In this modern era, the use of digital currencies is a familiar practice for most of the people. The role of currencies has been growing since the release of 3651 controller and 3663 checkout terminals by IBM in 1973, which has led to mobility, expediency, safety, and reliability. The orthodox and conventional cash and cheque are replaced by more modern and convenient alternative of digital currency due to the emergence and escalating use of debit and credit cards, advancement of technology, developments in the field of eCommerce, P2P methods of payment including square and Vemo and ATM machines.
However, these technologies are not enough to match the pace of this expeditiously developing world; a new type of currency has been emerging as new interest in the recent years called cryptocurrency.
Cryptocurrency for Layman
Cryptocurrency was introduced for the satisfaction of individual’s demand for a digital platform in order to perform secure transactions with the influence of the government, anonymously in 2008. The basic idea of designing this digital asset was to utilize it as an exchange medium for securing transactions, controlling the additional unit creation and the verification of asset transfers with the help of cryptography.
This digital currency uses decentralized control contrary to the use of centralized control used in banking systems and electronic money. A public transaction database that functions as a distributed ledger named as blockchain is used in the working of cryptocurrency.
The first cryptocurrency based on centralized control named as Bitcoin was intercepted in 2009, has been gaining a huge media, academics and financial-industrial following since its introduction. It has emerged as the leader among all of the cryptocurrencies designed on the technology of Blockchain and it is rapidly developing and occupying the whole industry. Cost-effective transactions, anonymity, high liquidation, and security are one of the few benefits of this bitcoin over the traditional payment methods including visa and master cards.
Increasing Trend of Bitcon Usage
In the recent years, the interest in Bitcoin has shown an escalation globally. Different governments including Canada has considered bitcoin for the research grant payments and different companies related to information technology. They have been accumulating bitcoin for protection against ransomware and it has been becoming an opportunity for investment in China, which has ultimately increased its purchase in the region.
Board of Governors of the Federal reserves of different countries including the super economic Power of United States has been emphasizing on understanding and practicing new advancements introduced in the field of financial industry that include particularly, the Bitcoin, distributed ledger advancements and the concept of blockchain to enhance the performance of the central banks. This emphasize because of the ultimate beneficial outcomes has made the use of cryptocurrency as the key success technology of the financial industry.
Numerous cryptocurrencies has been designed and established since 2009, more precisely 720 cryptocurrencies have been reported to exist in the financial industry until February 2017. Among all of them, Bitcoin is recognized as the enormous and most famous cryptocurrency that in the total market of cryptocurrencies it has been capturing 81% of the market. Although the accumulated market capitalization is around US$19billion of all the cryptocurrencies, where 97% of the market is represented by the topmost 15 currencies and 90% accounts for seven of these in the total capitalization market.
Cryptocurrencies are designed based on decentralized approach and refers to scripts that are coded digitally. These scripts strives the replication of the currencies used today that are backed up by the government.
Although, the centrally controlled houses or banks can track those currencies that are backed up by the government but in cryptocurrency, a blockchain that is digital ledger, which is viewable by the public, is responsible for tracking the transactions. This network setup distributed and based on miners which is a more advantageous and expeditious system as compared to the conventional currencies that are backed by the government
Firstly, the blockchain has made the transactions very quick and cheap by permitting direct transaction between two parties instead of involving an intermediary for the transaction. Secondly, rather than raising funds through conventional initial public offering IPO, cryptocurrency has made the raising funding more uncomplicated and forthright.
In the market of initial coin offering ICO, this approach has significantly assisted in spurring growth. Finally, it has gained popularity among privacy concerned people, people who are against the management of currencies because of the political association and its characteristic of an exchange medium in the black market because of its pseudonymous character.
Numerous cryptocurrencies has been designed and established since 2009, more precisely 720 cryptocurrencies have been reported to exist in the financial industry until February 2017. Among all of them, Bitcoin is the most famous cryptocurrency that in the total market of cryptocurrencies it has been capturing 81% of the market.
According to a market tracker of cryptocurrency, more than 1100 cryptocurrencies are identified trading in more than 5500 markets, aggregative a value of around USD150 billion globally has more value than the IBM and McDonald’s market capitalization. The most established and famous cryptocurrency named as Bitcoin has been accounted for under half of the value of this.
Significance of Cryptocurrency
Cryptocurrency is beneficial for financial transaction related to sale of goods only because currencies that are backed by the government have an immense advantage due to the tax. In every economy, tax is considered as a huge single transaction, and cryptocurrency cannot be used for paying corporation tax, payroll tax, and sales tax. A company has to use the government-backed currencies for tax payments. Another loss involved in using the cryptocurrency is the risk of exchange rate because company will have a significant loss if the value of currency got increase as compare to the cryptocurrency.
The cryptocurrency is a useful currency for illegal transactions because the regulations of banking systems and the transparency in identifying the laundering of money has significantly helped in reducing the illegal transaction in government-backed currency. Illegal economy operations need to use alternatives other than money backed by the government and cryptocurrency can possibly be a significant option for them
Challenges to Cryptocurrency
Usually, the decentralized system of cryptocurrency has to emphasize on overcoming three primary challenges in its practical implications.
Establishment of consensus
In the absence of a regulatory central authority, distributive approach of transaction verification is the most reliable approach for the cryptocurrency, which requires strong, updating and verifying the transaction record. The consensus of user is mandatory for the maintenance of accurate transactions record. A competition for accurate maintenance of the record is essential for establishing the trust in currency. In Bitcoin, mining process is used for the solving the cost problems of computation in which validators for transaction called miners are involved
Problem of double-spending
The problem of double-spending involves the attempts of the buyer in convincing the network for accepting such history that eradicates the conduct of the payment. The usage of cryptocurrency can be undermined due to the double-spending. The usage of blockchain and introduction of confirmation lags can mitigate this problem.
Validation of the Transaction
A reward structure that included incentivizing of the honest minors is essential for the validation of transaction because it is an expensive and costly process. New coins and transaction fee are used for financing the rewards in Bitcoin.
Although cryptocurrency is one the most beneficial and advantageous inventions that has emerged as an alternative to the government-backed currencies and different economies have shown interest in utilizing the approach of decentralization. Security, privacy, ability of the computing process and collaborations are some of the challenges associated with the use of cryptocurrencies.
A new system is essential for securing and scaling up the data with the help of multi-party distribution networks. An efficient infrastructure in compliance with the legal frameworks, rapidly varying pace and expectations can assist in increasing the efficiency of the cryptocurrencies. As it is a new technology, which is in the experimental phase, but it is assumed that with significant improvements, this technology is expected to develop and enhance the financial system of the industry.
According to my opinion cryptocurrency is an essential and enhanced exchange of medium based on new technology of cryptography. It is a cost-effective, fast, and efficient as compared to the conventional centralized banking system but more research is mandatory for the success of this cryptocurrency. It is believed that it is in its initial stages, improvements and enhancement can ensure better outcomes in the future. A controlled system approach and better infrastructure is essential for its complete implementation in the financial system.