Wondering whether you should really invest in blockchain and crypto? Abhishek Sareen breaks down what crypto currency is, and what its future is.
Crypto currency is a new age financial transaction system, which can potentially make the current banking system redundant. And although we all have already heard about and even read about crypto currency, most of us are still clueless about how the whole thing works. This article of mine tries to simplify the concept so that any layman can understand crypto currency and related terms like block chain, crypto currency mining, Bitcoin, Ethereum, Dogecoin, etc.
Cryptocurrency for Beginners
Before we get into crypto currency, let’s try to understand what the current currency and financial system looks like. As most of us are aware, most countries issue a currency, which is issued by a country’s central bank, for example Federal Reserve in case of USA or Reserve Bank of India in case of India.
A currency note is legal tender, which is a promise (or debt) by a country’s central bank. You will find the following mentioned on an Indian currency note, “I promise to pay the bearer the sum of five hundred rupees,” from governor of the Reserve Bank of India, or in case of US dollar note, “This note is legal tender for all debts, public and private.” What it means is that a country’s central bank takes the ownership of this debt, and thus issues it for the general public for the convenience of trade.
This currency is initially issued or loaned to local banks through bond collaterals, who then issue it to the general public or their bank account holders. Banks have an internal system which helps them transact currency between themselves (through systems like NEFT/SWIFT/IMPS/UPI etc.), and by maintaining a ledger and the accounting systems for their depositors. The current financial system is very complicated and involves various types of institutions like, central bank, depositor bank, transaction systems for local and international transactions, etc. I have oversimplified the banking currency concept but I’m sure you get an idea.
Coming to crypto currency, to simply put it it’s just a piece of software which replicates a complete financial system, which anybody create or join without any restriction. Everything in the crypto currency financial system is out in the open and transparent. This makes the existing financial ecosystem, question their existence.
How Crypto Currency Works
So let us try to understand the crypto currency system step by step. One of the most popular crypto currency today is Bitcoin. Its creator Satoshi Nakamoto is still anonymous. Bitcoin is an open source payment transaction system and works on the principal of block chain.
Block chain is a shared and synchronized database system, which does the job of current banking ledger and accounting system. The closest analogy that I can give is the internet’s domain naming server (DNS) system. For example when you want to make a website, you would want to purchase a domain name like “opiniown.com”, so you would need to register this unique domain name, with DNS service provider like Google Domains or Godaddy by paying a fee.
Once you register this new domain name and direct your website hosting server to it, this domain name and direction entry is then updated in DNS service provider’s database, then within in the next few hours, other DNS servers across the globe update this record in their databases too. So next time when anybody across the world types “opiniown.com” in their browsers, it gets directed to your website hosting server, and opens the website opiniown.com. Just like we purchase a website domain name using a DNS (Domain Name Service) provides, the crypto currency system also works on a block chain algorithm, where all the data is de-centralized and encrypted.
To make a transaction one needs to create an account with crypto currency’s (block chain) service provider. Once you create an account, your account gets synchronized with other block chain servers across the world. An account creator can then transfer a crypto currency (like Bitcoin) from one account to another, and this transaction database ledger is maintained on all block chain servers. And if anybody wants to become a part of this crypto currency nodal server, they need server hardware and storage space to maintain these accounts & transaction ledger database.
Crypto currency system follows are very democratic approach unlink a present financial transaction system, where every account and transaction records are maintained on across all block chain servers with an encryption, this ensures security of the transaction and data redundancy backup measure as all the data is distributed in the overall system.
What is Crypto Currency Mining
Anybody can become part of an open source crypto currency system by opening a full nodal server (for example Bitcoin), all you need is a data storage space on their computer/server to maintain all records of accounts and transactions till date. And if they can contribute to processing of crypto transaction, they stand a chance to earn a piece of crypto currency, this is also known as crypto mining.
Crypto mining is the process of facilitating crypto transactions on crypto currency network, by providing processing power / CPU time, in exchange for crypto currency. In order to open decent size full nodal server, one would require approximately Rs 25 Lakhs (Roughly $33,000) of hardware, to be able to start mining a crypto currency like Bitcoin.
Now the big question that arises is, who bears the cost of maintenance of these crypto currency’s nodal servers, as there is a high amount of computer hardware, electricity, processing power etc. In case of the existing financial system, banks make up this cost by lending interest rate difference between banks and depositors. However, in case of crypto currency, when a transaction is made by an account holder, a fraction of Bitcoin (crypto currency) is deducted and kept by the system.
Nodal servers, which do bulk of computational processing for this crypto currency transaction, get a piece of this Bitcoin (crypto currency) as a reward. So at any point of time, Bitcoins are being deducted during a transaction and are being rewarded to transaction (computational processing) facilitator. This process of computational processing for facilitating a Bitcoin transaction is called crypto currency mining.
What is Cryptocurrency Investment
Depending upon the demand and supply of any commodity like gold or wheat, the price of a crypto currency (also known as crypto) can be determined in a market. People are nowadays investing in crypto’s like Bitcoin, Ethereum, etc., hoping to make profit. However, the price of crypto does not affect the transaction between two crypto currency transacting parties.
So now the big question…
Could Crypto Currencies Replace the Current Financial System?
In theory, crypto currency can replace our financial system. But would the current political and financial establishments let them? It would just make the current banking system redundant, and lead to a big loss of power, security and jobs for financial and political establishments. Cryptocurrency in India is still a new thing.
The crypto financial and payment system definitely proposes a significantly cost efficient system. When compared to existing financial systems, as it is very easy to maintain, secure, and multiple data redundancies using the block chain nodal systems.
One of the biggest advantages of the crypto financial system is that it can execute a cross border payment very quick, easily and cheaply compared to existing financial payment transfer systems. Having a payment system so efficient can also has some disadvantages. For example, money can easily flow into the hands of anti-social organizations that affect the internal security of a country. The crypto currency system is probably as efficient and private/secure as Havala transaction system that it can easily be misused.
What Could be a Possible Future for Crypto Currencies?
The crypto currency system definitely is a work of genius, however it lacks the backing of credible financial systems. I believe governments around the world could agree on a common crypto currency and allow cross border transactions, with authenticated user identification. This sounds like the ideal solution, however it shakes the core foundation of open source & participation that crypto currencies are based upon, as there is no owner and no governing authority in crypto.
Crypto currency system, as I described earlier, is like the internet or DNS. It’s not owned by anyone and everyone is free to participate. It seem like an ideal solution for a free world, however the fact is we don’t live in a free world. As Jack Reacher quotes in the movie, “Look at the people. Now tell me which ones are free. Free from debt. Anxiety. Stress. Fear. Failure. Indignity. Betrayal. How many wish that they were born knowing what they know now? Ask yourself how many would do things the same way over again?”
Abhishek Sareen is a sales & marketing professional with over 16 years of experience. He started his career as a management consultant and currently works in international business. He has set up businesses like Track & Trail, BrooksBicycles.com and created consumer brands like Montra, Machcity and Roadeo.
Prior to this, he has also worked in sports retail as department manager. He’s is a passionate cyclist and participated in several endurance competitive events like MTB Himalaya.
His interests are in behavioral psychology, economics and chess. He is a graduate in Computer Science and an MBA in Marketing. He completed his executive education from IIM-A in 2016 focusing on business strategy.