Cryptocurrencies: A new era of transactions
Introduction:
Starting off with some history, the concept of cryptocurrency operating over a blockchain technology was introduced back in 2009, by Satoshi Tsunakawa, who founded Bitcoin. Since then many other cryptocurrencies have emerged. These aim at completely modifying our present system of money handling. The technology is developing and might even replace our present technologies entirely. So, having some knowledge about all this might be helpful.
Bitcoin VS Blockchain:
Many of us find the terms blockchain and bitcoin quite confusing. Some even believe them to be the same. Let us define each of separately.
Blockchain first. To understand it, we need to know what a distributed ledger is. A data structure! For people with some background in programming, it is similar to any other data structure like a stack, or a queue, etc, but is a bit more complicated. More on that later. Others may simply view it as an arrangement for containing data, whose accessibility (adding, modifying or retrieving data) is disciplined. Consider the simplest example, A stack of plates. The only way you can add a plate to it is to keep it at the top, you cannot insert in anywhere in between and similarly, a plate can be removed from the top only. So, incorporating such disciplines to our data has numerous applications. A set of data containers (computer memory) and these discipline rules make up a data structure.
This ledger is present in multiple locations and hence called distributed. So, when this data model is combined with something known as ‘smart contracts’, that is basically a computer code that performs certain operations when some specified conditions have been met. For example-Transfer 2 bitcoins to party X on receiving 5% stakes. So, as soon as party X release its 5% stakes, it is given 2 etc. These ‘smart contracts’ along with other machineries, make up the blockchain.
Now bitcoin or for that matter any other cryptocurrency, is digital money that has some scaled value in terms of fiat money (like USD, Indian Rupee, etc). Most cryptocurrencies have variable value depending upon their demand. These cryptocurrencies operate over the blockchain technology. We will cover more about the crypto economy in later sections.
Why blockchain and all this buzz around it?
Blockchain’s implementation as a cryptocurrency-bitcoin in 2009 was the first ever blockchain application in human history. Since then, the blockchain has proved to be one of the biggest inventions of this century. We need to understand some of the technicalities of it so as to cherish its value.
Blockchain Functioning:
So, the block chain consists of blocks sequentially linked to each other. Each block has 4 pieces of data:
1. A Merkle tree: It is a record of all the transactions occurring in a particular span of time to make up the block. All these are valid transactions, for example- no one transfers more money than he has in his wallet, etc. The tree is characterized by a unique hash. (Merkle tree is another data structure)
2. Nonce: This is where we are introduced to bitcoin ‘miners’. The bitcoin miners are supposed to solve via cryptography a complicated and highly computation power consuming puzzle, to come up with a key. They also validate all the transactions occurring in a span of time, and group all the valid transactions into a block. This key is a 32-bit number and is called the nonce. A good point to note is that the key value depends upon the timestamp (defined later), nature of transactions and previous block’s hash. The miner to first come up with this key wins the block and is awarded a certain reward (bitcoins for example) for it. Since, cracking this key requires very high computational powers, and a change in any value of the block requires to change the nonce too(because as mentioned earlier the key value depends on it), the security and immutability of data on blockchains is very high, better than our existing payment gateways.
3. Reference to previous block: Each block contains the hash (explained in Merkle tree) of the previous block and this is how the blocks get linked.
4. Timestamp: This plays an important role in making the selection of nonce more difficult and complicated. It is somewhat related to the time of transaction.
So, you realize, the entire blockchain technology actually works not on any one single central server, but on a distributed network (for example miners in bitcoin) spread throughout the world. This is called peer to peer network architecture. It is very similar to torrents! Hence, the data of blockchain is present in multiple locations and any change (which is extremely rare) if done can be easily captured. Also, the data is easily retrievable and hence long lasting. So, it is a quite robust mode of handling our money. Another advantage? It is cheap. Moreover, there is no need of any third party (like a bank) to process the transactions. All this clearly establishes a decentralized form of money transfer, which is one of the main principles of blockchain. The transaction fee for each payment is quite low as compared to our present internet payment methods. So, clearly, blockchain sets up a very revolutionizing platform for the finance sector.
What entrepreneurs and investors should look forward to?
Now that we have a fair idea of how cryptocurrencies work, let’s look into how they are made. There are no government law or protocols regarding some necessary clauses that must be met by a cryptocurrency. This is the biggest problem with cryptocurrencies. Being in its growing stages, there haven’t been considerable efforts towards integrating it with our economy, the primary focus has been on developing the technology part only. So, many countries abandon it deeming it unreliable and fake. This is a major problem to be tackled.
Coming back, so, either you can code your way from the scratch to develop your own blockchain technology, or you can use Ethereum’s open source platform which caters to easing this process. Ethereum is the second biggest name in this industry after Bitcoin. It provides an easy way for everyone to create their own cryptocurrency. It has also developed a protocol- ERC20, which should be abided to by every cryptocurrency. Although it is not compulsory.
Every transaction on this platform occurs via Ethereum’s currency(ether). So, to buy tokens of a newly made digital money, you need to trade it for ethers. Obviously, a token will be purchased only when there is demand for it. So, a demand has to created and maintained.
Initial Coin Offering:
Now we come to an interesting concept called Initial Coin Offerings, which is the modern day crowd-funding method of these cryptocurrencies. Let us go about it through an example. Suppose I come up with an idea to start a dairy service in my town. Unlike the traditional dairy service which requires every customer to go and pay on the dairy shop, maintain track of the products bought themselves, my company will offer a completely online platform to do so. You only need to subscribe to a particular scheme say 2 litres of Amul pure milk per day and pay accordingly via my cryptocurrency. The system is sophisticated and hence many investors are interested. To go about the idea, I need money. So, I create around 1 lakh tokens of my own each costing 1 rupees and offer it to the investors. I try popularizing it and attract investors from many different parts of the world. More diverse the source of investment, the better coin offering it is. Now obviously initially the daily customers wouldn’t be interested until I start with my venture. So, all the 1 lakh coins are sold solely to the investors. I take the money, set up everything I planned and start the business. The initial coin offering part is done. Now every customer I attract has to buy my tokens from the investors and pay in return for it. All this is done on an online platform. In a few days the demand increases by manifold, and so I increase the price of each token to 1.5 Rupees. So, from now on the investors start earning profit. I can keep scaling up the prices as per the demand or also create some more tokens if there are more customers. This is how crypto economics works and we will see one real awesome company working in such a way later. Also, I am sure quite a few of you will also be thinking, how did cryptocurrencies help? So, since this was just a toy example, there were no evident benefits of it as such. However, an important aspect of this idea was to provide online payment facility. So, cryptocurrency provided us a way for that. If I would have chosen the conventional way, it would have been costlier. Also, it helped in fund raising wherein investors from across the globe could participate easily and the process itself rewards them back. Also remember that this payment system is quite secure and long-lasting in itself, which is a good reason to stick to it.
So, just like any other company, you need to first attract investors and raise funds, Then, create demand for your product and maintain it, amplify it. But the difference is the ease of everything. Be it making investments or buying your product/service. Also, this system in itself is quite robust, secure and long-lasting.
Golem:
This the awesome company I mentioned about earlier. Their idea is to create a worldwide supercomputer, the first of its kind, that draws computational power from nodes across the globe. Individuals can render their computer to the network when not in use. The network makes use of their computer’s resources (from multiple nodes) to build a kind of supercomputer. Any person with a need to access such huge computational power can pay for the same via Golem Network Token(GNT) and use it. People who render their computers to the network are paid back via these GNT’s.
Here we may also understand the importance of cryptocurrencies. This system requires a lot of International Transactions as well. The processing fee is quite high normally for these transactions but transferring GNT’s is cheaper.
Other references:
1. Other applications of Blockchain apart from cryptocurrencies: https://www.coindesk.com/7-cool-decentralized-apps-built-ethereum/
2. More on smart contracts, really good one if you are curious about the programming behind all this.
3. Transaction rates of various cryptocurrencies.
4. Cashing out your bitcoins(in case you are interested in investing)
5. We also could not cover in this blog an interesting topic called Dapps. You can read about them here.
This was EDC ,IIT Guwahati’s this week’s blog , we release informative content on medium every friday ! So stay tuned and keep following us on Medium and facebook to stay updated with the startup-ecosystem.
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Compiled by Utkarsh Mishra.
