A lot of people still struggle with the concept of how traditional fiat currency is “centralized”, and digital currencies like Bitcoin are “decentralized”. Without properly understanding what these terms mean, there is no way for everyday consumers to see the benefits of either option. A recent infographic released by HolyTransaction might bring some clarity.
The Downfall of Centralized Currency
One of the most often heard comments is how fiat currency can be printed on-demand. While most people think this statement is overrated, every governing body around the world can create additional fiat currency “out of thin air.” It goes without saying that, by increasing the total supply of fiat backed by the previous value, all money in circulation becomes less valuable.
Speaking of fiat currency being “backed” by assets to create the illusion of value, the US Dollar has not been tied to a tangible asset for quite some time. In fact, every US Dollar in circulation is backed only by “the full faith and credit of the United States”, and has no inherent or intrinsic value whatsoever.
Furthermore, once “new money” has been generated out of thin air, with no value to it whatsoever, the US Treasury distributes all of the additional funds to one of twelve Federal Reserve Banks. It is important to note there are two privately-owned Federal Reserve Banks, creating a non-transparent ecosystem in which a handful of people determines the wealth of an entire nation.
By saying these twelve Federal Reserve Banks are privately owned, the term “privately” may not be an accurate description. All of these financial institutions can do as they please, as there is no direct overseer from any government branch. This is not a positive trend, as there have been multiple financial crises over the years.
Last but not least, the Federal Reserve can inject this new money – created out of thin air with no value – by purchasing Treasury Bonds. But there is another option, as this money can also be used to purchase loans with the sole purpose of financing the debt of the entire United States.
How Decentralized Currency Is Different
Bitcoin, the most popular decentralized currency in the world right now, has a fixed supply of 21 million coins. No more coins can ever be issued beyond that point, giving all bitcoins in circulation some form of value at any time, with the potential to increase in value over time. It will take until 2140 until all 21 million bitcoins are mined.
Speaking of generating new Bitcoins, there are no institutions “printing” additional funds. The only way to bring additional coins in circulation is through a complex process called “mining.” As a reward for bringing new coins in circulation, Bitcoin “miners” receive the privilege of being able to spend these coins first.
Until the 21st million Bitcoin is mined, anyone in the world can participate in the “mining” process. There is no approval process to go through, as Bitcoin is an open ecosystem welcoming people from all over the world to participate. All funds are controlled by the people active in the ecosystem, creating a decentralized system.
Additionally, Bitcoin has no single point of failure, making the network far more secure and completely tamper-proof. Unlike fiat currency, where one institution is responsible for controlling the money supply, Bitcoin is consumer driven. On top of that, Bitcoin has multiple points of distribution, as the “mining” process takes place all over the world.
Last but not least, spent bitcoins are injected directly into Bitcoin’s growing economy once again. Spent fiat currency is kept out of the ecosystem until it is brought back to the bank, a process that can take anywhere from hours to years. Bitcoin’s economy is self-sustainable, open to anyone, and simply better.
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