Decrypting Crypto

One of the greatest seismic events in the world of crypto currency is the recent filing for bankruptcy by the cryptocurrency exchange FTX. FTX Trading is a cryptocurrency exchange founded in 2019. It soon grew to become one of the largest crypto currency trading platforms reaching a valuation of almost $32 billion dollars[6]. In fact, in July 2021 it peaked as the “third largest cryptocurrency exchange by volume”[6] in the world, with over one million users. Despite all this, on November 11th 2022, FTX filed for bankruptcy resulting in potential loss for many of its investors . Most of us have heard this news but may not know much about the complex world of crypto. So I am going to try and explain in simple terms what a crypto currency is and the technology behind it.

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What is cryptocurrency?

Crypto-currency or ‘digital’-coins, simply put, is a digital asset that securely makes use of the block-chain technology, which was “first proposed as a research project in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with.”[1]. The very first cryptocurrency that implemented the concept of blockchain was Bitcoin, which was described in the 2008 whitepaper, titled "Bitcoin: A Peer-to-Peer Electronic Cash System, as a “peer-to-peer electronic cash system” that used a “distributed timestamp server”, to record and verify transactions. The system was designed to allow for the direct transfer of payments from one party to another without going through a centralized financial institution.

 

So what is a Blockchain and how does it work?

Blockchain is essentially a decentralized digital ledger that is shared among networks of computers. The blockchain’s main purpose is to store information electronically. Individual blocks in the chain record multiple transactions, and once a block is added to the chain, the information is considered immutable. This makes blockchain a secure and transparent way to store and transfer data, as it allows for a verifiable and auditable trail of all transactions. When a transaction is entered, the request is sent to a network of computers scattered across the world. The computers solve complicated equations to prove that the transaction was valid. Once confirmed, the transaction is put into blocks of information which is then recorded into a permanent history. After that the transaction is complete. 

 

What are the applications of Blockchain?

Blockchain is used in many sectors of the industrial world. For example, in retail where the companies use blockchain to track the movement of goods between suppliers and buyers. The media and entertainment industry use Blockchain technology to log copyright data. However, blockchain technology is most famous for its crucial role in cryptocurrency in the financial sector where this technology can be used to facilitate faster and more secure financial transactions.

 

Why am I hearing so much about crypto?

The primary reason that crypto has gained traction is due to the fact that one can buy and sell for profit. Coins are created through a process called mining. Mining involves computers solving complicated mathematical problems in order to generate the coin. 

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What gives crypto its value?

The short answer is: Supply and Demand. Bitcoin, the first cryptocurrency and the most traded, has a set maximum supply of 21 million[5]. Meaning after the 21st million coin is mined, no matter how long someone attempts to mine, you can never generate another coin. Bitcoin resembles gold in this point of view, there not much you can do with it but since we know that there is a limited supply, the demand for the coin goes up. It's important to note many other crypto currencies do not have this limit. 

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The pros and cons of crypto:

Those in favor of crypto support it because crypto offers a fast way to transfer money from one place to another. Since crypto is based on a public blockchain, you can check if any fraudulent transactions are made. However, one of the main downsides of crypto is its impact on the environment. Since crypto mining is directly tied to the efficiency of your computer, the more power you put into it, the faster you will be able to gain the rewards. “The University of Cambridge estimates that Bitcoin alone generates 132.48 terawatt-hours annually. That amount of electricity results in nearly 40 billion pounds of carbon dioxide produced by US Bitcoin mining alone.”[3] In addition, there is no central regulatory body to prevent the scammers on social media platforms from coaxing naive investors into fraudulent schemes. As there are no laws in place to protect an individual or a business from scams, crypto is often frowned upon by many in this regard.[10]

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Final thoughts 

While blockchain and cryptocurrency have the potential to revolutionize various industries and bring significant benefits, they also come with their own set of challenges. Hence it's up to all of us, individuals and organizations alike, to carefully assess the potential pros and cons of this technology as we move forward with integrating them into various aspects of our day to day life.