How do Central Bank Digital Currencies compare to Decentralized Finance Technology?

CBDC's are the new talk of the town, but they are definitely not just like blockchain cryptocurrencies

There is so much happening in the blockchain technology and cryptocurrency space at the moment that it all seems to be overwhelming for new users. It is necessary for everyone to equip themselves with information, especially the ones coming from a reputable platform that prides itself on helping the unlearned and unbanked.

The race for a digital economy is currently topping the agenda for countries all over the world in order to implement the use of blockchain technology. However, these digital finances created by such government financial institutions have proven to maintain the nature of our fiat system.

In this article, we would try to shed light on the comparison between a central bank-backed digital currency (CBDC) and a decentralized cryptocurrency.

Are CDBC’s really cryptocurrencies?

According to Investopedia, the term central bank digital currency (CBDC) refers to the virtual form of a fiat currency. A CBDC is an electronic record or digital token of a country's official currency. As such, it is issued and regulated by the nation's monetary authority or central bank. The currency is backed by the full faith and credit of the issuing government.

There are cons and pros to having a CBDC against a decentralized currency. These are some of the reasons why this form of currency could pose a threat to the people's freedom. 

  • The CBDC is a centralized form of currency and may erode the privacy of citizens. 

  • The CBDC has a possibility of having an unlimited supply of tokens as such currency is attributed to the financial strength of the nation or country in question. 

  • The tokens are highly regulated and can be affected by inflation.

The positive aspects include but are not limited to the following reasons:

  • Financial inclusion: safe money accounts at the central banks could constitute a strong instrument of financial inclusion, allowing any legal resident or citizen to be provided with a free or low-cost basic bank account.

  • Preventing illicit activity: A CBDC makes it feasible for a central bank to keep track of the exact location of every unit of the currency (assuming the more probable centralized, database form); tracking can be extended to cash by requiring that the banknote serial numbers used in each transaction be reported to the central bank.

  • Safety of payments systems: A secure and standard interoperable digital payment instrument issued and governed by a Central Bank and used as the national digital payment instrument boosts confidence in privately controlled money systems and increases trust in the entire national payment system.

  • Technological efficiency: instead of relying on intermediaries such as banks and clearing houses, money transfers and payments could be made in real-time, directly from the payer to the payee.

  • Financial safety: CBDC would limit the practice of fractional reserve banking and potentially render deposit guarantee schemes less needed.

Cryptocurrencies convey the actual decentralization

However, the decentralization of cryptocurrencies is actually what makes it trustworthy. In general, more decentralized cryptocurrencies are likely to be more stable and likelier to survive (long enough for you to profit from mining) than more centralized and less distributed cryptocurrencies. In the cryptocurrency arena, the term decentralization is thrown around as an absolute: the system is either decentralized or it is not.

Some of the characteristics of decentralized finances include but are not limited to the following:

  • Social networks: The number of users and the people participating in these cryptocurrencies are also very important in regard to the cryptocurrency decentralization spectrum. The larger the user base and the more diverse technical opinions on the system, the more robust the software and physical hardware is to changes being pushed by major players in the system.

  • Initial coin distribution and coin issuance: For a Proof of Work cryptocurrency with a predetermined issuance schedule, the distribution of coins can be considered fairer than a system in which a high percentage of the coin issuance was pre-mined and distributed to a select few insiders. 

  • Network hash rate: The level of the cryptocurrency’s hash rate distribution among peers is also an important decentralization measurement for PoW cryptocurrencies. If only a few companies, individuals, or organizations (such as mining pools) are hashing a blockchain to create blocks, the cryptocurrency is relatively centralized.

Although these terms might sound a bit technical, we at Klever would ensure that they are explained in our subsequent articles to enable our followers to participate fully in our educational plans to empower more people with knowledge-based content on blockchain technology and cryptocurrencies. We also recommend that new people can start benefiting from this pool of information by downloading the Klever wallet and Klever Exchange to keep themselves updated.

It is indeed a Klever thing to do.

James Enajite

Klever Writer

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