Crypto Academy Week 14 , Homework task for [ @levycore].. Learn About Cryptocurrency.
Continuing learning process in cryptoacademy via knowledgeable lectures delivered by professors, i am writing this homework task for professor @levycore which is about cryptocurrencies.
What is the fundamental difference between Cryptocurrency and the conventional financial system?
Cryptocurrencies are blockchain based digital assets characterized by its decentralised nature, anonymity, nonrepudiablity and transparency . The fundamental difference between conventional currency and cryptocurrency is that the cryptocurrencies are decentralized digital assets unlike conventional currency which is a name given to centralized tokens.
Let me briefly explain few differences between these two systems.
Decentralized Nature
Cryptocurrencies are decentralised. By decentralised asset, we mean that there is no central authority to control it. So you have absolute control over your asset. In conventional financial systems, our funds are under control of banks ( government, semi -
government or non government).
Anonymous Nature
Decentralized nature of cryptocurrencies lead to "Annonymity" which means crypto transaction details are not known to anyone. Although transactions are verifiable publicly. Anyone can check transactions status but cannot trace it back to user despite unique address. To further simplifiy, let me put it like this, suppose you transfer 1 BTC to your friend, transaction details (hash) are stored on blockchain forever and anyone can check transaction has taken place between two accounts but who you are and who your friend is, it cannot be traced. On contrary, in conventional system, if you transfer 1 lakh token ( say dollar) to your friend, details of both the accounts, are known to the banking authorities and they can get back to you easily because they are holding all your sensitive information like address, photo ID, contact details etc.
It is this unregulated and anonymous nature of the cryptos, which makes it vulnerable for use for illegal purposes.
Instantaneous Transactions
Crypto transections are almost instantaneous, which means that they reach your peer sitting anywhere in the world within real time at single click of button. Suppose you want to transform BTC to friend sitting anywhere in the world. These transactions are carried instantly. Once debited from your account, they get credited to your friend's crypto account within seconds. On the contrary, cross border transactions take hours to execute in conventional financial system. Morever the transaction fee in conventional financial systems are higher then cryptocurrencies
Non-repudiability
The above mentioned features like decentralized nature , instantaneous nature of transactions and anonymity may sound cool to most of the users but then we should not forget the non-repatriable nature of the cryptocurrencies. It means that once transaction has been completed on your part, there is no way to get it back , if by mistake you have transferred it to wrong user address, unless and untill the recipient is willing to pay it back. On the otherhand , in conventional financial system, such issues are negotiable.
These are not the only differences between these two systems , mamy other differences are there, which shall be explained in forthcoming questions.
Why is a decentralized system needed?
Decentralized system has succeeded in catching attention of masses for following reasons :
Permissionless
Decentralised system gives users an absolute control over assets. There is no central authority to dictate terms and conditions. Everyone can access their decentralised wallet anywhere and anytime .
No geographical Barrier
In decentralised system there are no geographical restrictions to transactions. You can transfer funds to anyone & anywhere in the world as it is a peer to peer system. However, these restrictions do exist in
conventional financial systems whenever there exist some tension between two countries.
24 x 7 operations
Decentralised systems are operated by users themselves, there is no middleman like banks involved. So you can carry out transactions anytime. No need to wait for hours in banks as in conventional financial system. No chaos due to banking holidays etc. Moreover, there are no server down issue as decentralised system is typically carried out on blockchain and it is a public ledger based on multiple servers. So all servers can't be down at any particular point of time.
Enhanced Security
As decentralised system is blockchain based and there is no substitute of security to the blockchain as of now. It is far superior than centralised security system.
Transparency, instantaneous nature of transaction, lesser transaction fee, quality service delivery, accountability and auditablity are other features in which decentralised system is better than centralized system. These features shall be discussed in corresponding sections.
What affects the value of cryptocurrencies?
The value of cryptocurrency is determined by multiple factors and some of them are given below :
Uncertain future.
There is no central authority to control the supply, demand or inflatiom in case of crypto currencies. So there is always a sense of Insecurity among users as to when and how much to invest. There is no authority to make claim to, in case of wild devaluation etc.
Sentiment of market.
Sentiment of market changes due to diverse factors like good or bad news like government asking for regulation of cryptos, any mishaps like hacking attacks etc. A famous example of Mt GOX exchange can help clear this point. in 2014 , Mt GOX suspended its operations for sometime citing reason of suspicious activities on exchange and that news lead to decrease of BTC price by 20% because it was major stakeholder of BTC at that time.
Big Buck Holders influence.
Cryptocurrencies are yet to be adopted by masses. There is huge disparity in distribution of cryptocurrencies . So the large stake holders do influence the market. It is easy to understand that those stakeholders who possess cryptos worth million of dollars have potential to influence the market at any point of time because to liquidate huge sum, market has to follow the way they want.
Why can't everyone be a miner?
To understand this question, brief introduction of mining is mandatory.
Mining is a process through which new cryptocurrencies come into market and it also serves as means of recording the cryptocurrency transactions after validation. It is carried out with the help of powerful computers with very high computational power. These computers are supposed to solve complex mathematical problems (hashs) by means of their high computational capability. There is a unique transaction hash for each transaction . The computer ( node) to first get the hash right is rewarded new cryptocurrency. The node than sends this transaction details along all the nodes involved in public Ledger and thus serve the purpose of maintaining integrity of blockchain system.
This process of mining is a part of consensus algorithm known as proof of work (PoW). PoW is followed by cryptocoins like Bitcoin. The point that i want to emphasize here is, PoW is not the only consensus algorithm, there are other algorithms like proof of stake, proof of capacity, proof of burn , Stellar consensus algorithm etc.
As we have developed basic understanding of mining , now I'll try to point out reasons that why everyone can't act as a miner.
Mining requires very high cost equipments like Computer, GPUs, ASIC. So affordability is issue for major chunk who wish to mine.
High maintainance charges of the equipments is also a significant problem.
These equipments consume very high amount of energy, the price of which has to be adjusted.
Mining reward system is very sporadic. Everyone involved in mining is not rewarded but for a particular transaction only one node is rewarded and that is the node to find hash first.
At some places mining is not allowed, that has given rise to miner consolidarion.
So multitude of factors have to be weighted before deciding whether to go for mining or not.
Why can cryptocurrency transactions be called more transparent?
Cryptocurrency transactions are carried on blockchain and blockchain is a decentralized public ledger.
As name implies, blockchain is a chain of blocks and each block is a storage unit of information. Blockchain is a database of crytpocoin transactions, maintained on multiple computers ( nodes) . Every transaction after validation is distributed throughout the system to be recorded on every node independently.
These transactions are verifiable by everyone on the blockchain. Moreover the transactions once recorded cannot be edited or deleted. So these features make cryptocurrencies more transparent.
Development of cryptocurrency in INDIA.
India is heading towards adoption and regulations of cryptos but has not adopted yet. Cryptos are not illegal in india but are unregulated. Let me highlight few historical facts of our country from time to time.
Crypto in 2018.
Reserve Bank of India (RBI) , the supreme financial institution banned cryptocurrencies and directed all banks in country to not accept any form of crypto transactions. It was because some folks were misusing the cryptos.
Crypto in 2020
Supreme court of india revoked the 2018 ban of RBI and asked bank to resume transactions.
Crypto in 2021.
Finance Minister of our country issued a very affirmative statement in this regard and below is quoted text.
From our side, we are very clear that we are not shutting all options. We will allow certain windows for people to do experiments on the blockchain, bitcoins or cryptocurrency."
So i can clearly understand that we are soon going to adopt and regulate cryptos . We don't want to lag behind any country in world in technology but we are facing regulatory issues as we have witnessed some illegal transactions carried by some miscreants with cryptos. As of now, we have more than 10 million indian people indulged in crypto trading.
Hi @drqamu, Thanks for submitting your homework
Feedback: You have explained every point very well and Your basic understanding of cryptocurrency is very good. nice to read your post
Rating: 9
Thank you very much sir.