Digital money is a form of currency that uses computer networks to make payments. While physical currency, such as cash, has identifiable features that make it unique, digital money does not.
As digital objects, such as songs or images, can be replicated infinitely on the internet, there must be a way to ensure that digital money is not also replicated.
Commercial banks and payment networks, such as those that use credit cards, guarantee the uniqueness of digital dollars. When a digital dollar is spent, banks deduct it from the account, preventing it from being spent again.
The first widely used form of digital money was credit cards with magnetic stripes, which were introduced almost 50 years ago. When paying for something in a store, the buyer taps their credit card on the digital terminal, and the merchant’s bank forwards the credit card details to the network.
This credit card network then requests payment authorization from the cardholder’s bank. The cardholder’s bank validates the cardholder’s details and the amount of available credit and then approves the purchase.
Cryptocurrencies such as Bitcoin differ from the forms of digital money that are already commonly used by consumers around the world. The main difference is that when payments are made, a blockchain replaces the relationship between the two banks.
A blockchain is a list of records containing transaction data held in a distributed ledger, a digital record of the account books for Bitcoin transactions that are available for anyone in the world to see. The thousands of computers around the world that participate in the cryptocurrency network store and maintain ledger copies.
While commonly used forms of digital money are safeguarded by computer servers that facilitate the credit card network, the blockchain and distributed ledgers prevent double-spending in the Bitcoin network.
As such, cryptocurrencies enable the transfer of ownership of digital assets without recourse to a centralized authority. This may be the true revolutionary development of cryptocurrencies, as it challenges notions of money and property that have long upheld modern civilization.
