What Are the Advantages of Cryptocurrencies?
By the end of this article, you’ll learn:
- 1. The key advantages of cryptocurrencies
- 2. The limitations they face
- 3. Why there are so many different types of cryptocurrencies—and why they hold different values
What Are the Benefits of Cryptocurrencies?
Explaining the value of any new technology means showing how it solves a problem. In this article, we’ll explore how cryptocurrencies aim to tackle the challenges posed by traditional money systems.
But any solution has to also be scalable and possible. That is why we will also take into account the constraints of cryptocurrencies before concluding with a rundown of pros and cons and examining the valuation of different cryptocurrencies. If you do care about the real-world application, there are already quite a few operators who have welcomed crypto in gaming—especially on the likes of the top ethereum casinos.
Let's begin with the issues of traditional currency and the possible applications of cryptocurrencies:
Permissionless Access
You can use Bitcoin, Ethereum, or any other cryptocurrency with an internet connection. No apps, no gatekeepers required—just a crypto wallet.
Application: Millions of individuals across the globe that lack access to conventional banking systems.
Borderless Transactions
Alice can send cryptocurrency to Bob anywhere in the world—quicker and usually cheaper than traditional payment systems. Currency exchange is free of fees, too.
Use case: Migrant workers sending remittances home.
Resistant to Censorship
Cryptocurrencies are made to be democratic in nature, in the sense that rule changes are not imposed by a controlling party. This makes users secure from censorship or exclusion based on what or whom they are.
Use case: Individuals subject to financial repression or freezing of accounts.
Transparency
The entire history of Bitcoin transactions can be viewed by anyone who has internet access without needing to know who Alice and Bob are.
Use case: Reduces conflicts over and deepens trust in transactions.
Digital Scarcity
Some cryptocurrencies, including Bitcoin, have a limited supply cap. For example, there will never be more than 21 million bitcoins.
Limited-supply assets provide value preservation in the long term, in that Bitcoin is compared to digital gold.
Use case: An alternative store of value.
Limitations of Cryptocurrencies
Although it's wonderful that Bob and Alice can transfer data or money to one another from different parts of the world without ever having met, crypto transactions also come with some bounds.
Transaction Speed
Each cryptocurrency possesses an ambiguous speed for processing transactions. Some are essentially instant, but Bitcoin, for instance, could take 10 minutes to authenticate a batch of transactions—of no use for day-to-day transactions like a coffee purchase.
Transaction Capacity
Blockchains vary in how much capacity they have to process per block. They are none of them presently as quick at processing as payment systems like Visa or Mastercard.
Security Trade-Offs
Bitcoin sacrifices speed and size for security and decentralization. Other blockchains process faster but are not as decentralized in doing so.
Improving balance among security, scalability, and decentralization is called the blockchain trilemma—one of the biggest challenges in the crypto world.
Illicit Activity
The downside of permissionless networks is that the villains can utilize them too. Criminal networks, hackers, and phishers have been able to exploit these networks, which has led to constant calls for stricter regulation.
Conversely, although illicit activity represents a minority proportion of all crypto transactions, the magnitude of the amounts involved remains a concern.
Environmental Impact
A second concern is the environmental cost of proof-of-work mining in blockchains like Bitcoin. It requires lots of energy to perform these operations.
There is not yet a worldwide standard for the size of the carbon footprint of blockchain mining or its percentage that uses renewable energy sources. But Ethereum found the issue large enough to shift away from proof-of-work to proof-of-stake in 2022—an initiative that reduced Ethereum's carbon footprint by about 99.992%, Ethereum asserts.
Volatility
The revolutionary potential of cryptocurrencies has made them attractive investment vehicles—but no one knows if, or when, they'll fully mature. Speculation and volatility have a way of creating wild price swings, making many cryptocurrencies impractical for day-to-day transactional usage compared to traditional money.
Conclusion
Today, there are thousands of such cryptocurrencies with the same beginnings but with different tactics to solve blockchain's limitations. Some solve the trilemma, some try to reduce volatility (like stablecoins), and some just exist to ride viral fame (like memecoins). It is important to understand their unique strengths and weaknesses in order to realize their position in the evolving world of digital finance.
