Cryptocurrencies

Legal Tender of the Future

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If you’ve ever seen Guardians of the Galaxy or Thor Ragnarok, then you have probably heard of the term “units”. If you don’t know what “units” are, they’re a form of currency, universally accepted in the world of Marvel comics. Ever wonder how such a currency can exist? With so many planets throughout the universe, wouldn’t it be chaotic to have a single currency? Who would manage it? Who would decide its value? Why would everyone accept it? How would something like that possibly work? The possible answers to these questions were discovered right here on our humble planet about ten years ago, in the form of a currency which had until now only been toyed around as a novel idea, but nothing more. Incidentally, this idea even has a name straight out of a science fiction novel - Cryptocurrency.

Cryptocurrencies have been becoming the talk of the town of late! A large number of people are talking about cryptocurrencies, buying them, selling them - or simply investing. Cryptocurrency miners, traders and even brokers are rising in number with every passing day. In a time like this, one might often wonder what this hype is all about. In this article on cryptocurrency, we will take a detailed look at every aspect of cryptocurrencies and how they function.

But before diving into the vast ocean of cryptocurrency, it would be better to splash some water of it onto you - centralized currency. So what is this centralized currency? In simple terms, centralized currency means that the concentration of control of the currency is under a single authority, i.e. government, bank or any other financial institution. So basically, only a single body, our government or the bank handles our money. History has been witness to the mismanagement that this system has led to whether it is the introduction of currency peg between the peso and the dollar to fight hyperinflation by the Argentinian government in the early 1990s or the abandonment of the currency by the government of Greece during the financial crisis of 2007-08. Sandwiched between the powers of the bank and the government, the fiat currency suffers from quite a few disadvantages such as high exchange rates, slow transaction rates, potential fraud, etc.


Need for Decentralized System

Having mentioned some of the disadvantages of the current system or the centralized system, it’s time to throw some light on the solution. This brings us to the concept of a “Decentralized System” - one which requires multiple parties to make their own independent decisions or a system where there is no single centralized authority that makes decisions on behalf of all the parties. As an analogy, we can consider the example of our government - a democratic body where the people of the country have the rights to elect their representatives. Similarly in a decentralized system, there is no single body that is responsible for every action. What’s so good about it? Firstly, there is no involvement of a third party whenever a transaction has to be carried out. This causes the transaction to be done faster. If money can flow faster then moves can be made faster, decisions can be made faster, goods can move from point A to point B faster and so and so forth. In simple terms, it improves the global economic condition at a rapid pace.

What is Cryptocurrency?

A cryptocurrency, in the simplest of words, is digital money. In technical terms, cryptocurrency is a general name referring to all encrypted decentralized digital currencies like Bitcoin. It is electronic money, created with technology controlling its creation and protecting transactions, while hiding the identities of its users. Simply put, a cryptocurrency is basically the combination of two words: Crypto + Currency where Crypto- is short for “cryptography”, a computer technology used for security, hiding information, identities and more.Ledgers of all transactions are based on blockchain technology, which is a digital, decentralized ledger. It keeps a record of all transactions that take place across a peer-to-peer network. These ledgers are available as an encrypted copy with all the members, to allow individual verification of records.

Why Cryptocurrency ?

Cryptocurrencies are quicker, cheaper and more reliable than our regular government issued money. Instead of trusting a government to create money and banks to store, send and receive it, users transact directly with each other and store their money themselves. Because people can send money directly without a middleman, transactions are usually very affordable and fast.

Invention of Cryptocurrency

So how and when did cryptocurrency actually come into the scene? A pseudonymous software developer going by the name of Satoshi Nakamoto proposed Bitcoin in 2009, as an electronic payment system based on encryption. It was announced on SourceForge with these words, “Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double- spending. It’s completely decentralized with no server or central authority.” Satoshi’s idea was to produce a means of exchange, independent of any central authority that could be transferred electronically in a secure, verifiable and immutable way. His goal was to invent something that many people failed to create before - digital cash. After Bitcoin, many other cryptocurrencies were invented and are still being continually invented almost every single day - some of them being Litecoin, Monero, Dash, etc. The new inventions are made keeping in mind the shortcomings of the earlier currencies. Although today, we have as many as 1565 cryptocurrencies, Bitcoin still has more than 50% of the market share, owing to its early invention.



MECHANISM AND BLOCKCHAIN

After having dealt with the what, when, why, and who, now comes the interesting part - the how of it all. How does the transaction and exchange take place when using cryptocurrencies? A short answer would be through public key cryptography and blockchain technology:

A. Cryptography - “Cryptography or cryptology is the practice and study of techniques for secure communication in the presence of third parties called adversaries.” In simple words, it is used to encrypt messages to conceal them from middlemen/unauthorised persons. Now, broadly speaking, it is of two types -

I. Symmetric Key Cryptography - When both the sender and the receiver have a common key which is used to perform encryption and decryption. Let us consider a very simple version of this kind of cryptography, say Alice and Bob wish to transfer a secret message X (composed entirely of numbers for simplicity) and they have decided that the common key is 3. To send a message X, Alice can add 3 to all the digits of the message and then send it to Bob, who on the other hand subtracts 3 from each digit to retrieve the original message.

II. Asymmetric Key Cryptography - This technique involves two keys, one used for encryption by the sender, and the other for decryption by the receiver.To understand this let us take the help of a common analogy of mixing colours. All of us know that it is easy to predict the colour formed on mixing two colours, but one cannot tell which two colours were used to create the new colour. This is called a trapdoor function i.e. a one way function. Coming back to Alice and Bob, this time, both of them are aware of a public base colour (say Yellow). They then choose a private colour of their own (let Alice’s private colour be Blue and Bob’s private colour be Red), and combine some of that with the base colour to create a public mixture. They can then send these mixtures to each other (Alice sends Yellow + Blue and Bob sends Yellow + Red). Here lies the interesting part - Although the colours are publicly visible, it is not possible to guess the base colour just by looking at this mixture.

Having received each other’s mixture, Alice and Bob can then mix in their own private colour again, to produce a blend of three colours (Yellow + Blue + Red). Interestingly, each of them will have the same colour, since the order in which we mix paint is irrelevant.

B. Network of Investors - In the world of cryptocurrency, all the participating members are connected to each other through a complex peer-to-peer network, used to validate transaction records. Now that you have a rough idea about the components involved, let us go a step further and explain how the transactions take place behind the scenes. Let’s say Alice wishes to transfer an amount of ‘X’ bitcoins to Bob. Assuming both of them use bitcoin wallets, Bob generates a new public key through his wallet which is actually a new bitcoin address. Now, Alice signs the request (a combination of the public key and the amount), with her private key corresponding to the address with which she’s transferring from.


VERIFICATION PROCEDURE

Participating members throughout the network compete with each other to be the first to verify a transaction, as the reward for doing so are newly minted bitcoins. One such connected peer verifies the transaction between Alice and Bob. After successful verification, a new transaction block is added to the blockchain. This transaction is now irrevocable.


GETTING YOUR HANDS ON CRYPTO COINS

Now that you know about the need and the mechanism, you might feel like you want to get into the business yourself. In order to obtain a bitcoin, litecoin or any other cryptocurrency, you have a choice of either mining or purchasing them.
Mining a cryptocurrency is similar to mining any other mineral which hasn’t been taken out of ground yet. Just as those minerals are yet to be discovered, the cryptocurrency coins which haven’t been mined yet are undiscovered. Basically, each block in the blockchain is like a mathematical puzzle. The answer to this puzzle is a number which when passed as input to a hashing algorithm, along with the data in the block, gives an output in a certain range. Whoever finds this number first receives some amount of cryptocurrency as reward. All the miners who were working on that block now have to move on to the next one. The reward per block keeps reducing as more and more mining takes place, and the extent of reduction varies from one cryptocurrency to another. Since the reward keeps reducing, there eventually comes a time when the currency exhausts. This finite nature is one of the reasons why people choose to invest in cryptocurrencies. As the source keeps depleting, the exchange rate has a chance of rising. For instance, there are approximately 21 million bitcoins in existence, and at the current rate of mining, all of them are expected to be obtained by the year 2140. As more of them are being discovered daily, their price is rising. However, this may not be true for all cryptocurrencies as the hashing algorithms and number of coins depend on the cryptocurrency under consideration.

After getting to know all this, it’s possible that you would have made up your mind to become a miner yourself. However, it isn’t that easy: Once you have a wallet for storing your coins, you need to install a mining software. Though the software is free, the hardware and the resources required can put a lot of pressure on your finances. This fact cannot be emphasised enough, especially when it comes to popular crypto coins. Unless you have sufficient disposable income at hand, it is not advisable to go about mining bitcoins solo.

Cryptocurrency Mining

Mining other coins does not require as much upfront investment as compared to Bitcoins, however they still require a powerful Graphics Processing Unit (GPU). Miners usually have to customize their hardware to get enough speed to make their mining profitable. Since a lot of miners are working on the same block at a time, this speed needs to be considerably high for it to yield coins in a profitable manner. Since most of you wouldn’t be able to spare so many resources, maybe going solo is not the best option.

The alternative to going solo is to join a mining pool. The logic is pretty simple: Let’s say you are a regular fellow with a regular build, digging the ground in hopes of finding some underlying treasure. Now let us assume that there is another group of diggers, also having similar builds, digging together for the same treasure. It is pretty obvious that the group would be able to dig faster and more efficiently compared to you. Hence the chances of the group finding the treasure are significantly higher. The only issue is that being part of a group would mean sharing the reward. A mining pool can be compared to the treasure hunting group wherein miners pool in their resources and share the rewards. If you are a small scale miner or a beginner, then a mining pool is the best way to get small rewards in a short period of time.

Buying and Selling

After you’ve earned your precious coins, i.e. cryptocurrencies, you might want to know how to cash them. A sale can directly be made between acquaintances and associates. However, if no one you know is into cryptocurrencies, then maybe you would want to do something else.

There are cryptocurrency exchange platforms on which people can buy and sell coins in exchange for money or other cryptocurrencies. There might be some interface charges involved, which may vary from platform to platform. These platforms differ in terms of whether the sale is made between small investors, institutional holders, traders, etc. Sale can also be made using platforms which help individual buyers and sellers connect with each other. The transactions between them can be done using cash deposits, bank transfer, etc. The methods mentioned above are common for most cryptocurrencies.

However, in case of Bitcoins, special devices called ATMs are also available, which provide Bitcoins in exchange for cash. Over 3,500 Bitcoin ATMs have been established across the world as of August 2018. Some of the ATMs also offer the option to provide cash to the seller in exchange of Bitcoins. There are also a bunch of applications and websites which help users in finding nearby ATMs.

CAUTION

Till now you’ve mostly read positive things about cryptocurrencies, but in reality the path is not filled with rainbows and sunshine. Just like every other thing in the universe, cryptocurrencies come with their own set of drawbacks.

What has been discussed here is just the tip of the iceberg. Since the technology involved is fairly new, often people dump their money without fully understanding the scheme. They fail to understand that cryptocurrencies are not a grow-rich-quick scheme. A lot of variables affect the outcome, and hence there is a fair chance that you might burn your wallet if you invest mindlessly.

Another drawback is that if you lose the password to your crypto wallet, there is no possible way to retrieve your coins. So if you are someone with a poor memory you need to be extremely careful with your crypto wallet passwords. Payments made using cryptocurrencies are irreversible. A transaction made using cryptocurrencies cannot be cancelled and hence you should take extreme care while dealing with one.

Apart from the points mentioned above, another issue with cryptocurrencies is their volatility. The price of a certain cryptocoin can rise to thousands of dollars at one moment, and fall down to nothing at the next without any warning. So there are no guarantees that the price of any of these currencies would stay stable. Hence corporations are apprehensive of accepting payments made through them. This leads to the next disadvantage: Cryptocurrencies aren’t widely accepted as a form of payment. Thus, you can’t go to your local supermarket, and offer a litecoin as payment for your groceries.

So if you’re thinking about mining or buying a cryptocurrency, you need to keep all the pros and cons of the same in mind.

CONCLUSION

The basics of several areas of cryptocurrencies have been covered and now it’s up to you what you want to do with all this information. You can look up more stuff and find out ways to grow your capital by diving deep into the cryptocurrency world by researching in this field and investing in several different coins, or by starting a mining rig of your own. You might even find a cryptocurrency which, like the “units” from MCU, might be used universally someday - the possibilities are endless.

Though cryptocurrencies face several obstacles today, the future might not be the same. With more and more new technologies coming up, new trends come into practice and old ones get outdated at a rapid pace. Who knows, maybe ten years down the line, cryptocurrencies would be able to fully take over online payments. Till then, it is better to stick to the centralized currencies being offered to us and hope that cryptocurrencies gain the stability and reliability that is required to make the world go round.