Understanding Currencies and Digital Currencies

What is Currency?

Currency is, in simplest terms, a medium of exchange and store of value.

It allows two parties to trade more easily than a traditional barter scenario as it removes the requirements for each party to have goods or services that the others desires.

In the modern world, people generally associate currency with notes and coins. These two forms are the most visible form of currency however there are other examples such as cheques, IOU, promissory notes, barter and air points. All of these forms share a common concept, that they have a value that people understand and accept and that value can be exchanged for goods or services.

Traditional currencies are usually created and managed by State and National Governments. These are also known as “Fiat Currency”. The “value” of the currency is linked to the financial markets belief that these governments will honour the value of the note or coin.

These currencies can range from traditionally strong and stable currencies like the Euro and USD, to the far more volatile currency situations seen in places like Zimbabwe and Venezuela.

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What is Digital Currency?

Since 2009 the internet has fuelled the rise of “Digital Currencies”. These currencies differ from traditional currencies in two major ways. First, they are entirely digital, with no physical note or coin form like those usually found in Fiat currencies. Second, they are DeCentralised, with the value often not linked to a government or organisation, but instead linked to the general level of demand for the currency itself.

Digital currencies are also traditionally a “mutually distrustful system” which requires an open ledger system so all parties can view transactions and confirm values. This contrasts with the Mutually Trusted System of Fiat Currency, where parties do not need to trust each other but instead trust that the issuing government will honour the value of the currency the person possesses.

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