Money and its functions

What is Virtual Currency?

Virtual currency is a type of unregulated digital currency. It is not issued or controlled by a central bank. Examples of virtual currencies include Bitcoin, Litecoin, and XRP. Digital currencies are stored in and transacted through designated software, applications, and networks in digital form.

Virtual currencies are typically issued by private issuers and used among specific virtual communities. The security of the software and networks that virtual currencies stand on is a critical concern.

The traditional regulated currencies are backed by sovereign debts (fiat currency) or hard assets such as gold. In contrast, virtual currencies are not backed with no intrinsic value. The value of a virtual currency is mainly driven by the sentiment of traders. As a result of its unregulated nature, a virtual currency can experience extensive price fluctuations.

Summary

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  Virtual currency is a type of unregulated digital currency that is not issued or controlled by a central bank. Examples include Bitcoin, Litecoin, and XRP.
  
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  Virtual currency can be either centralized or decentralized. A decentralized virtual currency does not have a central administrator.
  
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  The decentralization of virtual currency relies on blockchain networks, which are cryptography-based. The cryptography-based virtual currency is known as cryptocurrency.
  

Types of Virtual Currency

In terms of legal status, there are two major types of virtual currencies – centralized and decentralized.

1. Centralized

A centralized virtual currency has a central administrator or repository. The central administrator of a virtual currency is typically the issuer of that currency. The role is similar to a central bank in a regulated currency system. XRP is an example of centralized virtual currency.

2. Decentralized

Conversely, a decentralized currency does not have a third-party central administrator or repository. Instead, a distributed system will authenticate the transactions of a decentralized virtual currency.
Many decentralized currencies are based on blockchain networks such as Bitcoin, Litecoin, and Ethereum. A blockchain network links a list of records, which is known as blocks, with cryptography. When a transaction is requested, the request is broadcasted in the network consisting of many computers (nodes).
After the transaction is verified by the network, a permanent and unchangeable block that contains the transaction information is added to the existing blockchain. The transaction is completed and recorded accordingly.
Compared with a centralized virtual currency system, the decentralized peer-to-peer network avoids a central administrator, and thus avoids a centralized security failure. Also, due to the absence of intermediaries, decentralization allows for more transparency between parties and lower transaction costs.
However, the lack of a central authority leads to regulatory concerns. Money laundering and other illegal transactions can take advantage of the decentralized setup.