Blog #14 - Cryptocurrency Explained - Finance With Atul


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Tuesday, May 4, 2021

Blog #14 - Cryptocurrency Explained



Imagine you're having conversation with your friends, now at some point in this conversation someone's going to bring up crypto currencies. Now crypto currencies is something that everyone wants to talk about but no one really knows how they work so today I'm going to fix that I am Atul from “Finance With Atul” and in this article we will see what is crypto currency?



Barter System


Since man world, currency has been a very important part of our lives in the caveman era. They use the barter system, now the barter system involves goods and services being exchanged among each other so now we have a situation where a caveman is exchanging seven apples and getting oranges in return now the barter system fell out of use because it had some glaring flaws. Now these flaws include having people's requirements coincide for example say you have five apples and your friend has five oranges you want some of his oranges now until and unless your friend has a requirement for the apples that you own he'll not be ready to make an exchange for it. There is no common measure of value now since there's no common measure in terms of which value of a commodity can be expressed there's a problem.


When you have to decide how many apples you are ready to trade for one orange or a mango not all codes can be divided or subdivided for example you can divide a number of live animal into different smaller units the goods cannot be transported easily now unlike our modern currency fits in your wallet or your mobile phone the goods that you own cannot be taken with you everywhere you go after realizing that the barter system then work very well. Currency went through a few iterations in 110 BC.


First Official Currency


An official currency was minted in 1250 AD, gold plated Florence was introduced and this was used across Europe and from 1680 to 1980. Paper currency gained widespread popularity and was used across the world and this is how modern currency as we know it came into existence. Modern currency included paper currency, coins, credit cards and digital wallets for example you have Apple pay, Amazon pay, pay DM, Pay Pal and so on. All of this was controlled by banks and governments now this means that there was a centralized regulatory authority the delimited how paper currency and credit cards worked.


Bitcoin is decentralized peer to peer


Now imagine the scenario of doing an online transaction, here you are thanking your friend for paying for your lunch. Are you saying that you're sending the money to their account? Now this transaction takes place successfully but there are several ways where this could have gone wrong they could have been a technical issue at the bank for example the systems could have been the machines that weren't working properly and so on that means there's a central point of failure which is the bank. The users accounts could have gotten hacked for example they could have been a cyber attack or identity theft and so on or the transfer limits for that account were exceeded this is why the future of currency lies with crypto currency.


Now imagine the transaction between two people in the future one of them has the Bitcoin app and there's a notification asking whether they sure they're ready to transfer five bitcoins, if yes processing takes place here. We're authenticating the users identity checking whether they have the required balance to make that transaction and other things now after that's done the payment is transferred and the payment is received all of this happens in the matter of minutes and is as simple as that this in turn removes all the problems of modern banking. There's no limits to the funds you can transfer your accounts cannot be hacked and there's no central point of failure now as of 2018 there's more than 1,600 cryptocurrencies available now. There are some popular ones like Bitcoin, litecoin etc.



What exactly is cryptocurrency?


A cryptocurrency is a digital or virtual currency that is meant to be a medium of exchange. Now cryptocurrency is quite similar to real-world currency just that it does not have any physical embodiment. It also uses cryptography to work the way it does now some of the features of cryptocurrency are that there's a limit to how many units can exist with Bitcoin this limit exists at 21 million now after this no more bitcoins will be produced you can easily verify the transfer of funds now. The hashing algorithms that Bitcoin uses makes it very easy for users to determine whether a transaction is valid or not they operate independent of a bank or a central authority. They work in a decentralized manner now new units can be added only after certain conditions are met for example for Bitcoin only after block has been added to the blockchain will the miner be rewarded with bitcoins and this is the only way new bitcoins can be generated so what makes cryptocurrency so special. 



Firstly there's little to no transaction costs. Now if you use the digital wallet you'll know that if you're transferring money from your wallet to your bank account you lose some amount of money you have 24/7 access to money. You can't just walk up to your bank at 3 a.m. morning and say that you want to withdraw some money. There are no limits on purchases, there's freedom for anyone to use for example if you are setting up an account in your bank you need to do some amount of paperwork and documentation with cryptocurrencies. All of that can be avoided, international transactions are faster the wire transfers take about half a day to transfer money from one place to another but with cryptocurrencies it only takes a matter of minutes or seconds.



What’s the crypto in cryptocurrencies?


It is a method of using encryption and decryption to secure communication in the presence of third parties with ill intent. Now this refers to third parties who want to steal your data or want to eavesdrop on your conversation cryptography uses computational algorithms like sha-256 which is the hashing algorithm that Bitcoin uses a public key which is like a digital identity of the user where he shares with everyone and a private key which is a digital signature of the user which he keeps hidden.


Now let's talk about a normal Bitcoin transaction. First you have the transaction details now this details who you want to send it to and how much bitcoins you want to send them then it's passed through a hashing algorithm for Bitcoin we use the sha-256 algorithm the output that you obtain is passed through a signature algorithm with the users private key now this is used to uniquely identify the user. This output is then distributed across the network for people to verify this is done by using the sender's public key the people who verify the transaction to check whether it's valid or not unknown as - now after this is done the transaction and several others are added to the blockchain where it cannot be changed again.


If the concepts of hashing seem a little difficult to you I would suggest you read  the blockchain technology so that you can understand better now the sha-256 algorithm like I told you earlier looks something like this now seeing how complicated it looks I’m sure it's safe to say that the encryption is very difficult to hack today. We will be focusing on two major crypto currencies Bitcoin and ether, now bitcoin is a digital currency that is decentralized and works on the blockchain technology it uses a peer-to-peer network to perform transactions. 




Let's talk about ether. Ether is a currency that's accepted in the etherium network now the etherium network uses blockchain technology to create an open-source platform for building and deploying decentralized applications now let's talk about the similarities VidCon and ether they are the biggest and most valuable cryptocurrencies in the market. Right now both of them use blockchain technology which is nothing but a technology that involves transactions being added to a container called block and creating a chain of blocks in which data cannot be altered currency is mine using a method called proof-of-work which is a form of mathematical puzzle that needs to be solved before a block can be added to the blockchain. Finally these are widely used across the world.


Now let's talk about the differences with Bitcoin. It is used to send money to someone; this is very similar to how real-life currency works with ether it is used as a currency within the etherium network. Although it can be used for real-life transactions as well Bitcoin transactions are manual which means you have to personally perform these transactions with ether you have the option to make these transactions manual or automatic or programmable which means that these transactions will take place when a certain conditions been met for Bitcoin. It takes 10 minutes to perform a transaction which is the amount of time it takes for a block to be added to the blockchain, with ether it takes about 20 seconds to do a transaction no blockchain is used like money for real my transactions and ether is used to power the etherium network and power real-life transactions as well ether is used as fuel within the etherium network to power both of these things.


Now there is a limit to how many bitcoins can exist which is 21 million we supposed to hit this number by the year 2140 ether is expected to be around for a while but not to exceed 100 million units. The Bitcoin is used for transactions involving goods and services and ether uses blockchain technology to create a ledger to trigger a transaction when a certain condition is met for Bitcoin. We use an algorithm called associate 256.


Future of Cryptocurrencies


Now what's the future of cryptocurrencies, the whole world is clearly divided when it comes to cryptocurrencies on one side you have supporters like Bill Gates, Al Gore and Richard Branson who say that cryptocurrencies are better than regular currencies on the other side we have people completely against it people like Warren Buffet, Paul Krugman and Richard Schiller who are both Nobel Prize winners in the field of economics, they call it a Ponzi scheme and means for criminal in the future, there's going to be a conflict between regulation and anonymity since several cryptocurrencies have been linked with terrorist attacks.


Governments would want to regulate how cryptocurrencies work on the other hand the main emphasis of cryptocurrencies is to ensure that their users are kept anonymous by the year 2030. Cryptocurrencies would occupy 25% of national currencies which means the significant chunk of the world would start believing in cryptocurrency as a mode of transaction, it's going to be increasingly accepted by merchants and customers and it will continue to have a volatile nature which means prices will continue to fluctuate like they have been for the last few years



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