Money, a tool used by Billions of people in their everyday lives. We humans use money on a daily basis to purchase clothing, food, water, accessories, pay taxes, pay our bills and for many other stuff. We have been using Money for a long time now. In 600BC, the first official currency was mined by King Alyattes of Lydia, modern day Turkey. In the 4th century BC, Aristotle pondered upon the idea of a proper currency and proposed that a currency should be Durable, Portable, Divisible, fungible, and must have intrinsic value. By the year 1661AD paper money was slowly picking up after the first bank notes were being printed in Sweden. Then in the 1960s, Diners Club launches the Credit card system. People no longer needed to hold large amounts of cash and transactions could be made Digitally. Our civilization performs efficiently and effectively with the aide of Money. The Various currencies used by the various Countries are in constant competition as to which would turn out to be dominant at the end of the day. These currencies, used by various nations such as the Dollar, the Euro, the Yen, The Rupee are called Fiat Currencies. These are backed with strong foundations and resources by Countries, to help stabilize them. Currencies are handled by the Central bank of a country. Here in India, The Reserve Bank of India takes care of issuing the Rupee to other banks and the public. They are the main monetary regulators of our Country. The currencies are issued for the public and the people earn Money by doing various jobs and duties. The public then depends on these banks to help make transactions, save their money, 2 undertake loans and aide in other ways as well. Banks have been the central authority to handle monetary movements from one entity to the other, until now. This is the dawn of the Cryptocurrencies.
The idea of a digital currency is not a new one. Many prior attempts at creating a Digital currency have taken place. But there were issues, like the double spending problem wherein a digital asset needed to be useable only once to prevent the copying of it and effectively counterfeiting it because any digital document or data sent to another person is just a copy of the original data and not the data itself. There was another problem, The Byzantine Generals Problem, wherein a consensus for the conformation of the movement of currency was not yet figured out. For over 10 years, the concept had been introduced by computer engineer Wei Dai. In 1998, he published a paper where he discussed “B-money”. He discussed the idea of a digital currency, which could be sent along a group of untraceable digital pseudonyms. That same year, another attempt by the name of BitGold was drafted by Nick Szabo. BitGold equally looked into creating a decentralized digital currency. Szabo’s idea was spurred by inefficiencies within the traditional financial system, such as requiring metal to create coins and to reduce the amount of trust needed to create transactions. While both were never officially launched, they were part of the inspiration behind Bitcoin.
The Dawn of Cryptocurrencies:
The year is 2008, a devastating market crash had occurred. The economy had faced one of the worst market crashes ever. The people were not happy with the banks cause they did not comply to their requests and demands. While this debacle was going on an unidentified person named Satoshi Nakamoto, published his White paper, “Bitcoin: A Peer-to-Peer Electronic Cash System” which specified in detail as to what a Cryptocurrency is and how it could be implemented by using a technology known as Blockchain. In 2009, Satoshi Nakamoto launches Bitcoin(BTC), which changes everything. By 2013, Bitcoin grew in value from $13 to $266 and kept on growing up to 2018, which went as high as $20000 in value. Then there was a brief downfall in 2018, which brought it down to around $4000. It picked up in 2019, valued around $10000. Analysts predict that it would grow even further. During this time many other Cryptocurrencies were launched like Ethereum(ETH), Ripple(XRP) etc.
What is a Cryptocurrency?
So what is a Cryptocurrency? Why is there so much hype? Why do Millions of people depend on it? To answer these questions we must explore as to what a cryptocurrency is and how it works. A Cryptocurrency is both a digital asset and a currency that holds value just like Fiat currencies but not issued by any Banks. The philosophy or the idea behind a cryptocurrency is for it to be decentralized. What does Decentralization mean? Firstly lets understand what banks act as. Anytime a transaction is carried out, as in one person transfers money to the other, its first checked and confirmed by a centralized authority, the bank and then the money is transferred by the bank to the other. The banks act as mediators between two or more parties. This is a centralized system. The 3 banks have the utmost power over your money and your transactions and there is a single point of failure. But in the case of Cryptocurrencies, there is no centralized authority, no banks, no governments to interfere and also eliminates the single point of failure problem. Cryptocurrencies are transferred from peer to peer or P2P, which means it moves directly from one person to the other while maintaining the utmost anonymity. The main engine for any Cryptocurrency, to work efficiently is a technology called Blockchain. Then who has control over the currency? The answer is both nobody and everybody. The public runs it. Cryptocurrencies give power to the public and people volunteer as Miners who help maintain the blockchain and to confirm transactions. These Transactions are stored and recorded at all times in the Blockchain.
What is a Blockchain?
Blockchain is a technology created by Satoshi Nakamoto. It’s an online decentralized Ledger system that stores information in successive Blocks. Each Block holds information and are Cryptographically protected using a system called Hash system. These blocks are all linked to one another. Blockchain is nothing but the use of successive Blocks, which hold information, which are all chained together. They are immutable and unhackable. If someone tries to change one older block, he/ she has to figure out the complex encryptions of 1000s of successive blocks to prevent the blockchain from breaking apart which would take immense processing power of a 100 Supercomputers. The Blockchain solves the problems occurred before, the Double spending problem and the Byzantine Generals Problem.
Who are the Miners?
Miners are people who volunteer to help maintain the blockchain. Lets consider an instance, Mr. A sends 3 BTC to Mr. B. The Miners before that compete with one another to solve a mathematical problem which would be the key to creating a new block on the Blockchain. Mr. C, Mr. D, Mr. E and Mr. F all compete in figuring out the right key to create the block. Then Mr. E figures it out and a new block is created which would store the transaction that took place between Mr. A and Mr. B. But it doesn’t end there. Mr. E is the one who has successfully created the new Block, now Mr. C, Mr. D and Mr. F, who were competing to create the block would all try to find whether the Block and the transaction has been created and recorded in the right manner and would look for any fraudulent activities and then would confirm the authenticity of the block. Mr. E receives his compensation for creating the new block.(in the case of Bitcoin, Mr. E would receive 12.5 BTC, as of 2019). The transaction is recorded onto the new block and Mr. B receives his 3 BTC. This method or algorithm used is called “Proof of Work Methodology”. This happens at the scale of Millions in the real world and the Miners have no idea as to who the other Miners are.
Solving the Double Spending and Byzantine Generals Problem:
The Blockchain, invented by Satoshi Nakamoto, solves the Double Spending problem and the Byzantine Generals problem. With the help of Blockchain, every single transaction is recorded which eliminates the Double Spending problem. What is the Byzantine Generals problem? The Byzantine Generals problem is a hypothetical 4 thought experiment about The Byzantine Army who plans to attack a city. The army is divided into 5 groups under 5 generals. Each general must decide whether to Attack or to retreat. But no one knows the real intention of the other group. What if while one attacks the other retreat or what if one follows some other tactic, which goes against the ideas of the entire army. To solve this problem a common ledger could be created wherein every information is recorded in real time and a consensus is made between the generals to take a certain action. This is how Miners come into action and perform together to meet a consensus as we discussed before.
How are Blocks chained together?
In a Blockchain, successive blocks are chained together using Cryptographic Hashes. What are Hashes? The Hashing mechanism is a method of Cryptography, wherein any given information is encrypted into a ‘hash’, which is a string of gibberish acting as a fingerprint for that data. The beautiful things about these hashes is that it cant be Decrypted back to its original information because the data is converted into a fingerprint which cannot interpret that original information. So when a new block is created, a new Hash is generated and the Hash of this new block is linked with the previous block.
For example, Satoshi has a balance of 100 coins. He sends 50 coins twice. This is how the Blocks are chained together.
Public key and Private key:
Public keys and Private keys are not foreign concepts for Cryptographers. These are two basic things; Cryptographers deal in their professional lives almost everyday. But what is a Public key and a Private key? As the name suggests, a ‘Public key’ is a key assigned which is made available for everyone via a publicly assigned repository directory. Consider a Public key in Cryptocurrencies as your Bank Account number. 5 These public keys are assigned or generated to the holders of specific Cryptocurrencies. Similarly a ‘Private key’ is a digital signature which protects your information and using which transactions are confirmed by an individual. They are not revealed to the public and remains confidential. This concept of using Public and Private keys is known as Asymmetric Cryptography.
What are Consensus Algorithms? Consensus Algorithms are various algorithms created onto a Blockchain which aides in creating a system that allows the Miners to reach a consensus between them. There are many types of consensus algorithms used. The one, which is wildly used, is “The Proof of Work” algorithm or simply PoW. The Proof of work methodology enables a system wherein the miners compete with one another to solve specific problems which would be the key to creating a new block. After one person figures out the solution, the other miners work on confirming that the new block created is a valid one.
Every groundbreaking innovation or technology has some problems. The same turns out to be in Cryptocurrencies. Previous problems before the dawn of cryptocurrencies such as the Double Spending problem and the Byzantine Generals problem have been resolved by Satoshi Nakamoto which enabled the creation of the first and the best Cryptocurrency, Bitcoin and the creation of the Blockchain technology. But there are other problems. The first problem is the “Proof of Work Algorithm” implementation. The Implementation proves to be a perfect one but the problem is that a miner would require immense processing power of powerful GPUs to help solve the mathematical problem required to create a new block. Other Consensus Algorithms like the “Proof of Stake” algorithm prove to solve that problem by implementing a different process. But the most problematic and problem with cryptocurrencies is the extreme anonymity of the users and cryptocurrency holders. The transactions and the identities of the users remain anonymous, which enables people to purchase illicit substances. In November 2013 the FBI arrested Ross William Ulbricht, the creator of a website named “Silk Road” which sold Drugs over the Darknet/Deepweb. The FBI found out 6 that many people were purchasing Drugs online using Bitcoin and its from then on alarms started going off. Governments started worrying that this could increase in the sales of Drugs online. Many regulatory frameworks have been implemented since then.
Empowering Indians using Cryptocurrencies:
As of 2019, Cryptocurrencies were banned in India, which have been lifted by 2020. Dealing with cryptocurrencies could land a person in prison for a significant period of time. Cryptocurrencies are being used by Millions of people all around the world who live in a free Country. In India, people are required to be educated about cryptocurrencies and the impactful it could be. Using Cryptocurrencies, the people can be empowered to make significant differences to the society and its proven from time to time that it does help the economy as a whole.
How Cryptocurrencies could impact a Society? Cryptocurrencies, when implemented bring utmost value to society and to the ones who do not have the basic privileges.
- Send Aid without corruption: Cryptocurrencies prove to be useful during crisis situations. Corruptions by governments, on-the-ground providers and even nonprofits prevents required amounts of aid from reaching to the right people who have dire requirements. Even in the most volatile situations, Money could be sent directly to the people in need and help them buy the necessary resources. The level of crisis is reduced with the help of cryptocurrencies. Organizations like “Givecrypto” aid during crisis situations to send money and resources directly to intermediaries and tracking receipt. In 2017 the World Food Program supported more than 10,000 Syrian refugees with digital currency vouchers to trade at selected markets in Jordan, successfully transferring $1.4M and eliminating corruption.
- Economic identity and banking: Cryptocurrencies could be used to provide a financial identity to the 40% of adults who are unbanked. These 2 billion adults cite barriers such as fees, distance to banks, lack of necessary documentation and also not having enough assets to warrant an account. To reduce poverty, everyone needs to be included Financially, by allowing people to manage savings, receive loans and build credit. Companies like Philippines-based Coins and USbased BanQu are using blockchain technology to help the unbanked by creating financial alternatives in an efficient, transparent and scalable manner.
- Saving Money: Due to high inflation, many people in Developing and underdeveloped Countries find it hard to maintain long term savings. In many countries that follow a dictatorship regime, people find it hard to protect their assets from 7 been seized by the corrupt government, if money is stored in local financial institutions. In the case of Cryptocurrencies, centralized authority is not required and these corrupt local institutions could be avoided. This could prove to be useful to countries like Venezuela, who have been facing hyperinflation which went up to 5000% in 2017.
In order to introduce Cryptocurrencies into the lives of Millions of people who do not have access to financial institutions, they are required to be educated about the functioning of cryptocurrencies must be provided with the right training using various tools to help empower them and enabling them to make decisions on their own. We here in India could empower the people, who do not have access to financial institutions by providing them a good training on as to what cryptocurrencies are and how they could be useful to them.
Lets take the recent Kerala floods for example. On 16th August 2018, severe floods had affected the south Indian state of Kerala. It was one of the worst floods, India had ever seen. Almost every district of Kerala was placed on red alert. According to reports, one sixth of population residing in Kerala was affected. During this debacle, The Government of Kerala started a donation website for flood victims. As of 30th August 2018 about $350 million was collected from various sources. In all of this, many people did not receive direct monetary help and a big chunk of it remained with the government. In such cases, Cryptocurrencies could step in and provide aid to the ones who have a dire requirement for it. Using Cryptocurrencies, Money could have been sent directly to the people and to the leaders which could have solved problems in a more faster way.
How India could regulate Cryptocurrencies?
The pressing concern of the Indian government is the illegal use of Cryptocurrencies. Tracking monetary transactions in Cryptocurrencies is almost impossible. Cryptocurrencies have adopted extreme pseudonymity and that basically is the whole philosophy about it. But if the Indian government is afraid of things being too lose, they could implement various other strategies to not let things go out of hand. The “United States Virtual Currency law”, is a law drafted by the United States government to regulate Cryptocurrencies. The “Commodities Futures Trading Commission” has deemed Cryptocurrencies as commodities. Similarly the “Securities and Exchange Commission” SEC has made it necessary to register and Cryptocurrencies traded in the U.S. if it is classified as a ‘security’ and of any trading platform that meets the definition of an exchange. Similar laws could be implemented in India by “The Reserve bank of India”, RBI and the “Securities and Exchange Board of India”, SEBI. The government could even link the Aadhar cards with the ‘Public keys’ of the Indians who hold various Cryptocurrencies and use basic tracking software to track for illicit activities. Many legal frameworks could be applied to regulate Cryptocurrencies in India.
The Power of the New Economy:
Since the dawn of the Cryptocurrencies, Millions of people have adopted and prefer Cryptocurrencies over fiat currencies. It’s a liberating experience and people feel more empowered while using them. As of December 2018, almost 32 million 8 Bitcoin(BTC) wallets had been set up globally. The Ethereum(ETH) network has processed a total of over 353 million transactions to date. That’s an increase of over 100 million transactions since June 1 (up from 240 million total transactions). On January 4th, the network processed 1.3 million transactions in 24 hours, the most in a single day ever. Since June 1, the average number of daily transactions has been roughly 610,000. There are nearly 49 Million addresses on the Ethereum Blockchain. Ripple(XRP) is now being integrated in Organizations and carry out financial transactions. And then there are many other Cryptocurrencies used by Millions of people.
More and more people prefer to use cryptocurrencies rather then trusting in Financial Institutions. Each day, millions of people deal in cryptocurrencies all around the world. This is the new Economic revolution. A paradigm shift has occurred wherein the need of Financial institutions are removed. The dependence on banks are no longer required where the processes could be automated and the authority is given to the general public. People buy land, food, real estate, clothing etc. using Bitcoin today.
Value of Cryptocurrencies:
Cryptocurrencies start holding value after an ICO. An Initial Coin Offering or simply ICO is method of launching and funding Cryptocurrencies. It works almost exactly like an IPO(Initial Public Offering). ICOs are held only for Cryptocurrencies wherein an initial price is set and the public decides as to how much they are willing to pay for one Coin. This is how Cryptocurrencies get their initial value. People can trade with Cryptocurrencies just like trading in Forex.
Launching a Basic Cryptocurrency:
Anyone with a good programming knowledge could launch their own cryptocurrency. One can launch a cryptocurrency by themselves without creating a new Blockchain. A cryptocurrency can be deployed using the Ethereum Blockchain. For that we have to understand as to how different The Ethereum Blockchain is from the rest of the blockchains.
i. Working with the Ethereum Platform:
The Ethereum Blockchain created by Vitalik Buterin was launched in July 2015, which took the world by storm because of its higher functionality. The Ethereum Blockchain acts not just a ledger system for its cryptocurrency, but also as a platform to launch “Decentralized Applications” and “Smart Contracts”. The Ethereum Blockchain platform integrates a “Turing complete” programming language called Solidity, using which; developers could create Decentralized Applications (dApps) and Smart contracts. One must also take into account that Blockchains are immutable, wherein once it’s launched, it can never be altered or updated. Same is the case for the Ethereum Blockchain platform.
ii.Solidity code for a basic Cryptocurrency:
A simple cryptocurrency implemented and deployed over the Ethereum Blockchain using Solidity, the programming language…
The file extension of a solidity file is ‘.sol’. From the above code, any person with technical knowledge would understand as to how the cryptocurrency would function. This can be developed using the ‘remix ide’, which can be found online. In the next papers, a detailed exploration of the Technical side of creating a Cryptocurrency and a basic Blockchain would be done. One must learn the Solidity programming language to deploy a smart contract on the Ethereum Blockchain. The Cryptocurrency — ‘RathCoin’ created above represents a “Smart contract” on the Ethereum platform. And the before launching the above Cryptocurrency on the Ethereum blockchain, one must have significant Ethers(ETH) to launch the Smart Contract. Launching a smart 11 contract is not free and u need to pay a very low transaction fee of 0.000996 ETH which is about 0.206599 USD. For testing purposes one can use “Metamask” web tool, select the “Rinkeby Test Network”, collect Ethers from various faucets online and then launch the Cryptocurrency on that Test network. After this the number of Tokens or coins must be entered.
We have discussed in detail about the basics of what Cryptocurrencies are and how they function. We started with the history of currencies and how money has been influencing our civilization for Millennia. We then explored the history of Cryptocurrencies, as to how the idea originated and the efforts put in by many people for 10 years to create a fully functioning Cryptocurrency. Following the history of Cryptocurrencies, we learnt what Cryptocurrencies are, the requirement of a new technology called Blockchain and many other components such as the various algorithms that make up a Cryptocurrency. We understood who the miners are and how they help maintain a Blockchain. Subsequently, we looked into the various issues/problems Cryptocurrencies have which causes some hindrances. We then got to see as to how Cryptocurrencies prove to be useful for many Countries in many significant ways and also the problems it could solve for Indians. Towards the end we explore the launching of Cryptocurrencies and how anyone could launch a basic Cryptocurrency on their own over the Ethereum blockchain using its own ‘TuringComplete’ programming language, Solidity. Cryptocurrencies could enable people to be empowered and also bring significant change to our society.
1. Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, https://bitcoin.org/bitcoin.pdf, 2008
2. Vitalik Buterin, Gavin Wood, Joseph Lubin, “Ethereum: A next generation Smart Contract & Decentralization application platform”, https://whitepaperdatabase.com/ethereum-eth-whitepaper, 2014
3. Rebecca Burn-Callander, “The history of money: from barter to bitcoin”, https://www.telegraph.co.uk/finance/businessclub/money/11174013/Thehistory-of-money-from-barter-to-bitcoin.html?source=post_page, 2014
4. Ezra Klein, Joe Posner, Christian Slater, “Explained — episode 5 — Cryptocurrency”, Netflix, 2018
5. The Guardian, “Kerala Floods: death toll rises to at least 324 as rescue effort continues”, https://www.theguardian.com/world/2018/aug/17/kerala-floodsdeath-toll-rescue-effort-india, 2018
6. Preetish Panda, “Cryptocurrencies can boost India’s digital ambitions”, https://thenextweb.com/contributors/2018/03/04/cryptocurrencies-can-boostindias-digital-ambitions-heres/, 2018
7. T.K Arun, E.T Bureau, “Why India shouls not outlaw Cryptocurrencies”, https://economictimes.indiatimes.com/news/economy/policy/why-indiashould-not-outlaw-cryptocurrencies/articleshow/69933164.cms?from=mdr, 2019
8. Wikipedia, “Virtual currency law in the United States”, https://en.wikipedia.org/wiki/Virtual_currency_law_in_the_United_States
9. Rahul Shrivastava, India Today, “Govt committee recommends ban on cryptocurrency in India”, 2019