Cryptocurrency. We’ve probably all heard about it by now. Bitcoin….and bitcoin…and yeah…That’s all I really know (knew) about it. That was before I got a WONDERFUL- emphasize wonderful- opportunity to take some time off and actually learn something about it. And really, it wasn’t that bad. So let me enlighten you a little about cryptocurrency, how it really works, and how it relates to Central Bank Digital Currencies. (CBDC).
So let’s start with the basics. What exactly is cryptocurrency? Well, for starters, cryptocurrency is “a digital payment system that doesn’t rely on banks”, or a third-party, “to verify transactions.” In short, it’s a digital currency that is an alternative form of payment by using encryption algorithms. (We’ll get into more of that later.)
So let’s start with the basics. What exactly is cryptocurrency? Well, for starters, cryptocurrency is “a digital payment system that doesn’t rely on banks”, or a third-party, “to verify transactions.” In short, it’s a digital currency that is an alternative form of payment by using encryption algorithms. (We’ll get into more of that later.)
Cryptocurrency is created through something called mining. No, not like mining for gold. (Although it would be funny.) But really, mining is “the process of validating cryptocurrency transactions and creating new units of cryptocurrency”. It uses powerful computer hardware and software to-drumroll please- solve complex math problems. Yep. Cryptocurrency is literally made from solving complex math problems. Using powerful computer hardware and software, of course.
But really this is more complex. You see, cryptocurrencies use blockchain technology. A blockchain is a distributed database or ledger that is shared among the nodes of a computer network. Think of it as a ledger, or even a database. As a database, a blockchain stores information electronically in digital format. It’s a form of a public ledger, which is “a series of blocks on which transaction details are recorded after suitable authentication and verification by the designated network participants.” (It’s best known for their crucial role in cryptocurrency systems, for maintaining a secure and decentralized record of transactions.
Compared to a typical database, a blockchain structures its data into blocks which are strung together, rather than into tables. This structure makes an irreversible timeline of data when implemented in a decentralized nature. As a block is filled it finalizes and becomes part of this timeline.
So why would cryptocurrency be made? What was the main purpose? Anything made is often to make something easier. We always innovate something new to make what we’re already working with easier, faster, and simpler.
Well, for starters it was to engage in financial transactions without exclusively relying on banks or governments. When we usually partake in transactions, a third-party, such as a bank, is used to do so.
Whenever we perform transactions, our money doesn’t immediately get transferred to the other person. For transactions from different banks, it can take one to five days. Why does this happen? Well, it’s excessive to continuously pay a transaction to another bank in small amounts. If I make a transaction of $10 dollars to another person, someone else could be making a transaction of $50 to another. Instead of continuously processing transactions in amounts like this, something called the Delta of Transactions takes place. This process happens over a periodic basis.
So let’s say I make a transaction of $30 to someone at another bank, and someone at that bank needs to pay a transaction of $10 to someone at mine. Instead of updating a don performing every transaction, the banks will wait until the end of the day, and transfer the net amount to each other. In this case, since the other bank will ‘gain’ $30 and ‘lose’ $10, my bank will transfer $20 to the other bank. That is the net amount.
What cryptocurrency does is take out this step. Because we rely on the bank or a third-party to deliver the transaction, this Delta of Transactions process takes place, and our payment gets transferred after a while. But with cryptocurrency, it happens immediately. The thing with cryptocurrency is that your money stays with you. Compared to all your money being with the bank, you have your money. So whenever you want to process a transaction, it happens immediately because you’re doing it yourself. The only problem is that, if your money is with you, you could lose all of it. Cryptocurrency needs a cryptocurrency wallet. It’s something that stores the public and/or private keys for cryptocurrency transactions. Basically like a vault or a bank account. It holds the keys and allows you to access your coins. Because it’s with you, if you lose that ‘wallet” you end up losing all your money. If you have money stored in the bank, if you lose your wallet, you would still have money, and not have lost all of it.
However, there are certain situations where cryptocurrency is actually beneficial. Let’s take the Bahamas for example. The Bahamas consists of 70 scattered islands, and it can take over half a day to simply reach the bank. As a result, the Bahamas established a style of cryptocurrency called Sand Dollar to make money easily accessible.
So I mentioned CBDC at the very beginning. CBDC (Central Bank Digital Currency) is digital currency issued by a central bank, rather than a commercial bank. While CBDCs are controlled by a central bank, cryptocurrencies are almost always decentralized, meaning they cannot be regulated by a single authority.
CBDCs are pegged to the value of a country’s fiat currency. This fiat currency is issued and regulated by a nation’s monetary authority or central bank. ( Such as the US Treasury) In the US along with many other countries, many people do not have access to financial services. The main goal of CBDC is to “provide businesses and consumers with privacy transferability, convenience, accessibility, and financial security.” It would also reduce the risks of using digital currencies in their current form. Cryptocurrencies are highly volatile and have a constantly fluctuating value. This can cause severe financial stress in many households and affect the overall stability of an economy. Bitcoin was made anonymously. Despite being believed to be made by a pseudonym group, nobody knows who created it. That being said, they can do whatever they want with Bitcoin. Who knows if they choose to make Bitcoin valued at a high price or suddenly drop it really low. To prevent this but still provide digital currency, governments are starting to create CBDCs.
Compared to a typical database, a blockchain structures its data into blocks which are strung together, rather than into tables. This structure makes an irreversible timeline of data when implemented in a decentralized nature. As a block is filled it finalizes and becomes part of this timeline.
So why would cryptocurrency be made? What was the main purpose? Anything made is often to make something easier. We always innovate something new to make what we’re already working with easier, faster, and simpler.
Well, for starters it was to engage in financial transactions without exclusively relying on banks or governments. When we usually partake in transactions, a third-party, such as a bank, is used to do so.
Whenever we perform transactions, our money doesn’t immediately get transferred to the other person. For transactions from different banks, it can take one to five days. Why does this happen? Well, it’s excessive to continuously pay a transaction to another bank in small amounts. If I make a transaction of $10 dollars to another person, someone else could be making a transaction of $50 to another. Instead of continuously processing transactions in amounts like this, something called the Delta of Transactions takes place. This process happens over a periodic basis.
So let’s say I make a transaction of $30 to someone at another bank, and someone at that bank needs to pay a transaction of $10 to someone at mine. Instead of updating a don performing every transaction, the banks will wait until the end of the day, and transfer the net amount to each other. In this case, since the other bank will ‘gain’ $30 and ‘lose’ $10, my bank will transfer $20 to the other bank. That is the net amount.
What cryptocurrency does is take out this step. Because we rely on the bank or a third-party to deliver the transaction, this Delta of Transactions process takes place, and our payment gets transferred after a while. But with cryptocurrency, it happens immediately. The thing with cryptocurrency is that your money stays with you. Compared to all your money being with the bank, you have your money. So whenever you want to process a transaction, it happens immediately because you’re doing it yourself. The only problem is that, if your money is with you, you could lose all of it. Cryptocurrency needs a cryptocurrency wallet. It’s something that stores the public and/or private keys for cryptocurrency transactions. Basically like a vault or a bank account. It holds the keys and allows you to access your coins. Because it’s with you, if you lose that ‘wallet” you end up losing all your money. If you have money stored in the bank, if you lose your wallet, you would still have money, and not have lost all of it.
However, there are certain situations where cryptocurrency is actually beneficial. Let’s take the Bahamas for example. The Bahamas consists of 70 scattered islands, and it can take over half a day to simply reach the bank. As a result, the Bahamas established a style of cryptocurrency called Sand Dollar to make money easily accessible.
So I mentioned CBDC at the very beginning. CBDC (Central Bank Digital Currency) is digital currency issued by a central bank, rather than a commercial bank. While CBDCs are controlled by a central bank, cryptocurrencies are almost always decentralized, meaning they cannot be regulated by a single authority.
CBDCs are pegged to the value of a country’s fiat currency. This fiat currency is issued and regulated by a nation’s monetary authority or central bank. ( Such as the US Treasury) In the US along with many other countries, many people do not have access to financial services. The main goal of CBDC is to “provide businesses and consumers with privacy transferability, convenience, accessibility, and financial security.” It would also reduce the risks of using digital currencies in their current form. Cryptocurrencies are highly volatile and have a constantly fluctuating value. This can cause severe financial stress in many households and affect the overall stability of an economy. Bitcoin was made anonymously. Despite being believed to be made by a pseudonym group, nobody knows who created it. That being said, they can do whatever they want with Bitcoin. Who knows if they choose to make Bitcoin valued at a high price or suddenly drop it really low. To prevent this but still provide digital currency, governments are starting to create CBDCs.
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| digitalasset.com |
So lastly why would this be important. Well for starters, everything in this world has to do with money. There’s nothing free in this world. The world revolves around money. You go to school to get a job to earn money. You need money to get food, get a house, and perform the basic functions to live. As technology develops, cryptocurrency or even digital currency would become widely used like regular currency. We need to learn how it’s used and the benefits of disadvantages to using it so that we’re prepared in the future. If I get a job and my boss asks if I could be paid in cryptocurrency or CBDC, I need to understand what happens when I use it. Although it’s not as useful now, we would eventually get to a point in time where it would be. This would eventually become a way of payment, and we need to understand how it works. It’s our money after all.
References + Resources:
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Blockchain & distributed Ledger technology (DLT). (2018, May 8). World Bank. https://www.worldbank.org/en/topic/financialsector/brief/blockchain-dlt#:~:text=Distributed%20ledgers%20use%20independent%20computers,in%20an%20append%20only%20mode
Can RBI's digital rupee initiative help INDIA beat the USA’s SWIFT network dominance? (2022, November 5). YouTube. https://youtu.be/07yMvq5WxAs
Cryptocurrency explained with pros and cons for investment. (2013, July 29). Investopedia. https://www.investopedia.com/terms/c/cryptocurrency.asp#:~:text=A%20blockchain%20is%20a%20digitally,use%20with%20cryptocurrencies%20and%20NFTs
Cryptocurrency vs CBDC vs digital money: What’s the difference? (2022, October 8). Business Today. https://www.businesstoday.in/latest/economy/story/cryptocurrency-vs-cbdc-vs-digital-money-whats-the-difference-349323-2022-10-08
Fiat money: What it is, how it works, example, pros & cons. (2003, November 20). Investopedia. https://www.investopedia.com/terms/f/fiatmoney.asp
What is a Central Bank digital currency (CBDC)? (2018, September 6). Investopedia. https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp
What is cryptocurrency and how does it work? (2022, February 9). www.kaspersky.com. https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency
What is data encryption? (2022, March 30). www.kaspersky.com. https://www.kaspersky.com/resource-center/definitions/encryption
Blockchain facts: What is it, how it works, and how it can be used. (2014, June 13). Investopedia. https://www.investopedia.com/terms/b/blockchain.asp
'FTX has been hacked': Crypto disaster worsens as exchange sees mysterious outflows exceeding $600M. (2022, November 14). CoinDesk: Bitcoin, Ethereum, Crypto News and Price Data. https://www.coindesk.com/business/2022/11/12/ftx-crypto-wallets-see-mysterious-late-night-outflows-totalling-more-than-380m/
How are cryptocurrencies created? (2022, May 5). GeeksforGeeks. https://www.geeksforgeeks.org/how-are-cryptocurrencies-created/
