that exist on the blockchain, mostly on Ethereum.
But rather than currencies that are interchangeable, NFTs are collectibles, unique assets that aren’t interchangeable. And they’ve seen explosive growth in 2021 and in 2022.
Millions of people are collecting NFTs as a way to boost their overall investment portfolio. But they also collect this form of dynamic media to acquire unique pieces of digital art.
You can purchase them on an NFT marketplace. There are countless artists getting into the NFT space. This includes traditional artists who are exploring a new medium, as well as plenty of artists who have started their careers with NFTs.
A Growing Financial System
A digital ledger is what empowers a brand new financial system. It’s a system that is decentralized and growing in popularity and value every single day.
And even if haven’t started using it yet, you will be using it regularly very soon.
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