This is the first part of a 3 part module on cryptocurrency. The other two parts will be published accordingly.
The hype is real. Every day you hear about Bitcoin, Etherium, and many more. Do you wonder what are these? Why is everyone talking about it? It becomes even more difficult for people with non-tech backgrounds. Well, not to worry, you are at the right place. This blog will help kickstart your crypto journey!!
What is Cryptocurrency?
In layman’s terms, Cryptocurrency is a medium of exchange.
Do you know money? Obviously, you do. Money is a medium of exchange as well. So, is crypto similar to money? NO. What makes it different is that it doesn’t exist physically. It is a digital currency. Note: Digital and virtual currencies are two very different things. Crypto exists in the digital world. It functions almost similarly to money and is a form of payment that can be exchanged online for goods and services. But, what the hell it actually is? It’s really a set of data, secured by cryptography (the science of encoding and decoding information) – that’s why it’s called “cryptocurrency.
This data is nothing but answers to many different complex mathematical equations that are humanly impossible to solve and are thus solved by computers i.e processors. Didn’t understand? No worries. Let’s try a more simple explanation. See, the digital world is based on the foundation of data. Most of the processes that are going on in the world wide web are directly or indirectly connected to managing data. This data can be your name, phone number, an article on evolution, the pic you liked, your shopping wishlist. Anything, literally anything. The processing power needed to find the correct way to manage this data is provided by huge servers and computers. These computers have to find the best way out of a billion ways to make the transaction(Exchange of data). For this, we can say some amount of work is done by these computers or machines. And we all know work is never done for free. This work done is then said to be equivalent to what you know as cryptocurrencies. This is the concept behind the first and most famous cryptocurrency, Bitcoin. It works on the principle of ‘Proof of Work’ i.e POW. I’ll discuss it in depth in the next part of this crypto module.
Well, there are many pros and cons on why we should or shouldn’t invest in it. I’ll highlight a few important ones.
When data is encoded, the information is converted from one form to another, less discernible form, and is then decoded – or reverted – back to its original form by the end-user. This complex process eliminates the possibilities of double spending and counterfeiting, thus reinforcing the security of using cryptocurrency to pay for things. In a way, cryptocurrency works like a secure, cloud-based filing system, much like Dropbox or Google Drive. Cryptocurrencies work using a technology called the blockchain. Blockchain is a decentralized technology spread across many computers that manage and records transactions. Part of the appeal of this technology is its security.
Decentralization – It’s not a regulated entity.
When I say not regulated I mean it is not controlled by a third party or an organization/government. The money which we earn, where is it coming from. The governments and large banks enjoy the privilege of making and circulating money. This is centralization. When a central agency is responsible for circulation and manufacturing. There can be 100 books written on how big financial institutions, governments, etc manage, manipulate and regulate money according to their wishes. However, crypto is a ‘by the user, for the user’. It is not controlled by any agency or organization. By decentralizing, cryptocurrency avoids interactions with third-party servers and government agencies, which often engage in mass data collection and allow potential control of an individual’s access to funds. This lack of affiliation with a government or banking system allows transactions to be processed anonymously, which some users consider a notable benefit. If you are wondering how decentralization is achieved, here’s your answer. It doesn’t physically exist and what doesn’t exist can’t be regulated. Simple.
Nothing is perfect and god knows crypto isn’t too. There are certain risks involved as well. A. Operates beyond government oversight B. Doesn’t exist physically C. Volatile in nature.
I’ll talk about these risks in detail in part 2 of this module soon to be published.
Agenda for Part 2 –
- Risks involved.
- What is POW i.e proof of work?
- How the concept of POW is moving crypto away from decentralization?
- How to invest.