Pillars of cryptocurrencies

The main pillars of cryptocurrency are decentralization, anonymity, fast transactions with low fees, data protection and transparency. These pillars make cryptocurrencies a robust form of money, as these properties make it virtually impossible for hackers to compromise the coin's owner. Thanks to the blockchain technology and strong encryption, hacking a bank account or credit card is in practice much easier than hacking cryptocurrencies.

5.2.1 Decentralization

Cryptocurrency transactions are peer-to-peer, i.e. without the involvement of a third party. Traditionally, financial transactions involve intermediary, regulatory or legal authorities to manage the payment process.

However, a cryptocurrency transaction completely eliminates all third parties from the picture, and that is good news for consumers, since it will save time and money for them. Saving time is an important factor, as successful companies such as Uber and Airbnb prove: By eliminating intermediaries, efficiency goes one step further. For instance, when buying real estate, blockchain technology and cryptocurrencies can help eliminate expensive middlemen like brokers, lawyers and notaries, which inevitably increase the costs of already expensive transactions.

Corruption is a major problem in the world and in all layers of society. Decentralization will not prevent corruption, but misuse of centrally stored data will be less easy. Most cryptocurrencies are focused on decentralizing their networks and because there is no overarching authority, no one can influence the value of the coin or damage the process.

The blockchain technology is used by a global network of computers, which collectively manage the databases that record transactions in cryptocurrencies. This means that cryptocurrencies are not controlled by a central authority that passes on the costs incurred for them to the consumer, but by the network, which allows peer-to-peer transactions free of charge. The financial infrastructure in the world shows many similarities in the different countries, but due to the different technological systems and regulatory regimes, it is a complex system of many entities. Carrying out a financial transaction therefore costs time and money.

By eliminating the involvement of third parties, cryptocurrencies increase transaction speed and reduce costs. The decentralization of cryptocurrencies also means that transactions do not rely on a single point of origin or authority to stay accurate and reliable, and this is one of the key innovation points of cryptocurrencies. The financial transactions retain their reliability because they are recorded on several servers at the same time and all users are essentially an equal participant within the system.

You cannot physically store cryptocurrencies, like other digital money in a bank account. The technology behind digital money simplifies transaction tracking and accounting. Central bank fiat money is issued by a central issuer that can consequently determine how much fiat money it will issue.

Cryptocurrencies are not issued by a central authority and thus the central authority cannot manipulate the amount of money in circulation. By manipulating the money supply, the government can influence the economy, and thus the government's money creation monopoly has become a tool for the redistribution of wealth. That seems nice, but money creation means living on credit and in reality it is a political instrument that is used to a greater or lesser extent depending on the political color of the current cabinet. So if the government cannot exercise control over money, the population will ultimately benefit from this, because prosperity should mainly come from production and not from money creation.

Money flows can be tracked by banks and other financial institutions and there are good reasons for this.

With cryptocurrencies, digital money transactions become censorship resistant and impervious to tracking by government-designated authorities. Financial transactions usually involve intermediary, supervisory or legal authorities to manage the payment process. With transactions in cryptocurrencies, all third parties

disappear from the picture, which significantly shortens the transaction time and prevents any form of extra costs and this positive aspect benefits every cryptocurrency user.

5.2.2 Anonymity, pseudonymity, privacy and security

You don't have to give a lot of information about yourself to use cryptocurrency. With cryptocurrencies, your identity is not linked to your cryptocurrency tokens. User anonymity is respected by every crypto exchange. If you are anonymous, no one can view your financial situation, which makes your finances safer. These kinds of benefits are not offered by banks where your name, address and phone number are always on each statement.

Almost all cryptocurrencies are built from the bottom up around security and privacy. Users can therefore expect their transactions to be secure and private. Although the transactions on the blockchain are public, the sender and receiver are difficult to identify. All transactions in cryptocurrencies are recorded in a permanent ledger using blockchain technology and are only private to a certain extent. Most blockchains guarantee pseudonymity, rather than anonymity, which means that with every transaction on the blockchain, the identities of sender and receiver are not directly linked to real identifiers such as names, addresses or identification numbers. With sufficient research effort, for example by checking transaction histories on the Internet or analyzing other data such as timestamps and IP addresses associated with transactions, as I mentioned in subsection 4.3, most addresses can be traced back to identifiers. The wallet addresses are public and if an observer manages to link a user's identity to a specific wallet, they can track their transactions.

While most transactions are pseudonymous, there are techniques to make them more anonymous. There are methods to increase the privacy level. For example, some exchange platforms mix and group transactions to make it difficult for an outsider to tell them apart. And someone who doesn't want anyone else to see their cryptocurrency transactions even if they're anonymous can resort to privacy coins, which are specifically designed to make transactions completely untraceable.¹⁷

To carry out transactions with cryptocurrencies, it is not necessary to register with a financial institution, which guarantees a certain level of privacy. Transactions are performed pseudonymously, which means that both the sender and the receiver are each with an identification code, the wallet address, in the ledger and not with specific information about the person. While absolute privacy is not guaranteed, every cryptocurrency transaction is still a unique exchange between two parties, being more private than fiat currency transactions with third-party payment processors and better protecting users from issues such as identity theft.

17 https://cryptida.com

One of the most certain advantages of cryptocurrency is the safe payment method thanks to encryption and blockchain security. The most important element in crypto security is the hash rate. The higher the hash rate, the more computing power it takes to break into the transaction. The weakest link in the security chain is the individual who makes mistakes. In most cases where cryptocurrencies were hacked, a poorly secured centralized exchange was hacked or someone's private key of the wallet was stolen.¹⁸ Keeping crypto assets in one's own wallet is much more secure, but once a private key is lost, there is no way to get the money back.

5.2.3 Fast transactions, low fees

While international bank transfers can incur significant fees and often take three to five business days, payments in cryptocurrencies are completed in seconds or minutes at a very low cost. Once the new transaction has been confirmed by the network, it is fully settled and the new funds can be used.¹⁹ In addition, traditional financial markets are usually only open on weekdays with sometimes longer hours than office hours, but cryptocurrency markets are accessible 24/7 and 365 days of the year.

5.2.4 Strong data protection

Once you hand over a credit card, the retailer or merchant has access to that card's full credit limit. Credit cards work on a "pull" basis, i.e. the person initiating the payment withdraws the specified amount from the cardholder's account. Cryptocurrency, on the other hand, works with a "push" mechanism where the holder of the cryptocurrency executes the transaction without providing any further information.²⁰

5.2.5 Transparency

All transactions are immutable and tamper-proof written on the blockchain, they are public and easily accessible. Tools are available to look up transaction data in the blockchain ledger, including where, when and how much of a cryptocurrency someone sent or received. Everyone can also see how much crypto is stored in a wallet. This transparency makes it possible for someone to prove that they have sent and received money, reducing the chances of fraudulent activity. The immutability of cryptocurrency transactions also means that they are final and impossible to be disputed, reversed or counterfeited by the sender at a later date.

18 https://www.sofi.com/learn/content/benefits-of-crypto/

19 https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/benefits-of-cryptocurrency/

20 https://due.com/blog/7-amazing-benefits-cryptocurrency-new-digital-economy/