All about Digital Currency: Cryptocurrency
Posted: Jan 05, 2021
The internet is changing the discourse of society, economies and industry, since its inception. It has created a great value in disrupting the existing practices and creating cheaper, more efficient and accurate systems. It has helped in decentralizing and democratizing the access to information, value and services. It has removed the obstacles and middleman in the system, which has reduced the operational and logistical cosy in many ways.
One such example of removing an obstacle from a system is cryptocurrencies By truly decentralizing the network, it removes a dependency on any authority or institution to reduce, remove or change the value of any such holding.
What is Cryptocurrency?
A Cryptocurrency is a new age digital/virtual currency, secured by cryptography which makes it quite impossible for double-spending. Many cryptocurrencies are based on blockchain technology(a distributed ledger enforced by a disparate network of computers). An exclusive feature which differentiates cryptocurrency from other currency is that it is not issued by any central authority, which theoretically prevents them from government manipulation. There is an estimation, that there are more than 47 million cryptocurrency users around the world. Cryptocurrencies are created through a process called mining.
How miners create coins and confirm transactions?
Let‘s have a look at how these cryptocurrencies work, what is the mechanism behind these cryptocurrencies. A cryptocurrency like Litecoin consists of a network of peers. Every peer has a record of all the transactional history and thus have the record of the balance of every account.
A transaction is a file that says, "Roy gives Y Litecoin to Alice" and is signed by Roy‘s private key. It’s basic public-key cryptography. After getting signed, a transaction is broadcasted in the network, sent from a peer to every other peer. This is basic P2P-technology, which is used in the transactions.
Blockchain and Cryptocurrency
Any transaction is known instantly by the whole network. But it gets confirmed only after a specific amount of time.
Confirmation is a very critical concept in the ecosystem of cryptocurrencies. We can say that cryptocurrencies are all about the confirmation of the transaction.
If a transaction is unconfirmed, it is pending and can be manipulated. When a transaction is confirmed, it is rigid as a stone. It can’t be manipulated any longer, it can‘t be undone, it becomes the part of an immutable record of historical transactions, which is called a blockchain.
The transactions can be confirmed by a miner only. It is the job of the miner in a cryptocurrency-network. They take transactions coming to them, approve them as legit and spread them in the entire network. After a transaction is confirmed by a miner, every node has to add this to its database. It becomes a part of the blockchain.
For doing this job, the miners get rewarded with the tokens of the cryptocurrency, for example with Litecoins. Since the miner‘s activity is the single most important part of the cryptocurrency-system we should take a deeper look at their part to understand the concept of cryptocurrency.
What is cryptocurrency mining?
Theoretically, anybody can be a miner. Since the decentralized network of cryptocurrency does not have any authority to delegate this task, a cryptocurrency needs some mechanism to prevent one ruling party from abusing its power in the delegation of this task. Let us imagine someone will create thousands of peers and spreads forged transactions. The system would broke-down immediately.
So, Satoshi(founder of Bitcoin) set the rule that the miners will have to invest some work of their computers to qualify for doing this task. They have to find a hash – a product of a cryptographic function – that connects the new block with its predecessor. This is called the Proof-of-Work. In the case of Bitcoin, it is based on the SHA 256 Hash algorithm.
SHA 256 Hash algorithm can be the basis of a cryptologic puzzle that the miners compete to solve. After finding a solution to the puzzle, a miner can make a block and add it to the blockchain. As an incentive, he has the right to add a so-called coinbase(token) which gives him a specific number of Bitcoins. This is the only process to create a valid Bitcoin.
Bitcoins can only be created if miners can solve a cryptographic puzzle. The difficulty of this puzzle increases Miner’s investment in the amount of computer power, only a specific number of cryptocurrency token can be created in a given amount of time. This is part of the consensus which no peer can break in the network.
Why are cryptocurrencies so popular?
The revolutionary properties cryptocurrencies have is the reason for its success. Even their inventor, Satoshi Nakamoto, didn‘t dare to dream of this kind of success. Not every other attempt by a tech guy to create a digital cash system can attract a critical mass of users like Bitcoin, Bitcoin had something that provoked enthusiasm and fascination in the masses. Sometimes it feels more like that it is a religion rather than technology.
Cryptocurrencies are said to be digital gold. Sound money that is secure from any political or international influence. It is a kind of Money which promises to preserve and increase its value over time. Cryptocurrencies are also a fast and comfortable means of payment with worldwide acceptability and accessibility. They are private and anonymous enough to serve as a means of payment for the black markets, dark web and any other outlawed economic activity.
Cryptocurrencies use as a means of speculation and a store of value dwarfs the payment aspects. Cryptocurrencies gave birth to an incredibly diverse, fast-growing market for all the investors and speculators. There are exchanges like Okcoin, Poloniex or shapeshift, which enable the trade of cryptocurrencies for traders and investors. The daily trade volume of these exchanges exceeds that of major European stock exchanges.
In this rich ecosystem of coins and token, one can experience an extreme level of volatility. Commonly, a coin can gain 10 per cent a day – sometimes 100 per cent and vice versa. If one is lucky, one’s coin‘s value can grow up to 1000 per cent in a week or two.
Why was cryptocurrency banned in India?
There were so many apps in the past by which one can buy or sell cryptocurrencies. In 2017, the most popular cryptocurrency Bitcoin was increasing rapidly across the masses. To make quick money, a huge number of Indians started investing money at that time. Just after a few months, the price of Bitcoin went down from $20,000 to $4,000 and people lost their money, which led the authority to intervene.
The RBI had banned the trading in cryptocurrencies in 2018
The main reasons for the ban of cryptocurrencies were-
No Regulations on crypto-currency: All the crypto-currencies were working without any regulations. That means no one can control any crypto-currency, which means there was no framework or regulation in the trading. People had nowhere to go to report fraud or any such thing.
For example, if one wants to invest money in the stock market in India, SEBI(Security and Exchange Board of India) has the authority to regulate the stock market in India. SEBI has created rules and regulations for the smooth function of the market.
If you face any problem or want to report any fraud related to investment in the stock market, SEBI has the authorities to guide you and they can solve your problem. On the other hand, there is no one in the crypto-currency market to resolve the problems and frauds.
- Investment in Indian Economy:
Cryptocurrencies was a big threat to the economy. Instead of investing money in the stock market via a mutual fund, SIP or direct equity, if people start investing in Bitcoin, the economy will collapse.
That was the main reason why RBI(Reserve Bank of India) had banned all the banks in India for any kind of transaction related to crypto-currency. If you had invested in Bitcoin, you need to use that money on any other platforms that accept Bitcoin payments. You were not able to transfer your money to the bank.
- Wallet Hacking:
The crypto-currency companies and experts were saying that the concept of the blockchain(the algorithm behind crypto-currency) can’t be hacked.
But, there were many instances, where people’s money was stolen from the wallet. That means it was not that much secured as it was said to be.
What is the current status?
In March 2020, the Supreme Court quashed the restriction imposed by RBI to stop banks from transaction-related to cryptocurrency. Entities regulated by the RBI were also restricted from dealing with virtual currencies.On September 17, 2020, Economic Times reported that the Indian government is planning to introduce a new law, which will ban the trade in cryptocurrencies, which will place India, out of step with other Asian economies that have chosen to regulate the fledgling market. They also reported that the federal government wants to encourage the blockchain method, the technology underlying cryptocurrencies, but is not keen on keeping the cryptocurrency trading in India.
Many experts believe that instead of banning, India needs a regulatory framework to protect uninformed retail consumers in trading and investment.
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S. Vishwa is web marketing analyst at Finology Ventures. With 5+ years of web marketing experience, joined a Fintech company to help people to learn and earn more.