You’d have to be living under a rock these days to have not heard words like “cryptocurrency”, “Bitcoin” or “blockchain” flying around every casual discussion. But while some of us know exactly how it works and track its evolution, for many of us the concept remains vague and shrouded with unclarity. So before we get into some interesting developments in the world of crypto, let’s understand exactly what it is and how it works.
Cryptocurrency is a type of digital or virtual money. It serves as ordinary money, or currencies, such as dollars, pounds, euros, yen, etc. But it has no physical counterparts — banknotes or coins that can be carried around, that is, the cryptocurrency exists only in electronic form. Cryptocurrencies work using a technology called blockchain.
Blockchain is a decentralised technological concept that is very simple at its core. It has one big aim: to remove a third party gatekeeper and make everyone a gatekeeper instead. This means that the records of any money transfer between two people are available for everyone to view, making it the only source of truth. This will require sophisticated computing, thus the need for technology to implement such a system.
The monetary ecosystem and the money we use today was designed in an era when technology did not exist, it's a concept that was developed for paper money and is over 400 years old. Like gold and copper coins were replaced by paper notes (which must have seemed revolutionary for that time), cryptocurrencies are a bold attempt to re-design the monetary system as we know it with tools that are more relevant in today’s technological ecosystem.
Instead of relying on centralised gatekeepers, cryptocurrencies use a technology called blockchain to establish trust between a group of unknown people who want to do transactions with each other.
Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation. Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralised processing and recording system and can be more secure than traditional payment systems.
Okay now that we’ve wrapped our heads around what crypto is, let’s delve deeper into the gamut of possibilities blockchain presents.
Broadly speaking we can divide these applications into two categories: Current and Aspirational applications. Cryptocurrencies like BitCoin and Dogecoin are widely known for their inflated trade value and are associated with get-rich-quick ideologies (which some say is a bubble about to burst and others swear their lives by), but that is not all one can do with blockchain.
People can use blockchain in different ways. To send money globally At a fraction of costs incurred currently, to borrow with privacy & without discrimination, lending and borrowing using NFTs as collateral, no-loss lotteries and for growing one’s portfolio. Some Cryptocurrency enthusiasts in the music industry also envision a future where artists are paid fairly, the secondary ticketing market is no longer ravaged by scalpers, and the value of digital memorabilia soars.
What’s more is that even the RBI is looking to jump aboard the crypto train. They recently stated that they will be looking at a phased-introduction of the Central Bank Digital Currency. A CBDC is a form of virtual currency or cryptocurrency that is issued by a central bank as an alternative to its currency. These are largely stable coins, i.e. cryptocurrencies launched by governments whose value is tied to their currency that are backed by sovereign reserves and, unlike private crypto assets like Bitcoin or Ethereum, the value of these digital coins is not subject to volatile market fluctuations.
As we can see, the directions that blockchain could go in are endless. But as they say, the proof is in the pudding, and only after individuals, governments, and markets are fully exposed to them, have had a chance to dabble with them, and have understood the pros and cons of cryptocurrency will we be able see seismic changes in the financial ecosystem as we know it. What we can say for sure is that cryptocurrency is a long-term play and anyone looking at it merely for its wealth creation aspects is missing the point.
Whether it will become our new main currency, a solidly acceptable alternative or get entirely co-opted by the governments and banks is yet to be seen. But what is known is that governments and banking institutions will put up a tough fight to maintain their stronghold over our financial lives. As of today, despite the looming threat of getting gentrified by The Man, for the sake of the likes of Satoshi Nakamoto, Bitcoin's illusory inventor, we hope blockchain remains free of the very shackles it was born to break us out of.
We hope you enjoyed our post on the fascinating world of cryptocurrency and learned aspects of it you would like to explore intentionally. Keep following Fi Club for more articles on everything money and how it really works.