Cryptocurrency essays

Users trust that these rules are not subject to arbitrary changes and that rule changes if any will not benefit some individuals at the expense of the broader community. Overall, users must trust the mathematical structure embedded in the database and the computer code that governs its maintenance.

Managing a digital ledger without a delegated accounts manager is not a trivial problem to solve. If just anyone could add entries to a public ledger, the result likely would be chaos. Malevolent actors would be able to debit an account and credit their own at will. Or they could create social credit out of thin air, without having earned it. In the context of money and payments systems, these issues are related to the so-called double-spend problem. To illustrate the double-spend problem, consider the example of a dollar stored in a personal computer as a digital file.

It is easy for a customer to transfer this digital file to a merchant on a P2P basis, say, by email. The merchant is now in possession of a digital dollar. But how can we be sure that the customer did not make a copy of the digital file before spending it? It is, in fact, a simple matter to make multiple copies of a digital file. The same digital file can then be spent twice hence, a double-spend. The ability to make personal copies of digital money files would effectively grant each person in society his or her own money printing press.

A monetary system with this property is not likely to function well. Physical currency is not immune from the double-spend problem, but paper bills and coins can be designed in a manner to make counterfeiting sufficiently expensive.

Because cash is difficult to counterfeit, it can be used more or less worry-free to facilitate P2P payments. The same is not true of digital currency, however. The conventional solution to the double-spend problem for digital money is to delegate a trusted third party e.

Bitcoin was the first money and payments system to solve the double-spend problem for digital money without the aid of a trusted intermediary. The Digital Village: Communal Record-Keeping The cryptocurrency model of communal record-keeping resembles the manner in which history has been recorded in small communities, including in networks of family and friends. It is said that there are no secrets in a small village. Each member of the community has a history of behavior, and this history is more or less known by all members of the community—either by direct observation or through communications.

The history of a small community can be thought of as a virtual database living in a shared or distributed ledger of interconnected brains. No one person is delegated the responsibility of maintaining this database—it is a shared responsibility.

Among other things, such a database contains the contributions that individuals have made to the community. As we described above, the record of these contributions serves as a reputational history on which individuals can draw; the credit they receive from the community can be considered a form of money.

There is a clear incentive to fabricate individual histories for personal gain—the ability to do so would come at the expense of the broader community in the same way counterfeiting money would. But open, shared ledgers are very difficult to alter without communal consensus.

This is the basic idea behind decentralized finance, or DeFi. Governance via Computer Code All social interaction is subject to rules that govern behavior. Behavior in small communities is governed largely by unwritten rules or social norms. In larger communities, rules often take the form of explicit laws and regulations. At the center of the U. There is also a large body of legislation that governs the behavior of U. While these laws and regulations create considerable institutional inertia in money and payments, the system is not impervious to change.

When there is sufficient political support—feedback from the American people—changes to the Federal Reserve Act can be made. The Humphrey-Hawkins Act of , for example, provided the Fed with three mandates: stable prices, maximum employment and moderate long-term interest rates. And the Dodd-Frank Act of imposed stricter regulations on financial firms following the financial crisis in Because cryptocurrencies are money and payments systems, they too must be subject to a set of rules.

In , Satoshi Nakamoto brought forth his aforementioned white paper, which laid out the blueprint for Bitcoin. This blueprint was then operationalized by a set of core developers in the form of an open-source computer program governing monetary policy and payment processing protocols.

Relatively minor patches to the code to fix bugs or otherwise improve performance have been implemented. But certain key parameters, like the one that governs the cap on the supply of bitcoin, are likely impervious to change. Proponents of Bitcoin laud its regulatory system for its clarity and imperviousness, especially relative to conventional governance systems in which rules are sometimes vague and subject to manipulation.

Louis Fed economist David Andolfatto. During the minute episode , Andolfatto examines how distributed ledgers work and explains the mining process. This podcast was released Aug. How Blockchain Technology Works As with any database management system, the centerpiece of operations is the data itself. For cryptocurrencies, this database is called the blockchain. One can loosely think of the blockchain as a ledger of money accounts, in which each account is associated with a unique address.

These money accounts are like post office boxes with windows that permit anyone visiting the post office to view the money balances contained in every account. Beyond viewing the balances, one can also view the transaction histories of every monetary unit in the account i.

These windows are perfectly secured. It is important to note that many cryptocurrency users hold their funds via third parties to whom they relinquish control of their private keys. This has nothing to do with security flaws in the cryptocurrency itself—but with the security flaws of the intermediary. While anyone can look in, no one can access the money without the correct password. This password is created automatically when the account is opened and known only by the person who created the account unless it is voluntarily or accidentally disclosed to others.

These latter two properties imply that cryptocurrencies and cryptoassets more generally are digital bearer instruments. That is, ownership control is defined by possession in this case, of the private password. It is worth noting that large-denomination bearer instruments are now virtually extinct. Today, bearer instruments exist primarily in the form of small-denomination bills and metal coins issued by governments.

Nor is it required to disclose any personal information when opening an account. Once this is done, the front-end experience for consumers to initiate payment requests and manage money balances is very similar to online banking as it exists today. Cryptocurrencies have become provocative and somewhat glamorous, but their unique and key innovation is how the database works.

The management of money accounts is determined by a set of regulations computer code that determines who is permitted to write to the database. The protocols also specify how those who expend effort to write to the database—essentially, account managers—are to be rewarded for their efforts. Two of the most common protocols associated with this process are called proof-of-work PoW and proof-of-state PoS. The technical explanation is beyond the scope of this essay. Suffice it to say that some form of gatekeeping is necessary—even if the effort is communal—to prevent garbage from being written to the database.

The relevant economic question is whether these protocols, whatever they are, can process payments and manage money accounts more securely, efficiently and cheaply than conventional centralized finance systems. Native Token Recording money balances requires a monetary unit. This unit is sometimes referred to as the native token. Much of the excitement associated with cryptocurrencies seems to stem from the prospect of making money through capital gains via currency appreciation relative to the U.

To see how the prices of bitcoin and ethereum, another cryptocurrency, have changed over the past decade, see the FRED charts below. To be sure, the price of a financial security can be related to its underlying fundamentals. It is not, however, entirely clear what these fundamentals are for cryptocurrency or how they might generate continued capital gains for investors beyond the initial rapid adoption phase.

Moreover, while the supply of a given cryptocurrency such as Bitcoin may be capped, the supply of close substitutes from the perspective of investors, not users is potentially infinite. Thus, while the total market capitalization of cryptocurrencies may continue to grow, this growth may come more from newly created cryptocurrencies and not from growth in the per-unit price of any given cryptocurrency, such as Bitcoin. Louis, Economic Synopses, For more data from Coinbase, see these series.

Cryptocurrency Applications Cryptocurrencies designed to serve as money and payments systems have continued to struggle in their quest for adoption as an everyday medium of exchange. Their main benefit to this point—at least for early adopters—has been as a long-term store of value.

But their exchange rate volatility makes them highly unsuitable as domestic payment instruments, given that prices and debt contracts are denominated in units of domestic currency. While year-over-year returns can be extraordinary, it is not uncommon for a cryptocurrency to lose most of its value over a relatively short period of time.

How a cryptocurrency might perform as a domestic payments system when it is also the unit of account remains to be seen. El Salvador recently adopted bitcoin as its legal tender, and people will be watching this experiment closely.

Legal tender is an object that creditors cannot legally refuse as payment for debt. After bitcoin, many other alternative cryptocurrencies with varying degrees of functions and specifications have been created.

Also Read: Essay on Governance 4. Some of these cryptocurrencies are clones or forks of Bitcoin, while others are new cryptocurrencies built from scratch. These cryptocurrencies are known as "altcoins". Ethereum, Solana, Litecoin, Cardano, Namecoin, etc are some other popular cryptocurrencies.

It can help save money and time for both the remitter and the receiver as it is conducted entirely on the Internet. Cryptocurrency runs on a mechanism that involves very less transaction fees which makes it a cheaper alternative compared to other online transactions. As the payments are encrypted, they are safe and secured and offer an unprecedented level of anonymity. Also Read: Electric Vehicle: The Future of Transport Disadvantages of cryptocurrency As there is no regulation over cryptocurrencies, it is a possibility that cryptocurrency may be used for illegal activities such as money laundering, tax evasion, and possibly even terror-financing.

Another disadvantage of cryptocurrencies is that they are not accepted everywhere. Cryptocurrency and India Since the inception of most popular cryptocurrency i. However, cryptocurrencies remain unregulated in India, and taxing cryptocurrencies does not make them legal. Is banning cryptocurrencies a problem? Banning cryptocurrencies may result in an exodus of both talent and business from India. Also, blockchain and crypto experts might move to countries where crypto is regulated.

A blanket ban on cryptocurrencies might also halt blockchain innovation which has uses in governance data economy and energy. As the use and acceptability of cryptocurrencies are rapidly growing across the world, largest enterprises such as Tesla and MasterCard has adopted cryptocurrencies, a ban on cryptocurrency might deprive India, its entrepreneurs, and citizens of transformative technology.

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Pros and cons of cryptocurrency Pros The use of cryptocurrency facilitates the transfer of funds between two parties in transactions. This transfer is done through the use of public as well as private digital keys for security purposes. As a result, individuals who use cryptocurrency are in apposition to forego the high level of funds transfer charges that are charged under the conventional banking system Nesbitt , p1.

The use of blockchain technology enables the development of an online ledger which is highly proof against hackers. It can be employed on all computers with the bitcoin technology. Blockchain technology equally facilitates effective crowdsourcing as well as online voting.

Cons Some of the demerits of using cryptocurrencies are that they are not under regulation by central banks. As a result, the currency may be used in the fraudulent transfer of funds, adversely affecting the economy as well as businesses.

At the same time, the cryptocurrencies are virtual, hence lacks a central repository system. The implication is that the cryptocurrency balance may end up being wiped as a result of computer crash if there is no backup copy of the holdings. It is equally worth noting that the value of cryptocurrency is based on the forces of demand and supply. As a result, the exchange rate of cryptocurrencies against other currencies has a high rate of fluctuation in the market.

While this creates an opportunity for potential gain, an adverse change in value would result in losses Nesbitt , p1. For instance when the demand is low the value decline exposing the holder of such currencies to potential losses. At the same time, the currency is not prone to the threat of hacking. In spite of this, the enhancement of blockchain technology in securing the digital currency has been involving, something that has reduced chances of loss of such currency on the online platform.

Cryptocurrency regulation The cryptocurrencies are not regulated by the central federal banks. This has both merits and demerits. For instance, from the perspective of the account holder, it enables them to transfer funds without restrictions from the central banks. This is more so the case when dealing with cash that emanates from drugs, corrupt deals and other illegal activities.

In some cases, depositing of such money in banks may result in asset freezing when the banks become aware of the sources of these funds. Lack of regulation of cryptocurrencies by central or federal banks equally has some demerits to the economy. For instance, it may result in the government losing money meant for development to corrupt cartels that transfer the funds through the cryptocurrencies. This would end up adversely affecting the economy.

At the same time, the lack of regulation will result in a scenario where lack of regulation will result in a high level of variability of the value of cryptocurrencies in the market. This has the potential of reducing the predictability of such currencies in the market.

Some level of regulation of this form of currency may thus aid in minimizing these challenges both to the economy and individual cryptocurrency users. The regulators need to ensure in the market that the market is not manipulated through variation in currency value. This will ensure a more predictable business environment.

Trade in illegal activities such as the sale of drugs is likely to increase when trade is carried out with a limited level of regulation Nesbitt , p1. Effect of cryptocurrencies on international business Today, cryptocurrencies are having multiple impacts on people and organizations in the international environment.

The application will enable individuals and organizations to engage in cross-border transactions through safe payments and transactions. As a result, the level of trade in the global arena will increase. Money that we use for different purposes i.

A cryptocurrency is also a form of currency but it is not available in physical form. It is a newly developed currency that is an internet currency and can only be used digitally. In other words, cryptocurrency is a newly invented form of currency that is termed digital or virtual currency. Bitcoin, Ripple, Dogecoin, etc are some of the examples of cryptocurrencies. Cryptocurrency is a set of binary data and that is used as a medium of exchange for goods and services.

The record of every coin in cryptocurrency is being stored in the digital ledger cryptographically in a secure way so that no changes can be made in the transaction data. The people get the authority of the token according to the amount they have given for stake in cryptocurrency. It is stated as the centralized currency after it is issued by a single user. Later when it is stated as decentralized, its options are available on the digital ledger of every connected user in the blockchain.

Bitcoin is referred to as the first decentralized cryptocurrency that was invented in the year There was the invention of different cryptocurrencies after the invention of Bitcoin. History of Cryptocurrency David Chaum an American Cryptographer was the first one to create electronic money or ecash in the year This was brought into use by him in the year in form of Digicash.

The earlier form of electronic payment required the use of software and encrypted keys for continuing any kind of transaction. Bitgold was further discovered by Nick Szabo. It was also an electronic currency system in which proof of work function was essential for all the users to cryptographically publish the same.

Bitcoin that is regarded as the first decentralized cryptocurrency was then developed in the year by Satoshi Nakamoto. It required a cryptographic hash function and the proof of work scheme. Namecoin, Litecoin, and Peercoin were subsequently developed thereafter in the year Recently in the year , the government of China, which was stated as the largest market for cryptocurrency got crashed as the country declared all the cryptocurrency transactions illegal.

This incident also banned the working of intermediaries and miners in China. Classification of Cryptocurrency The first developed decentralized cryptocurrency was Bitcoin. It has attained great popularity and is being used in the different nations of the world.

The credit for the invention of this cryptocurrency goes to Satoshi Nakamoto in the year Various other cryptocurrencies have been designed after the emergence of Bitcoin and all are specific in their functions. There are more than cryptocurrencies in the world till November The other cryptocurrencies except Bitcoin are termed Altcoins.

The expected value of all the existing cryptocurrencies is about 1. Advantages of Cryptocurrency No Need for Third-Party Involvement- There is no any involvement of third parties for transferring funds between parties because of the development of cryptocurrency. Cost-effective and Efficient technology- The process of transfer of funds incurs no extra charge and takes place at a faster rate. The miners involved get awarded by cryptocurrency from the network after the process of the transaction.

Secure Technology- The data of the transaction is safely stored in the blocks with full privacy and cannot be edited by anybody. This protects the user from any kind of fraud and cybercrime. Privacy- The private keys can be used by the users to access their own cryptocurrency with full privacy.

Many E-wallets of cryptocurrency are provided with the private key and thus they can only be assessed by the owner itself. No Barriers in Joining the Network- Anybody can easily join a network of cryptocurrency as there are very no such restrictions for presenting the proof of identity, income and address. Issues linked with Cryptocurrency Every technology is a blessing for mankind as it is benefitting us in different ways but there are some of the disadvantages also associated with it.

The issues or disadvantages linked with the use of cryptocurrency are stated below: High Volatility in The Values of Cryptocurrencies- There is a high fluctuation in the values of cryptocurrencies as it is totally dependent on the supply and demands. This greatly affects the cryptocurrency holders. Illegal Use- There is high privacy in transactions of the cryptocurrency and thus it can easily be a medium for carrying out illegal activities like money laundering, terror-financing, selling drugs, child pornographies, criminal activities, etc.

Not Monitored by Central Authority- Cryptocurrencies are decentralized that implies that it is not controlled by any single authority or central authority. It is managed and monitored by all the users in the network. Thus, it is not considered a reliable currency as it does not have central control like the Reserve Bank of India has on the monetary policy.

The people also do not trust in investing in cryptocurrency as it is not controlled by a central authority and thus has no reliability. Difficult to Operate by the Uneducated Mass- The people who do not have the knowledge of the internet or are uneducated cannot access this technology. Thus such people could not avail the benefit of digital currency. High Energy Consumption- High power consumption is there in the process of mining the cryptocurrency. High power consumption states that it is not a sustainable technology as it possesses greater pressure on power production.

This can also result in rising in power prices and give rise to issues like global warming. Not Accepted Everywhere- Cryptocurrency is not having acceptance everywhere in the world. It is only accepted at few places. Moreover, the transactions are not reversible. Cryptocurrency in India The invention of Bitcoin in cryptocurrencies gave this currency new heights and popularity.

The people became more familiar with this technology during the pandemic due to the outbreak of Covid It had been a burning topic in different countries of the world including India. The investors and businessmen of India and different nations started taking interest in using this currency in trade and commerce after the advent of Bitcoins in the market.

Later in the year , it was announced by the Finance Minister of India that the country does not consider the private cryptocurrency as a legal tender in India. It was also announced by the Reserve Bank of India that none of the banks will deal in cryptocurrencies. Thus, a blanket ban was imposed by the nation on the use of cryptocurrency. The government of India at present has decided to introduce the bill called Cryptocurrency and Regulation of Official Digital Currency Bill, It will be implemented to ban all the private cryptocurrencies and create a digital currency in the nation.

The fund allocated by the Indian government for initiating the blockchains is very less therefore it is very difficult for investors and entrepreneurs to attain economical benefit from cryptocurrencies. Increasing Trend of Cryptocurrency in the World The advent of cryptocurrency is a great innovation in technology. The invention of the blockchain is the basis of the working of cryptocurrency. It is because of this technology that cryptocurrency is made decentralized.

Bitcoin was the first decentralized cryptocurrency invented in the year Thereafter many such cryptocurrencies have evolved.

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