How Does a Digital Currency Work?

Digital currencies are increasingly efficient and widely available. And, in only a few years, we may see them as valid payment alternatives almost everywhere. You have surely heard of Bitcoin, the most famous example of a digital currency for now. But, do you really know how this digital asset works? If all the merchants start accepting it tomorrow, will you know how to use it?

Nowadays, transactions and money transfers are easy to complete thanks to electronic payment methods. Using a payment provider like Paxum with the most advanced payment solutions can greatly aid someone who has to make transactions online. How will this change once digital currency becomes the norm?

This article discusses the definition of digital money and its many uses. Read on to learn about a technological and financial innovation ready to shape our future.

Woman using credit card for online payment.

Understanding Digital Money

A digital currency does not have a physical correspondent. Instead, it only exists in electronic form, generally on the blockchain. This new type of asset will never be reproduced in bills and coins, which is a step towards making money use more eco-friendly.

While you cannot touch it, digital money is easy to use via smartphones, credit and debit cards, or cryptocurrency exchanges. Furthermore, you may even take it out from an ATM after converting it to a fiat currency, such as USD, EUR, YEN, etc.

Notably, people have been using money digitally before Bitcoin. For instance, online transactions do not involve money changing actual hands. When you buy stuff online, the funds in your account go to the merchant’s account digitally.

So, what’s the difference between digital money and cash?

Well, paying via digital currency is generally faster and more efficient than paying with cash. Suppose you have to purchase a new car worth half a million dollars. Paying it in cash would require you to withdraw that money from your account, have a safe storage space, and transport it securely to the merchant. This process comes with extra costs, such as withdrawal and transportation fees.

On the other hand, paying via a digital currency could take merely seconds or minutes. It doesn’t require physical transportation, and generally, the fees are much lower than cash payments. Lastly, it is more eco-friendly and requires fewer resources since printing the bills is not necessary or possible.

What Problems Do Digital Currencies Aim to Solve?

Digital currencies help us evolve financially towards a cashless society. There are various drawbacks to this development. However, for now, the benefits outweigh them.

For example, a society relying predominantly on digital currencies should have a lower risk of dealing with money laundering and fraud. That’s because blockchain technology allows the recording and reviewing of every possible transaction ever taking place with said currency. As a result, fraudulent activities are easier to spot and even prevent.

Another advantage of digital money is that it solves the double-spending problem. This age-old issue is usually a downside of cash payments. However, digital currencies may ensure that a unit of digital money cannot be spent twice by the same person.