Emergence of Cryptocurrency: What Is It and What Does Future Hold?
The recent news about Bitcoin and Ether and LiteCoin and all the new ones coming up, such as PressCoin , has the world in a tizzy.
Cryptocurrencies are now worth close to $200B world wide, having more than doubled in the past 6 months alone.
There is no sign of this letting up anytime soon, with the estimated market cap of all cryptocurrencies projected to go up 10 times from here to 20 trillion dollars, yes with a T, by the end of 2020. That is, in little over the next three years.
But to understand this asset class, one has to understand money.
What is a Currency?
A currency is a generally accepted form of money in circulation within a nation serving as a medium of exchange for goods and services. Here’s what Wikipedia has to say about something called fiat money.
Since every nation has its own currency, with the Euro being an exception, the ‘fiat’ currencies today have value only since it is the only form in which trade can happen within a country. The ‘tokens’ for these currencies are circulated in the form of coins and bank notes.
In other words, fiat currency works, because a government says so. If the confidence in that government, or that country’s economic activity were to falter… Venezuela is an extreme example of a recent collapse of a fiat currency, Zimbabwe has been a fiat currency basket case for years.
So, what is better than fiat? A currency that is backed by something, such as gold, but all governments have long since decided that it was more convenient to just print more notes (or create more digital money in their central bank accounts) whenever they saw fit. Yes, whenever the politicians saw fit.
So what now? Can cryptocurrency (or crypto, for short) help this situation? Let’s take a short detour to understand a key technology involved in crypto.
What is Blockchain?
It all starts with accounting and book-keeping. A ledger is a book of record-keeping for tracking contracts, payments, buy-sell deals or movement of assets or property in an organisation. In a centralised ledger, a single entity controls what transactions are added to the ledger.
This means, for instance, that a bank has complete control. For example, it can directly assess a late-fee, a penalty charge, or a transaction fee, or any other charge, and commit this transaction to their ledger. This would transfer money from your account at the bank, into the bank’s, without any power for anyone to stop it.
Recent examples was the Wells Fargo fiasco where it was discovered that they had not only created accounts for customers without their permission, but were also charging them recurring fees… this went on for years before being brought to light.
These are just examples.
A blockchain is a decentralised ledger. This essentially means that there is no central administrator or centralised data storage. The ledger is shared across a large network of multiple sites, entities and people.
This means all the participants have a copy of the ledger. Each transaction is validated on the blockchain by solving a complex math problem, and only then is added to ledgers across the network.
If any manipulation of a ledger occurs and a malicious transaction is added onto the ledger of a particular node, the network can easily identify an invalid transaction as it is absent on other copies existing on the network.
So, now we’re ready… what is a crypto?
What is a Cryptocurrency?
A cryptocurrency is an encrypted digital currency that uses a decentralised ledger, called the blockchain, to record and validate the transactions. Cryptocurrencies are a peer-to-peer medium of exchange, which function without the oversight of a third party.
This eliminates counter-party risks and cost overheads.
What this actually means is that one gets to avoid the inter-bank transactions that potentially take days for clearing, even after paying a significant transaction fees, in addition to foreign exchange or other fees.
A transfer of funds between two digital wallets is called a transaction. That transaction gets submitted to a public ledger and awaits confirmation.
When a transaction is made, wallets use an encrypted electronic signature (an encrypted piece of data called a cryptographic signature) to provide a mathematical proof that the transaction is coming from the owner of the wallet.
The confirmation process takes a bit of time (ten minutes for Bitcoin as of now) while other nodes in the blockchain confirm transactions and add legal entries into the distributed ledger.
What is Bitcoin?
So, Bitcoin. This was the first of its kind, and took the world by storm. The ingenious creation of a mysterious organisation or (person!) who goes by the alias Satoshi Nakamoto.
Harnessing the power of the blockchain, he connected the whole world by giving a singular medium of exchange for services.
Bitcoin outclassed returns of any asset class by a thousand times. It is gaining popularity as an alternative to mainstream investment options.
It is only natural that governments and the big financial institutions are concerned about their lack of control over the currency.
What is Altcoin?
Altcoins are the alternative cryptocurrencies , launched after the success of Bitcoin. Even though Bitcoin is leading the virtual currency pack, newer and more innovative 'Altcoins' are getting launched that offer advantages over Bitcoin in areas like transaction speed, privacy, proof-of-stake, DNS resolution and more.
A few of them (Ehtereum, Litecoin, Dash, and more) have gained popularity while most others remain unknown. One of the most popular Altcoin, Ethereum, is a platform built specifically for creating smart contracts.
These are programmable digitalised contracts entered on the blockchain that legally bind the participating entities and provide greater security than traditional contracts.
The Future of Cryptocurrency
The fate of Bitcoin and other cryptocurrencies will always be under constant speculation due to the high volatility and lack of regulation at this time. This air of uncertainty around altcoin leads to manifestation of fear and doubt which the traded price boldly defies.
Blockchain technology however has huge potential to be integrated into the existing institutions of banking, healthcare, online retailing, media, electronic voting, and tons more.
The deeper understanding of the wide scope of applications of blockchain will shape the development of institutions and businesses.
In future articles, we will explain what ICOs are all about (Initial Coin Offerings), and how one can invest in cryptocurrencies. An example of this is PressCoin, something the media is keenly interested in.
(Amit Rathore is a serial entrepreneur, founder and board-member of Quintype. He is also founding partner of HigherOrderVC, a new kind of venture firm, focused on applying blockchain and cryptocurrencies in the new world order.)
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