India’s decision to not ban cryptocurrency is wise as other countries are trying to integrate it in their economy — to undermine the US dollar.
For those of you who have not wrapped your head around what a blockchain is or does, here is a ready reckoner.
Below it, we shall also detail India’s uneasiness with the blockchain and cryptocurrency and why it should be persuaded to embrace it.
What is a blockchain?
A blockchain is a unique database, behind the technology that powers cryptocurrency like Bitcoin.
The blockchain database stores information differently from a typical database. As the name suggests, data is stored in groups or blocks which are then chained together. It is called a blockchain because the latest transaction block will contain details of the previous transaction block.
New data enters fresh blocks and once that block is created, it is attached to the chain chronologically.
Different information can be stored in a blockchain, but it is mostly used as a ‘ledger’ for transactions. It is a type of distributed ledger technology (DLT). It is called a ‘ledger’ because it keeps track of everything that is happening, just as a ledger does. It is ‘distributed’ because a copy of the ledger is transmitted and stored with everyone, and is not a centralised network — like in banks.
In Bitcoin’s case, the blockchain allows everyone access to all information and transactions. How does it, therefore, maintain privacy? It links transactions to a recipient ‘Bitcoin address’ — which is a random string of alphanumeric — that changes for each transaction.
Information once stored cannot be changed or tampered with even though everyone has access to the records. This is because they are in a highly coded form.
If blockchains ruled, this is what would happen — a world of no rupees, no credit cards, no digital payment gateways, and no banks!
Who conceptualised blockchain?
The blockchain concept was launched by a pseudonymous person or group called ‘Satoshi Nakamoto’ whom no one has ever seen.
Australian entrepreneur-cum-computer scientist Craig Wright has claimed to be Nakamoto, but that is disputed.
Nakamoto released a white paper in October 2008 on Bitcoin (not blockchain) named ‘Bitcoin: A Peer-to-Peer Electronic Cash System‘. It highlighted how blockchain could be the software infrastructure that allowed Bitcoin transactions.
Yet, the paper didn’t use the word ‘blockchain’, but referred to how ‘blocks are chained’ together in holding information.
The word blockchain first appeared around 2010 in a chat forum named ‘Bitcoin Talk’ founded by Nakamoto.
Nakamoto’s seminal paper couldn’t have come at a better time. It was published a month after the 2008 global financial crisis, triggered by banks considered “too big to fail”, filing for bankruptcy. Home-loaners could not pay up.
The 2008 global financial crisis was considered a “powerful demonstration of what happens when the financial world puts too much trust in centralised institutions” like banks.
That is when blockchain proponents felt that a decentralised financial system — not controlled by one entity — would never have allowed the 2008 crisis to happen.
3 main features of blockchain Nakamoto proposed
Nakamoto’s paper proposed a payment system which had three main features. All could be implemented without a central financial institution.
One, it would be a system where trust can be obviated. There is no need for a third-party financial institution to provide an element of trust between buyer and seller who usually don’t know each other, especially in e-commerce.
In blockchain transactions, entities may not necessarily know each other yet they transact with surety due to secure cryptography techniques.
Two, unlike in cash, there is always a danger of ‘double spending’ of digital money. Technically, one could duplicate the digital money like a word file and spend it at two or more places. Nakamoto suggested a mechanism that would secure past transactions and also identify and stop double spending.
Three, it would be a system for new money to be generated. Those who generate blocks for transaction — also known as ‘miners’ — get a part of the transacted amount as fee. In addition, a miner also gets a designated number of bitcoins that the software is designed to send — a sort of reward for adding a block. This is how the blockchain software generates and releases new bitcoins into the system’s money supply.