{Disruptive Technologies: Part 2}
Sabse bada Ruppaiya!
3. Bitcoin/ Cryptocurrency/ Blockchain: This hot topic has made headlines due to the news of actor Amitabh Bachchan losing his gains in investments in bitcoin within a couple of days. The gains were worth staggering $100 million but sadly vanished within days. Before discussing bitcoin, let's build up a context regarding the existence of money to understand it well.
Well, the concept of money goes back to the prehistoric era. Starting with development, all isolated tribes used to grow some grains, fruits, vegetables and had some animals. To get something which they were not capable of growing, they used to trade their resources with another tribe. The trade started having problems:
1. As the value of anything was not determinable or standardized, there used to be skepticism over the fairness of the trade.
2. Few things were not divisible and had more value. This created a compromising situation for one party. For eg., I went to get a basket of mangoes from the other party but I had a cow for exchange. Obviously, the cow cannot be divided and used.
To solve this problem, precious metals started being used as money. It was divisible and had an approximate commonly perceived value.
But again, few issues arose as problems of carrying a large amount of metal, theft etc. were becoming prominent.
Then came the old seths who deposited the precious metals in their lockers and in exchange gave a guarantee note to the depositor. That guarantee note could be exchanged with anyone. The Concept of currencies and intermediaries such as banks came into the picture from this practice. Soon, unanimously gold was accepted as the common standard for issuing money. That currency was called Gold Standard Currency as it was kept as a guarantee in the treasury of various banks issuing their own currency. At time there were thousands of small banks having their own currency
Nearly 100 years before, we lept forward and the concept of Fiat Money came into the picture. This kind of currency is guaranteed by a sovereign government and the central bank of that country.
The Rupee or dollar bill or most of such currencies are "Fiat currency". Refer to the meaning of fiat to know more.
Now, everything went fine but the inherent problem of such currencies began appearing. Few of them are:
1. The problem of intermediary's monopoly. Banks, credit card companies, payment gateways like Visa, MasterCard etc. have the power to choose whom to do business with. Poors mostly don't have the luxury of these.
2. The problem of currency fluctuation. There had been several instances where currencies went down like anything. Eg. 1997 Asian currency crisis, 2014 Russian Ruble losing value by 40 %.
3. Hyperinflation, where you can't do anything if your hard earned money loses its value. Eg. Zimbabwe had the second highest incidence of hyperinflation on record. The estimated inflation rate for Nov 2008 was 79600000000%. A person going from home had to take million to billion to trillion Zimbabwe dollars for purchasing a dozen of eggs and loaf of bread. The funnier part is that by the time he reached the market, he realized that he could only buy 4 eggs and a half loaf of bread. Such was the inflation. {It may be a little exaggeration ;)}
4. Government making populist expenditures and the honest citizens have to take the blunt. Eg. Waiver of loans, Transfer of money to accounts for kickstarting growth.
Now, to tackle this, someone named Satoshi Nakamoto {Whether he is a person or a group of people is still unknown} perfected a technology in 2009 which we call bitcoin. It is made upon blockchain platform with features of cryptocurrency. Though it is not as simple as it sounds, let's just assume everything to be the same.
Bitcoin is basically a coded application where everything is transparent. It can be used just by a smartphone. There is no need to visit any bank or link Aadhaar card to it. ;)
The transaction happens without any intermediary and is open and can be seen by anyone on the platform but the identity of the persons involved is hidden.
Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority. There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. They are in progress to be recognized as "Legal Tender" in some countries. While some have started banning them. ;)
Balances are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them.
There is a public key (like a bank account number) which serves as the address which is published to the world and to which others may send bitcoins. There is another private key (like an ATM PIN) which is meant to be a guarded secret, and only to be used to authorize Bitcoin transmissions.
The independent individuals and companies like Cloud Hashing who own the governing computing power and participate in the Bitcoin network, also known as "miners," get transaction fee and bitcoin reward given they crack the puzzle generated by the bitcoin system. This sound like a video game. :)
New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. One bitcoin is divisible to eight decimal places and this smallest unit is referred to as a Satoshi (on founder's name).
Earlier, an ordinary desktop computer sufficed for the mining process; now, to combat the difficulty level, miners must use faster hardware like Graphic Processing Units (GPUs), etc.
Currently, several companies and millions of people are starting to invest in bitcoins. Traders are accepting bitcoins. Companies are dealing with bitcoins for payments. Companies like eBay, Microsoft, Expedia etc have started accepting payments from customers as well in bitcoins. There are several wallets, and bitcoin ATMs into existence these days.
Now, the proposed benefits of bitcoins are:
1. No impact of inflation as the supply is limited {21 Million bitcoins only}
2. Can help developing countries in poverty erosion as its very simple to trade in bitcoins and has no issues with accessibility.
3. The ecosystem is sound and cannot be hacked or breached.
4. Can be used as a global currency helping easier trades and no issues of exchange.
5. No taxes on the transaction and minimum taxation charges.
Now, few problems being faced are:
1. Bitcoin is hard to understand. It took me several days to get a hold of what it is. Also, it is difficult to convince a normal person about its viability.
2. Reactionary regulations like China banning bitcoins are on the cards.
3. It is being used by the evil forces like drugs and arms dealers, terrorist organizations etc. due to its anonymity feature.
4. The bitcoin is not stable as it had started with $0 per bitcoin in 2009 to $20,000 in December 2017. In the meantime, there had been numerous hikes and crashes.
People have made fortunes investing in bitcoins and some have lost their life savings. It is being used as a speculative game where people buy sell, buy again and re-sell again like trading in penny stocks. Some people call the inflated valuation as bubble and compare it to the dot-com bubble and are sure that it will burst one day. While others are confident about its future. World market leaders are calling it a game changer.
Some quotes are :
"Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than the currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.” -Bill Gates
“I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed is a reliable e-cash.” Milton Freedman Noble Laureate Economist
In conclusion, I would say that blockchain a great idea and was developed for altruistic purposes and it has the power to change the way we transact. It is an impactful step in moving towards the global agenda of better and brighter future. But yes, there are strings attached and we have to exercise caution.
{Apologies for such a long post but the topic is extensive and I have put few bits and pieces. Also, its something which is close to my heart!}
That's it for now
Chao
Prashant
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