A comparison between cryptocurrencies and fiat money
State-issued currencies (fiat money) can be printed at political will. Therefore, the inflation rate is also subject to political will. In contrast, inflation rate of a cryptocurrency, e.g. Bitcoin, Ethereum or Gridcoin, is predictable. This is due to the fact that cryptocurrencies usually follow an open-source protocol. Most cryptocurrencies have their inflation rate, a result of the creation of new currency units, predetermined by their source code. Everyone can read this code and calculate the inflation rate.
Quick and Reliable Transactions
Non-cash payments to purchase goods are usually made by using wire transfer, debit or credit card. A bank transaction can take multiple days. Besides, classic transactions could be reclaimed even days after a payment has been conducted. On top of that, a credit card payment can even be reclaimed after weeks. Merchants can never be certain whether the money they got from selling finally belongs to them. Transactions within a cryptocurrency network are being conducted within seconds to minutes and are irreversible.
Small Transaction Costs
The transfer of fiat money from bank account to bank account requires enormous infrastructure between banks, which is complex and therefore expensive to establish and maintain. Also, fees and operation costs grow with higher amounts. Transaction costs of cryptocurrencies are negligible – no matter the amount.
Fiat money is based on banking systems. Transactions require consent of centralized organizations like money institutes. In addition, bank accounts can be frozen and bank customers may even be dispossessed of their funds. On the other hand, every cryptocurrency user is capable of controlling their own decentralized "bank account" without any influence of third party entities.
European banks only need to guarantee that 100,000 Euros per bank account are protected against insolvency of the bank. Balances exceeding that amount belong to the bank's insolvency estate in case of bankruptcy. The consequence of a bankruptcy is partial dispossession of customers. In cryptocurrency networks there are no banks and 100% of the values belong to the users.
Fully Transparent and Fraudproof
Monitoring all transactions is impossible in fiat money systems. Besides the system being non-transparent to its users, this enables uttering of counterfeit money. All transactions ever made within a cryptocurrency network are transparent and are being checked, therefore false cryptocurrency units cannot exist. Furthermore, everyone can monitor how much money each existing account has by looking at the public ledger, the blockchain.
The minimum transaction amount of fiat money usually is a fixed amount, e.g. 1 US-Cent. Therefore there can't be micro transactions lower than this minimum unit. Cryptocurrencies can provide an arbitrary count of decimals, e.g. 0.00000001 GRC can be transferred within the Gridcoin network. These micro transactions enable a host of new use cases in machine to machine communication.
Disclosing personal information is a prerequisite to opening a fiat bank account. In contracst, cryptocurrency accounts can be generated by anyone. There is no user information necessary. An account consist only of a public and a private cryptographic key. The public key is known to the network, including the value of the account's funds. It acts as a pseudonym to the holder. The private key grants access to the funds only to the holder of the key.
Originally, when fiat currencies were issued, they were just proxies to gold that the central bank actually had to save in their vault. A bank “note” was merely instructing a bank to pay out the corresponding amount of gold. This concept, called the “Gold Standard”, is the root of our trust in paper money. However, it is no longer applied.
Nowadays the value of a currency is expressed in comparison to another currency, usually the US Dollar. In case the European economy grows stronger than the American economy, the Euro will gain trust and the fiat trading pair EUR/USD will rise as a consequence. Thus, the value of a fiat currency is based on how much people believe that it will be useful as a payment instrument in the future. This is exactly the same trust people have to put in cryptocurrencies to establish their value.