Okay but laana:
What really is crypto?
15th May 2021
Reading time ~ 4 minutes
Hi there,
There's been a lot of talk and jokes about cryptocurrency in the past couple of days. You've probably heard some of it - Bitcoin. Ether. Litecoin. Elon Musk's obsession with Dogecoin.
So this week, we are going to talk about cryptocurrency and break down the basics for you. What really is cryptocurrency? How does it work? Why is everyone buying it?
Okay, so cryptocurrency?
Let's first talk about how we buy and sell goods today. We can all agree that today we trade goods with paper money - using currency such as Rupee, Pound, etc. In the entire world, the currency is controlled by a regulatory body set up by the government (in India: RBI).
RBI is responsible for printing the actual paper money and controlling the entire system. Then, banks hold your money, process your transactions, detect fraud, etc. This system is set in place so that next time you want to buy some overpriced Starbucks coffee, you are able to do so successfully.
Cool, sounds great right? Well, let's see:
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Banks keep a record of all the transactions happening in my account. They are susceptible to fraud - hackers can go in and alter records.
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Sometimes, their tech fails and my card gets declined for no fault of my own.
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I have to go through so much paperwork to send money overseas while waiting patiently to see the money get transferred days after.
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Fraudsters can create fake paper money (very very skillfully).
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RBI can print more money whenever (which is a cause of inflation). Remember inflation from Part 1?
Meh, that's a lot of issues.
Enter: Cryptocurrency
Simply put, cryptocurrency is a digital currency that runs on blockchain. As in:
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Crypto - comes from cryptography (a type of secure technology that "locks" data so that no one will be able to read it without a "key")
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Digital - there's no paper version of cryptocurrency, it only exists electronically
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Currency - you can use it to buy goods (i.e it's a form of payment)
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Blockchain - the tech that makes cryptocurrency possible (we'll get to that)
Bitcoin, Ether, Dogecoin, etc. are types of cryptocurrency - like how the Dollar, Rupee, Yen, etc. are types of paper currency.
With Crypto:
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No one (like, no government, no bank, etc.) has any control over the currency (kinda like the old days where you had a barter system in place). They cannot decide when to print more crypto, when to hold back, etc. They don't know where the crypto coins are.
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You can transact with anyone, anywhere seamlessly, in a matter of seconds.
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It's virtually impossible to commit fraud with crypto because of the cryptography tech that it uses (for example - bitcoin uses SHA - 256, developed by the US National Security Agency - so, yeah it's pretty legit in terms of security).
Cool, so how is this even possible 🤯 ?
Enter: Blockchain
Today, when you buy something, your bank statement will show that money has been deducted from your account. Similarly, when you earn some money, it will show that money has been added. Your bank will maintain this for each penny and will do that for the millions of accounts it holds. The actual record - of the money going and coming in - is called a ledger. Because the bank processes the transactions, it acts as one true authority that maintains and updates the ledger.
With cryptocurrency, there are no banks, correct? But the ledger of the cryptocurrency leaving and entering your account still has to be maintained. So how is that done? Well, it's maintained by a system of computers worldwide - no one person has authority or power over the ledger, so technically it's a 'public ledger.'
When a new transaction in bitcoin occurs - say, I send 5 bitcoins to you. I will initiate the transaction on a cryptocurrency app. You'll accept the transaction and the money will be transferred. The ledger will show - 5 bitcoins for me, and + 5 for you. Simple.
Then, one day I decide - hey I know how to code, so let me just create a fake copy of this bitcoin and try to send it to my friend and commit some fraud. Simple? Well, not really. How does blockchain handle this?
So, for the 5 bitcoins to actually get transferred to you, the transaction must be authorized or deemed legitimate. This is where blockchain technology really shows its value. For a transaction to enter the ledger, the computers that are maintaining the ledger must authorize the transaction. They do this by solving mathematical problems that are kinda simple but take a lot of computing power (so it takes time and money to actually go through the problem).
It's kinda like solving for a key to decode the information. Solving the code validates the authenticity of the transaction - think: the fake bitcoin won't produce the right key, and won't get validated (we're simplifying things, but you get the point).
One computer will solve the code first, the other computers will use the code to verify that the problem is truly solved. Once it's verified, the ledger will get updated. This is done for each transaction. This whole process is also called 'mining,' and those that engage in this process (own the computers) are called 'miners.' Since miners spend time and money to maintain the ledger, they get paid back in some value of bitcoin. Anyone can become a miner, and no one miner can take control of the system, making it truly decentralized. Pretty cool, right?
Check out some handy resources if you'd want to delve deeper: here, here, and, here.
Got it, so what does this mean for me?
Well, you can buy and sell cryptocurrency (such as Bitcoin, Ether, Dogecoin, etc.) on a cryptocurrency exchange (similar to a stock exchange) such as Coinbase. You can buy one bitcoin for around INR 37 lakhs; one dogecoin for INR 32 (at the time of this writing). People can trade crypto or keep them long-term as an investment.
Now, crypto is essentially disrupting the entire banking system. It's also fairly new and governments are still assessing whether to allow this in the long term or not. I mean, crypto is taking control away from the government, so it's a touchy topic. RBI removed the ban on crypto in India in 2020. All of this makes cryptocurrency VERY volatile - the value can go up and down like crazy. Like any other good, as acceptance increases and more and more people buy crypto, the demand increases -> so the value increases.
Some companies have also started accepting crypto as a valid form of payment - you could buy a Tesla by paying in bitcoin (but as of this week, they paused it because mining crypto takes a ton of computing power = consuming a LOT of electricity - and when electricity is coal-powered = carbon emissions = not great for the environment).
We'd say no one has a definitive answer to what is going to happen to crypto, neither experts nor regulating bodies. Some folks love crypto, some follow Elon Musk, and some choose to not invest. It will, however, take some time before crypto is accepted widely as a form of payment. Until then, you can do your research, assess the risk, and decide whether you'd like to invest or not.
Thoughts or questions? Reach out to me at rujgupta@laana.club
Some interesting resources:
Blockchain is not just for crypto
How does Bitcoin have any value
More meme-based real coins: Shiba Inu Coin
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