Virtual currency is under the digital currency blanket that also includes cryptocurrency. It is defined as unregulated digital currency available in electronic nature and exists inside the blockchain network. Virtual currency is stored and transacted via computer and mobile applications, designated software, and digital wallets. The transactions are done over the internet using secure networks that are fast and easy to use. Unlike fiat currency, controlled by the central bank, virtual currency is issued and managed by private developers or issuers and used in certain virtual communities. We discuss the basics of virtual currency below.
Virtual Currency Basics
Virtual currencies like Bitcoin and Litecoin are represented in tokens. Since virtual currency represents monetary value electronically, virtual tokens can be defined as a digital representation of traded value. They store value and act as exchange mediums and account units of accounts.
While the government or hard assets back traditional money, virtual currency bases its value on various mechanisms like mining or drilling of oil. The traders’ sentiments also determine its value. The unregulated nature of this currency makes trading tricky, considering it may experience fluctuation of prices or huge valuation swings. It’s important to note that virtual currency depends on a trust system if you want to use it for your trades.
Forms of Virtual Currencies
Many different types of virtual currency are available for trading and can be grouped into two broad categories: centralized and decentralized currency.
1. Centralized Virtual Currency
Centralized means there is a central administrator or repository, i.e., one who issues the currency. They aim to monitor all transactions and secure assets for the buyer and seller. Any deals using centralized virtual currency aren’t backed on the blockchain, so personal information is required for verification.
2. Decentralized Virtual Currency
This type is quite similar to the centralized form except that no repository or central administrator is there to rely on directly, and the investors deal with each other. The currency is stored in the blockchain, where the records (blocks) are linked with cryptography.
When you request to carry out a transaction, your request goes through the computers in the network. At this point, you can’t proceed until verification is done. Once the network verifies the transaction, a block with the transaction details is added to the blockchain. The block doesn’t change and can’t be deleted, so new blocks are created every time a new transaction is done.
The decentralized virtual money has an advantage over centralized currency because the transactions are made at low costs, and the lack of third parties has made the process very transparent.
Benefits of Virtual Currency
Convenience is the major benefit of this currency. The network-based nature of virtual money makes payments or withdrawals fast and straightforward. International transactions have become very easy to make since you can do it from wherever you are.
Decentralization of the currency has reduced the risk of failure, like in the centralized currency, where the whole process is affected if the central administrator fails. The cost of transactions is also minimal, and the use of a blockchain is much safer.
People have become more aware of virtual currency leading to its growth and popularity. Using it to make payments and buy god or services is a great option so understanding what it is, how it works, the types and benefits are important.