INSIDEOUT: Cryptocurrencies

Article by Reyan Kumar Sapkota

The staggering rate at which decentralized currencies have been adopted by major corporations like Amazon, Microsoft, Tesla, and some countries like El Salvador has sparked widespread attention to the way cryptocurrencies work. Why are people loving it? Why do foreign banks hate it? Why does the dollar hate it? What has made it so preferable over the entire western world, in such a small period?

The answer is No centralization.

The underlying technology behind Cryptocurrencies is the smart use of Cryptography and Blockchain. After the 2008 financial crash, an anonymous group of individuals with the title name: Satoshi Nakamoto, published a paper: “Blockchain: A Peer to Peer Electronic Cash System”.

This was not the first time somebody proposed a decentralized currency system. The paper combined all the concepts that had been proposed earlier in an attempt to decentralize money. HashCash, DigiGold are the previous attempts of decentralizing the exchange of value over the network. Nakamoto smartly incorporated concepts like “Timestamp Server”, “Proof of Work”, “Cryptographic Hashing”, “Mining Difficulty”, “Consensus Mechanism”, “Blockchain Network”, “Merkle Tree” and “Incentive Protocol” into a full-fledged workable decentralized currency system.

The first Bitcoin transaction occurred in 2009 between Computer Scientist Hal Finney and Satoshi Nakamoto. Bitcoin slowly emanated into society’s trust system. While banks and money bridges like Visa, Mastercard took around a week to transfer money across borders and charged a heavy transaction fee, Bitcoin did the same thing within a matter of at most an hour and a bare minimum fee of a few pennies. The absence of third-party agents and the decentralized flow of value over the internet itself was the main reason for people to trust cryptocurrencies as a medium of exchange of value.

The use of interconnected cryptography, consensus algorithm, and decentralized distribution of transaction records across the network makes the entire system unalterable. Not a single Cryptocurrency hack has been pulled out successfully so far.

People, mostly in Western countries, have immense trust in the scalability of cryptocurrencies. Cryptocurrencies have also come out as a major source of investment over the past few years. The Mining Difficulty and cryptocurrency halving maintain the value of the currency.

People losing trust over banks, secured, decentralized, and transparent money circulation over the internet, larger corporations embracing the Blockchain technology and cryptocurrencies (Facebook, Tesla, IBM, Amazon), risk of hyperinflation in fiat currencies due to massive money printing, the large increase in the value of Cryptocurrency units (like Bitcoin, ether), countries legalizing cryptocurrency as legal tender, are some of the factors which caused this unparalleled boom in decentralized money.

Banks cannot freeze CryptoWallet as it does with Bank Accounts. Government cannot track the transaction across the network. Users have their private and public keys, so they can self-verify the accomplishment of their transactions. The decentralized network cannot be tampered with. Since it takes at most half an hour in any cryptocurrency for transfer to funds of any value (few pennies to billions of dollars), the anxiety and chances of irregularities during that transaction period are reduced. Cross-border payment time is reduced dramatically.

People's lack of trust in dollar transactions has posed a serious threat to major financial institutions like the US Federal Reserve and the IMS. There are rumors that the CIA has been given the responsibility of destabilizing Bitcoin and other major cryptocurrencies networks. The unparalleled and uncorrelated trend between the dollar’s inflation and Bitcoin’s deflation is a matter of serious concern for the intrinsic value of the dollar. Since Cryptocurrencies are unregulated, the dollar’s value will be undermined by the large-scale transactions done in Bitcoin. People are not only buying Bitcoins as assets but also using the Bitcoin units to buy things, rather than using dollars. If the majority of market products are priced in Bitcoin and if Bitcoin’s value continues to skyrocket at the current rate, the dollar bill will soon act as security priced upon Bitcoin. Currently, Bitcoin, securities (e.g. stocks), and assets all over the world are based on dollars, which makes dollars stable (despite it being a fiat).

The propensity of such decentralized currency towards making global currency digital is not a sustainable idea unless the currency is the global currency like the dollar. Every corporate and government asset has to be valued under Cryptocurrencies, the global transaction medium should be a cryptocurrency to make the decentralized currency a sustainable mode of exchange of value. Decentralized currency is not backed by anything. Although some advocates of cryptocurrency do say that the mining cost is the backup factor for cryptocurrency, it is not approved by regulators like IMS, because mining cost is volatile as it depends upon the ever-increasing processing power of mining engines, and cryptocurrency halving. Cryptocurrencies should co-exist with dollars and other bank-issued currency. Bitcoins are assets that do not produce any value, so in the long run, Bitcoins and other cryptocurrencies cannot be embraced as the only global currency. Some sort of decentralized regulation has to be introduced to correlate dollar inflation and cryptocurrency deflation.

Decentralized money is here to stay. Although the asset value might experience some bull run, the underlying mechanism (Blockchain Technology) has immense potential to revolutionize everything ranging from data storage, money, elections, communications, and many more. Let's embrace this new technology with some regulations and let us hope that we Nepalese can soon experience the juice of decentralized internet-based transactions.

Article by Reyan Kumar Sapkota. The author plans to publish his upcoming articles also in the INSIDEOUT series, where he intends to explore finance and capital market concepts. This is the first article of the series.