What is cryptocurrency, and is cryptocurrency the future of digital payments?
Let us first look at what exactly is cryptocurrency. Cryptocurrency is a form of digital currency or virtual cash that can be transferred from one person to another. The transactions are protected using various encryption algorithms. This type of cash exists only in the digital world and has no physical presence. The first cryptocurrency was started in the year 2009, by a person who identified himself as Satoshi Nakamoto. Bitcoin was the first cryptocurrency to come into existence and hence it is also one of the most popular one out there.
Cryptocurrency works on something called the blockchain network. There are hundreds of thousands of computers from all over the globe, that are a part of this network. To make it simple to understand, let us consider that each transaction is recorded into a spreadsheet called a ledger. Every computer that is on the network has a copy of this ledger and when a transaction is made, the transaction details are entered on the blockchain network and as a result it is also copied on the ledgers of hundreds of thousands of computers that make the blockchain.
The cryptocurrency is generated after a block of data is processed. It creates a block of transactional data in the network. Blockchain is a shared public ledger of cryptocurrency transactions. The computers on the blockchain network verify each and every transaction within the network using complex mathematical algorithms. Since the transactions are processed on computers from various locations, there isn’t one central agency that has control over this. Hence, cryptocurrency is a decentralised currency, which means that it is not regulated by any Country or Government. Investopedia has written an interesting article which goes in-depth on what blockchain is and its security features and so on. Click here to read the article.
How do you own cryptocurrency?
A cryptocurrency wallet is a software program where cryptocurrencies are stored. These wallets facilitate sending and receiving cryptocurrencies and give ownership of the currency balance to the user. Just as cryptocurrencies are the digital equivalent of cash, a crypto-wallet is similar to a physical wallet. But instead of storing cryptocurrency literally, what is stored is a lot of relevant information like the secure private key used to access wallet addresses and carry out transactions.
Wallets such as Paytm and PhonePe are commonly used to transfer money from one person’s bank account to another person’s bank account. These wallets are linked to our bank accounts. Similar to these wallets, we can also create cryptocurrency wallets to which we can deposit money. This deposited money can then be used to purchase various cryptocurrencies such as Bitcoin, Dogecoin, Etherium and so on. WazirX and Coinbase are two of the most popular cryptocurrency trading platform in India which allows you to buy and sell cryptocurrencies as well as use it to purchase stuff from the internet.
This cryptocurrency can then be used to purchase goods or services on the internet. Few years ago, the number of businesses that accepted cryptocurrencies as a form of payment, were very limited. Now, there are a lot more organisations that accept cryptocurrencies in exchange for their products or services. Tesla, one of the most popular companies in the United States, has started accepting cryptocurrencies for the purchase of Tesla vehicles. Web hosting companies such as Hostinger, also accept cryptocurrencies as a form of payment for web and domain hosting.
How are transactions processed on the blockchain network?
The transactions are processed using a concept called as cryptocurrency mining. It verifies transactions, prevents double spending, collects transaction fees and creates the money supply. Cryptocurrency mining is the process of adding transaction records to public ledger for past transactions. This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain helps to confirm that transactions have taken place to the rest of the network.
Mining is also the mechanism used to introduce new cryptocurrencies into the system. Miners are paid a transaction fee for successfully verifying a transaction. This serves the purpose of disseminating new coins in a decentralised manner as well as motivating people to provide security for the system. Cryptocurrency mining is called so because it resembles the mining of other commodities, it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the Earth.
Why is it almost impossible to commit fraudulent transactions using cryptocurrency?
As mentioned before, the details of each transaction is stored in a public ledger which is synchronised by hundreds of thousands of computers. Now, when a transaction is made, the block of data containing the transaction details is sent to the blockchain network and then copied to all the computers running on this network. A person trying to commit a fraudulent transaction will have to change the entry of his transaction on each and every computer that is on the network, which is almost impossible.
For example, if there are one million computers on the blockchain network, the transaction details on all of these computers will have to be changed in order to record the fraudulent transaction. So instead of checking one bank’s record for the transaction, the receiver checks with every single computer on the network. After every single computer individually records the transaction, they give a confirmation of the transaction. And because of this it is easy to tell if anyone is trying to commit a fraudulent transaction.
Conclusion
Current legal and financial structures are not designed with a technology like cryptocurrency in mind. Financial institutions are built on much older forms of currency. In some ways, it is comparative to the computing industry. The baseline of computing still relies on transmitting and processing 1’s and 0’s, providing only two dimensions of input. Yet all of our current technology uses this technologically archaic system due to adoption, cultivation, and lack of need for newer systems.
If cryptocurrencies becomes the global norm for transactions, long standing systems for trade would need to be completely reformed to deal with this type of competition. For this reason, cryptocurrencies could possibly be the single most disruptive technology of global financial and economic systems.
So coming to the question, is cryptocurrency the future of online payments? According to many people, the answer to that question would be a Yes. Since it is almost impossible to create a fake transaction and due to the fact that the algorithms used to verify transactions are some of the most secure techniques out there, many people believe that cryptocurrencies are the future of online payments.