What are Cryptocurrency and Blockchain Technology?
There are a lot of discussions, debates, and speculations regarding Cryptocurrencies going around. Most of us are familiar with currency notes, digital transactions, net banking, and various other modes of payment. Cryptocurrency is a novel terminology that is very recent.
So, is cryptocurrency some new form of currency or exchange medium? Or is it just another platform for existing monetary exchanges? By the time you finish this article, you will have a broad but simplified idea of the term cryptocurrency, its mining, and block technology.
Understanding Cryptocurrency.
Cryptocurrency is another medium of exchange, like fiat money (rupee, U.S. dollar, etc.), or like assets (gold, silver, etc.) that hold fundamental value as a medium of exchange or as useful commodities in true sense. This is a kind of online payment system built using blockchain technology which is increasingly becoming mainstream. In the last decade several cryptocurrencies sprung out and today are widely being circulated- Bitcoin (first and biggest decentralized cryptocurrency), Ethereum, Tether, and several others.
What is Blockchain technology? How is it related to Cryptocurrency?
Simply, blockchain technology is a system of cryptographically-secured account keeping. It is a decentralized ledger that facilitates the process of recording transactions and tracking assets in a business network. There are numerous domains in which this technology can be used- Medical data, Artist royalties, Logistics and supply chain tracking, Data storage, Internet of things, Gambling, Financial exchanges, and many more. Apparently, cryptocurrency is just one of the many possible applications of blockchain technology in which users keep track of these digital ‘coins’.
Did you know, these coins get actually mined? Yes, you read that right. Individuals or companies set up very powerful systems to support blockchain networks. For this, they are rewarded in the currency. This is called mining of cryptocurrency.
Broadly, cryptocurrencies differ from regular legal tenders on following aspects.
- No Centralized Control. While the fiat currency can be controlled by the Central bank’s monetary policies, cryptocurrencies are independent of any central control. The users keep a tab on every digital ‘coin’ and transaction rather than a centralized banking system like RBI or US Federal Bank.
- No real value. Unlike gold, silver, or other commodities, whose real value is also derived from their existence and usage for commercial purposes, Cryptocurrency is a digitized system of currency, having no real commercial use. In that sense, protection of wealth from inflation as offered by gold and silver can’t be promised by cryptocurrency.
Why the Governments are Alarmed?
There are various reasons for the disfavor of cryptocurrencies by most nations. Time and again, governments and central banks have expressed concerns regarding this new system of payments.
The future of cryptocurrencies will be shaped around the objective of tackling these concerns and mitigating the impacts. These concerns range from financial, social, to even environmental in nature.
- Cryptocurrencies are based on decentralized systems. This forms a major challenge to the ability of governments to create money. Further, conducting policies to control the financial state of the economy will be affected by and large.
- High volatility is another discredit. Recently, the values of Bitcoin and Dogecoin were affected massively just by simple tweets of a well-known cryptocurrency enthusiast, Elon Musk.
- Mining cryptocurrency requires humongous energy. As per Reuters report citing data from the Cambridge University and International Energy Agency, mining a Bitcoin annually consumes the same amount of energy as the Netherlands did in 2019. Now, isn’t that huge!
- Pollution due to energy required for mining is gigantic. The same report says, “Bitcoin production is estimated to generate between 22–22.9 million metric tons CO2 emissions a year, or between levels produced by Jordan and Sri Lanka.”
Governments and Central banks globally have various reactions towards cryptocurrencies. As per reports from the US Library of Congress, most countries warned their citizens against cryptocurrencies transactions. Some have banned them outright. RBI banned it in 2018. The decision later was overturned by the Supreme Court of India due to the absence of any law in this regard.
Many countries are trying to use the technology to create a respective government-sanctioned digital currency, while at the same time banning all other private cryptocurrencies. The best example is China’s digital Yuan.
El-Salvador, a small country in North America, became the first country to legalize Bitcoin, a private Cryptocurrency.