Cryptocurrency in a nutshell

Cryptocurrency has been quite a bit in news articles lately especially with regards to how how it must be regulated. So what exactly is cryptocurrency? Several definitions describe it as a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions. I particularly like how crisply Stephen Colbert puts it - "It is gold for nerds". Yet another comparison is made to casino chips - you need to exchange real currency for them.

Technically, the idea of virtual peer-to-peer currency was kindled decades ago, but really came into being in 2008, when bitcoin was conceived. Bitcoin can be thought of as a computer file stored in a 'digital wallet' app on a smartphone or computer. People can send Bitcoins to your digital wallet, and you can send Bitcoins to other people. They can be bought using 'real' money. Similarly you can sell things and let people pay you with Bitcoins. The flow is nicely illustrated in the figure below.

Bitcoin transactions are recorded in a public ledger called the blockchain. This helps in tracing the history of bitcoins so that people do not spend coins they do not own. In particular blockchain is a specific type of database that stores data in blocks that are chained together. All the new data which comes in is entered into a fresh block, and when the block is filled with data, it is chained onto the previous block. Blockchain mainly stores the data of all the bitcoins transactions made.

So how exactly are these transactions verified ? We have a group of folks called cryptocurrency miners who are competing against other people with high-powered computers to solve complex math equations. These equations are a product of the encryption designed to protect transaction data on the digital ledger. The miners may provide a proof-of-work or proof-of-stake depending on the model used for verification. The figure nicely illustrates the difference between these two verification methods.

A natural question which comes to mind is how should these currencies be valued ? It all depends upon how quickly block chain technology is adopted and how quickly merchants are willing to accept cryptocurrencies as a form of payment. Yet another aspect which decides their valuation is the take of the government on whether to consider these as a legal form of cash or to ban them in entirety.

Just as regular money bills can have the problem of authenticity i.e. are they legit or fake, so is the case with cryptocurrency. One has to be very vigilant to avoid falling for fake scams out there. Some of the scams include:

• Fake websites: These look like legit cryptocurrency trading sites. Always carefully examine the domain name of the hosting site before executing any transaction on it.
• Romantic scams: These use online dating as a means to lure people into investing in cryptocurrency. So how does this work ? Victims are typically contacted through their dating app account say on Tinder or Bumble. After the scammer gains their trust, they coax the victim to move the conversation to messaging services like Whatsapp. Face-to-face meetings are generally avoided citing the pandemic. Once the victim becomes familiar, they ask them to install fake trading applications with legitimate looking domains and customer support. A hacker even lends some money into the fake app to build trust and make the victim believe they’re real and caring. When the victim wants their money back or gets suspicious, they get locked out of the account and the hacker removes all their money from the account.
• Bad tweets and social media: Don't trust offers that come from Twitter or Facebook, especially if there seems to be an impossible result. Fake accounts are everywhere. If someone on these platforms asks for even a small amount of your cryptocurrency, it's likely you can never get it back. Just because others are replying to the offer, don't assume they aren't bots, either. You have to be extra careful.

Food for thought: What is your take on cryptocurrency a decade from now ? Will it lead to cashless transactions ? Is that a boon or bane ?