What is Currency?
Before
understanding the concept of cryptocurrency, one needs to understand what is a
“currency”? Currency has evolved with human civilization and has a long
history. In the 21st century, a currency refers to a piece of paper
(or sometimes based on metal) issued by some government (every country has its
currency), and that is used for the exchange of goods and services. Economist
defines currency as something that could be used as a medium of exchange, a measure
and store of value—photo by Charles Thompson from Pixabay .
The
paper-based currencies have its value because a particular government (or
issuing authority) guarantee that value. Without a government or issuing
authority guarantee, the paper currency is just a useless piece of paper. The
central banks of the country control these currencies. The central bank issue
currency in specific quantity to ensure the smooth functioning of the entire
economy of the country. The banking system plays a vital role in circulation
and control of all this money. Some currencies such as United States dollars
($), British Pound (£) or Euro (€) are international and are acceptable for
exchange of goods and services outside the countries that issue or ensure its
value.
What is Cryptocurrency?
The
ongoing digital revolution digitalized every aspect of life. Money is not an
exception. During 2008 a group of unknown people (or a single person) named as Satoshi Nakamoto introduced a digital currency called “Bitcoin”. Bitcoin (BTC) is
based on a new technology called “blockchain”. Unlike the existing paper-based
currencies, Bitcoin was not issued by any central bank, nor it needs any
banking channel for its circulation. So that’s why it is called decentralized
currency.
To
initially comprehend the concept of cryptocurrency, one can think of taking it
as a substitute for paper-based currency. However, there are a few difference
here. First, unlike paper currency, cryptocurrency is not issued by any
government, so it has an acceptability issue, although its acceptability is on the
rise with every passing day. Secondly, it does not have a physical or tangible
shape, but it exists on a publicly available accounting ledger book. Thirdly,
it does not need a “banking channel” for its circulation but instead runs
through the internet via blockchain technology. Fourthly, its value is very
volatile compare to the paper-based currencies. For instance, In 2009, Bitcoin
(BTC) started as less than a 1$, by May 2021, it is traded at over $60,000.
It
is also important to mention that after the start of BTC in 2009, with time,
more cryptocurrencies called Altcoins are introduced. Now, there are over 4500+
cryptocurrencies in the market, among which some of the popular currencies are
Bitcoin Cash (BCH), Ethereum (ETH). Some of these currencies are
blockchain-based, while others are using Master Nodes—photo by MichaelWuensch from Pixaba.
What is Blockchain Technology? (How cryptocurrencies work?)
Imagine,
you are businessmen and working in country A. You want to make a
business deal with a firm in country Z that is around 1000 miles away from your
country. You make your business deal, and now you want to make “payment” for
your business deal. For this purpose, you request your bank to act on your behalf,
and the bank pays the payment to the bank of the firm in country Z, from where
the other party get its amount and clear your business deal. And of course,
this entire process may take form a few days to a few weeks depending upon the
regulation for such payments in both countries. Now, look into this whole
process, the bank plays a key role. It links you with your party while you both
are 1000 of miles apart. Bank created this link for payment or exchange of good
for the money but obviously, it charges both parties for these services. Banks
have almost a full monopoly on these services, and they charge premium prices. Sometimes,
these costs are substantial. Also, think of converting the loss of value in
converting your local currency for international currency (such as $, £ or €),
as banks mostly use lower conversation rates compared to open market rates. Photo by xresch from Pixabay.
Blockchain
works pretty much in the same manner as being described in the above case. It
can ensure, an instant, safe and secure transaction between two (or more)
parties without engaging any bank and with a minimal cost by using
cryptocurrencies such as BTC. It is a technology that ensures that payment is
made, and its system automatically ensures (deny any double entry by its very
built-in nature) the safety and security as payment of each BTC is recorded on
publicly available account ledger. So
how the transaction will process by blockchain without any middle entity (like a
bank) on a public ledger. Here comes the concept of a fixed supply of BTC and
cryptocurrency mining. There are a good number of individuals with computers
(specially equipped) to find any block for updating the public ledger of
blockchain as a result new Bitcoin get created, and the general ledger gets
updated. There will be a separate blog on cryptocurrency mining soon.
What is the Future of Cryptocurrency?
The
blockchain technology is old and being in existence since the 1980s, but it had
been used effectively in cryptocurrencies in 2008. The use of blockchain and
the creation of cryptocurrencies based on blockchain has revolutionized the
payment industry. It not only facilitated business growth but also threatened
the very existences of “traditional banks”. The decentralized currencies threatened
the “central bank” control over the currency. The government fears that they
cannot “trackback” the cryptocurrencies based transactions. Thus there is the hesitation
of allowing such a system in some countries.
Finally,
with further development in blockchain from blockchain 1.0 towards 2.0, opens
more areas where this technology has been adopted effectively. These areas
include health care, smart contracts, financial services, supply chain, and
domain names.
Written
by Prof. Shrewd Senior
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