Cryptocurrency Primer — Part 1 : The actual five reasons why Bitcoin was invented.
Bitcoin, Etherium, Cryptocurrency, Billionaire !!!
These are the terms that have taken over the media and the financial world in the recent times. Everybody in the world wants to be a part of this mania but as I observed around, very few actually knew how it works and why it was invented. It’s like living in the modern world and not knowing how our economy functions.
Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life. — Tyler Cowen
In this post, I will try to explain what are the current problems in our banking system and how bitcoin tries to overcome them. I will get into more technical details about blockchain in the coming posts and at the end of series, any person with a basic knowledge of coding will be able to create his/her own crypto currency.
It is the year 2008. The housing bubble in the US has collapsed. The wall street has taken a major hit and there is wild spread unemployment. People have lost their trust in the banking system and the people running them — The Government.
Amidst all this chaos, a white-paper silently appears on the Internet on 9 January, 2009 presenting a new economic system which claims to get rid of the banks themselves and transfer the power to people.
The paper was signed by a pseudonym Satoshi Nakamoto (The signed person is believed to hold more than a million Bitcoins currently. Neat, isn’t it).
He presented a new form of currency called the bitcoin which is not under any governments control and does not use a central trust authority for transactions. The technology that it uses is called the Blockchain. You can read the original paper here.
But why has Bitcoin seen such a hype and mass adaption? What problems has it solved that our currencies like USD, INR ( called FIAT currencies ) have?Let’s go through all the problems and understand why bitcoin has been created.
The economic system is controlled by a few chumps in the government.
The economic system is centralised and controlled by the central bank and the government. And they sometimes take foolish economic policy decisions that shake the whole country and takes the country’s economy in the gutter. The global financial crisis (2008), The great depression (1930), The hyperinflation in Zimbabwe(2009), The Indian Banknote Demonitization (2016) and much more shows that a bad decision by some powerfull people can have a widespread effect on the economy.
We have to trust an authority to maintain our money and facilitate transactions. The problem here is that they shouldn’t be trusted and in case of any mishappening, they have no obligation towards us. They have the power to make a change in the ledger anytime and manipulate account information at will. Further, since almost every bank is digitised now, all account information and transactions are stored on a central server located somewhere in the world. These servers are prone to hacking and malicious attacks. Trust me, you don’t want to be a part of a hacking attack and loose your whole fortune overnight.
Long and Complex Payment system. Every transaction you do at a merchant store using your VISA/Mastercard involves more than five intermediary entities such as the issuer’s bank, receiver’s bank, merchant service providers, card processors and the VISA/MC agent. Every entity takes a fee for every transaction which combined can go upto 5% !! . Today’s transactions are expensive, inefficient and take days for settlement.
Ridiculously Slow Inter-Country money transfer. Let’s say you are an immigrant happily working in the United States. But one day there is a medical emergency in your family living in India. Your relative is in an ICU and they urgently require some money to pay for the operation. You know how much time it will take to transfer money from the US to India? More than 3 days. Yes, 3 fucking days. The current SWIFT system established to transfer money from one country to another is ridiculously slow and involves many entities to make a transfer happen. This is very inefficient given how globalised our companies and businesses have become.
The big daddy sees everything. Since every transaction that you make goes through a central authority, the government has eyes on every transaction you make. This is good for collecting taxes but can lead to some serious privacy issues. The transactions can be used against the common people and many times lead to harassment.
Bitcoin tries to address all these issues and come up with a new system for doing transactions.
Bitcoin is a peer to peer electronic cash system. It is not controlled by any government or a central authority. The system is decentralised with no central server or trusted parties which makes it impossible to hack. It has zero or negligible transaction fees and takes only ~10 min to send money anywhere in the world. Every transaction is encrypted and totally anonymous.
In the next part of the series, I will go through in detail how bitcoin is able to achieve all of the above. I will discuss more blockchain which is the backbone of bitcoin.
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