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How Digital Gold – Cryptocurrency Works? What is Cryptocurrency ? Check it out!

How Cryptocurrency Works? What is Cryptocurrency ? Check it out!

cryptocurrency-exchangeFrom the evolution of barter economy to practice of money as a mode of exchange, people have come up with innovative ideas which suggest coherent means to exchange value. Greek philosopher Aristotle suggested the following four different principles to make goods and services measurable appropriately and in turn served as a decent measure of “good money” (Lee, 2009):

  • It must be durable
  • It must be portable
  • It must be divisible
  • It must have intrinsic value

At the start of the exchange system, gold was considered to be a favored mode since it satisfied all the above criteria. But with the growth in economies, there was a demand in formalizing medium of exchange. Governments were obligated to design open and manageable standard of exchange which they could govern and legalize. This idea gave origin to fiat currency which was embraced across the world but had its own challenges and concerns.

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As an alternative to fiat currency, in order to address the issues, cryptocurrencies originated in 2009, influenced by a disruptive technology known by blockchain. As per “Investopedia, 2016”, a cryptocurrency is a digital currency that uses cryptography for security. Hackett, 2016 defines Blockchain which in particular handles the method on which data is organized and hence gives chance to let decentralized digital ledgers to come into the picture where a single government does not control transactions. In today’s scenario, the two most accepted form of cryptocurrencies is Bitcoin and Ether, which commands the Ethereumblockchain.

Cryptocurrency is considered as a major disruptor in traditional banking and financial institutions which has gained momentum over the last half a decade. Additionally, it is proving to be a nightmare for banking regulators throughout the globe. Regulatory bodies along with governments are holding discussions to find out procedures to legalize the growth of cryptocurrencies rather than encouraging them to flourish without directives and intrusion. In the year 2013, US Senate sat for a hearing on Bitcoins and in 2014, the Canadian Senate’s Standing Committee on Banking, Trade, and Commerce carried out an exhaustive study on the usage of digital currency. In current world scenario, the adequacy and acceptance of cryptocurrency as a legal instrument differs from country wise; some of the governments have started working towards devising laws and regulations around them while others have still not started on them. Agencies like security and law enforcement have raised red flags considering the mushrooming usage of cryptocurrency in sponsoring ever-growing disease of terror, ransom wares, illegitimate peddling of drugs and arms.

cryptocurrency-exchangeProfessor Clayton Christensen had come with up with a unique term – Disruptive Innovation defined as a “process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” Today’s fast-paced world has seen many such examples of disruptive technologies which have offset deep-rooted competitors. One such instance is the WhatsApp displacing Short Messaging Service (SMS). End Users have opted for these disruptive technologies due to the worth they bargain for in relation to being cost-effective, usable and simpler to use. If we take these parameters into account then, cryptocurrencies, have strong prospects to completely dislodge the current financial systems which ensure electronic transfer of currency across diverse political precincts. The possible advantages that cryptocurrencies offer and are the reasons for its success are as below

  1. Privacy Protection: At the time of laying down the principles of cryptocurrencies, advocates put forward the primary need of keeping privacy and secrecy of the parties that are involved in transactions. This was achieved through usage of fictitious names which helped in making the data and details of parties involved in the deal – privileges accorded to privacy aficionados.
  2. Cost-effectiveness: Any electronic monetary dealing involves fees/surcharges and if these transactions are happening across countries, it attracts processing fees levied by the banks, third-party clearing houses or gateways. On the usage of debit or credit cards, users have to pay processing or transaction fee which increases when used transnational, ranging in the order of 1% to 3%. In the case of electronic transfers, the processing or transaction fees range between 10% or 15%. With the usage of Cryptocurrencies, one can resolve the processing or transaction fee issue applied across the globe since the fee charged is abysmally low as small as 1% of the transaction amount. This is achieved because cryptocurrencies exclude third-party clearing houses or gateways, thereby bring down the charges and hence time interval. Another feature of cryptocurrencies which aids in reducing the cost is integral security and fraud prevention mechanism, this facility accounts for 40% of the costs of payment processing gateways.cryptocurrency-exchange
  3. Lower Entry Barriers: For global usage, in order to secure a bank account or a debit/credit card, it is mandated to submit the requisite proofs for salary, address or proof of identity. Every bank or financial institution has defined its customary standards for availing these facilities. Cryptocurrenciesenable to lessen these entry hurdles. They offer the facility to join at free will, high on usability and the users are not asked to submit any proofs related to income, address or identity.
  4. Alternative to Banking Systems and Fiat Currencies: In the current exchange method, governments exercise complete governance mechanism to regulate banking systems, worldwide money transmissions and the policies related to national currencies or monetary policies. But, cryptocurrencies offsets these hindrances and instead gives the user a consistent and protected mode of interchange of currency which does not fall in direct control of national or private banking systems.
  5. Open Source Methodology and Public Participation: The software source code on which cryptocurrencies are built use majorly open source methodology, which has its own advantage of being accessible to anyone for review, further enrichment, and inspection. The principle of development of software of cryptocurrencies is based primarily on “participation” rather than a localized set of entities or an organization. It invites anyone to contribute to the field of software development, defects reporting and fixing, testing and other activities of developing software. The software involved in building cryptocurrencies follows its own instruments to build structures, practices, procedures, and practices.
  6. Immunity to Government led Financial Retribution: In transactions involving cryptocurrencies, governments are not authorized to suspend or grab hold of a bank account which normally they are able to execute. This is good news for the users who are residing in repressive countries, where regimes are empowered to freeze or snatch the bank accounts. Cryptocurrencies are invulnerable to such cases of confiscation of accounts by the government.

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