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Cryptocurrency: An Introduction

 

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. 


 Imagine, if there could be a possibility for you being able to pay to the business party without engaging any bank. Also, you being able to pay “instantly” and with much less “cost” (a fraction of cost that bank charge from you), and is safe and secure. How would you like such “facility”?

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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