Cryptocurrency, blockchain technology, bitcoins, etherium - what are all of these? How does this work? Is it true that the Cryptocurrency ban is the beginning of the end of blockchain innovation in India? Currently, questions like these are puzzling crypto investors and traders. In this article, we will cover each one of them. But first, let us start with the basic literacy of cryptocurrency and blockchain technology.
What is Cryptocurrency?
A cryptocurrency is a monetary unit that can be used as a medium of exchange. These are created electronically and stored in the blockchain. Encryption techniques are used to control the creation of crypto units and transaction verifications that took place among the participants. Some of the examples of cryptocurrency are bitcoin, etherium, litecoin, etc. Cryptocurrencies do not have a physical form like gold or silver. They exist inside the blockchain network only. Since the blockchain is a decentralised network, the government cannot regulate their production as they do with fiat currency (dollars, rupees, euro, etc.). Some of the disadvantages of cryptocurrency are regulatory issues, complex blockchain technology and high competition among crypto platforms.
What is Blockchain technology? How does it work?
Blockchain is a decentralised technology that made the existence of cryptos. It acts as a ledger of all transactions that take place among the participants inside the network. The transactions stored inside the blockchain are impossible to edit or hack. This makes blockchain a secure network. Now let us see how it works.
Whenever someone requests a transaction, the system broadcasts the requested transaction to a P2P network. This network contains computers which are called nodes. Using algorithms, these nodes validate the transaction. A transaction will be completed after successful validation. After the completion of the transaction, a block will be added to the existing chain of blocks. Now the new block is combined with previous transactions to create a new ledger. The information inside this block cannot be altered. Not only in the crypto world but blockchain technology also has various applications in industries like automotive, healthcare, financial services etc.
How is cryptocurrency different from the normal currency?
The currency we use in our daily transactions is called fiat currency. It is issued by the government through the central bank (RBI). Before 1971, the currency used to be backed by gold. After the introduction of fiat money, the government started printing the currency. Based on the inflation levels, the central bank controls the amount of money that is in the market. Banks act as intermediaries between the transactions taken by various participants.
Cryptocurrencies are digital assets. They do not need any intermediary like a bank to handle the transactions. Unlike fiat money, central banks cannot control the production of cryptocurrency. They can be produced only through mining and only 21 million bitcoins can be produced. But in the case of fiat money, there is no limit to the amount of money that can be printed. Crypto transactions can take place between anyone without the help of a bank. There are also no geographical limitations.
Economics of Cryptocurrency
Economics deals with the production of goods/services and the supply of money in a country. Currency acts as a medium of exchange for goods and services. Acceptance, stability and confidence are the main characteristics that every currency should have. Now let us try to find whether cryptos possess those properties or not. Cryptos have an acceptance rate of 50%. That means not everyone is accepting cryptos as a medium of exchange. When coming to stability, crypto completely failed here because of its volatile nature. No retailer wants to accept bitcoin which has a high chance of an overnight fall in its value. Well, if we talk about the final property i.e. confidence, we can give it full marks. Thanks to blockchain technology, it made cryptos the most secure form of currency. Cryptocurrency offers full transparency, accurate tracking, and non-alterable ledgers.
How banning Cryptocurrency can affect our economy?
Many people have invested in cryptos. Banning crypto investing or trading can prevent them from capitalising on their crypto assets. In our country, many fintech startups are working on cryptos and blockchain technology. There are around 300 startups that are working in this field. Thousands of jobs are being created because of cryptos and blockchain technology. Along with jobs these startups are creating millions of dollars in revenue and paying regular taxes to the government. These people can lose their jobs and money because of the ban. This further increases the country’s unemployment rate. The 1991 liberalisation made India a leader in the IT sector. Many countries like the US, UK, Switzerland instead of banning cryptos they started taking steps to regulate it. Similarly, our government should understand cryptos and find ways to make the most of it.