The term finance underlines all activities associated with banking, debit, credit, money, investments, capital, etc. The system facilitates the exchange of products and services and uses various instruments to validate such exchanges. Cash-based or monetary assets, derivative instruments, and foreign exchanges are currently the three primary instruments. Cryptocurrency exchanges are one of the latest in the market.
Yet, despite serving billions of people every day, the global financial system suffers from significant flaws. The most prominent among them are excessive bureaucratic burdens, onerous paperwork, incompatible intermediaries, and rampant fraudulency & crime.
The system no longer serves the commoner. Instead, it is man who serves its whims.
Modernization, Decentralization & Enhanced Security Through Blockchain
According to an article in Harvard Business Review, around 45% of all financial intermediaries, such as stock exchanges, payment networks & transfer services, suffer from corruption of one form or the other. Moreover, overtly complex systems cause a gradual pile-up of regulatory charges. And, the end-user, that is, the commoner, ends up bearing the maximum brunt of it all.
The current global financial mechanism antiquat. Haphazard paper-based processes, the concentration of authority in a few hands, inefficient implementation of technologies are major handicaps. In addition, the system is excessively exclusionary, denying millions from availing even the most essential financial services or tools. The system’s flaws create unnecessary logjam and strain individuals for the simplest of things.
So, how can cryptocurrency make things better?
What Is Cryptocurrency & Blockchain?
Simply put, blockchain the digitally distributed ledger mechanism that powers the cryptocurrency system. It is the technology that powers some of the most popular cryptocurrencies, such as Bitcoin & Ethereum. From the payment platforms students use to pay for online statistics & math homework help to mass foreign exchange transactions, blockchain-powered cryptocurrency is revolutionizing everything financial.
Here’s how it transforms the financial system.
- There are three critical concepts or aspects in blockchain, namely,blocks, nodes, and miners.
- The BLOCKS:
A typical blockchain consists of multiple blocks. Each block has data; a 32-bit whole number called the nonce (number used only once) that’s randomly generated when a block is created and, in turn, generates a block header hash. The hash is a 256-bit number associated with the nonce. It starts with a large number of zeroes. When the first block in a chain create, its nonce generates a cryptographic hash. That block is then considered signed and forever tied to that nonce & hash until the block is mined.
For example, if you pay an online tutor to “write my essay” or “do my assignment,” the monetary transaction details record and stored in a block, which is then encrypted by the nonce-hash cryptographic combination.
This is one of the KEY features of blockchain and cryptocurrency technology. The intensely complicated nature of the hash-nonce combination makes it incredibly difficult to tamper with a blockchain. Generating the right combination requires a massive amount of time and computing power and crypto-mathematics keeps things secured throughout.
Miners create new blocks on the blockchain through mining. Every block in a chain has its unique nonce & hash and references to the previous block on the chain. Special mining hardware & software are necessary to generate a hash by solving highly complicated math problems. The right combination of 32-bit nonce and 256-bit hash needs to mine. Once done, the block then add to the chain.
Miners try and guess a valid nonce during multiple attempts to calculate a block hash that must meet specific requirements (i.e., starting with a certain number of zeros). Miners compete to mine a new block, and the first miner to find the valid nonce is granted the right to add the following block in the blockchain- and reward for doing so.
You will be surprise to learn that crypto data mining is pretty similar to the mining done while training AI-powered plagiarism checkers.
Nodes are the other critical concept in blockchain and the proponent behind the decentralized nature of cryptocurrency.
No single computer or organization owns any blockchain. Instead, blockchain is akin to a digital distributed ledger via all the nodes, each of which maintains a copy of the blockchain and keeps it functioning. While every node has its copy, the whole node network must approve of any newly-mined block.
Unassailable security and decentralization via network consensus are the two most prominent features enabling cryptocurrency to revolutionize the financial world.
The Future OF Finance Is Digitally Encrypted & Distributed
Better security and more autonomy & flexibility are the public demand across the world. Freedom from unnecessary red tape, high regulatory charges, and repression are what the people want. And that’s what cryptocurrency provides.
While the above section touched upon the operations of crypto and blockchain, a look at cryptocurrency’s key features and principles is necessary to understand why it is essential for the future of finance.
Each party or node in a blockchain has access to the whole database and its history. But, at the same time, no single party controls or owns the information within.
Communication occurs amongst peers without any central node or intermediary. Each node stores & forwards information to every other node.
Every transaction and its details are visible to all nodes in a blockchain. Also, every node in the chain has its unique 30+ character alphanumeric identification address. All transactions occur between these addresses.
Once any transaction has been entered in the blockchain database and a block successfully mined, the blockchain is updated. NO records can altere, and all blocks are linked to one another in the chain, making decryption next to impossible. Powerful computational algorithms and cryptographic approaches ensure everything’s permanent, secure, chronological, and available to everyone in a network.
Digital cryptography and automation ensure swift & secure operations. Everything’s tied to computational logic and the essence of programming.
The vast, global, digital ledger powering cryptocurrency is one of THE major disruptions in the world of finance today. The very fact that the idea of trust is not established by any regulatory authority such as banks or governments but by network consensus makes it more independent & secure, unlike anything before. As a result, all commercial transactions can complete without relying on intermediaries but with nigh-impenetrable security. (Remember the more than a billion nonce-hash combinations!)
The Rise Of Crypto
Economies and institution you to take notice. But, while many have been resilient and have even passed resolutions banning cryptocurrencies (China, Bolivia, Indonesia, Turkey, and Egypt), more and more actors are becoming receptive.
- A vast section of the global population has embraced cryptocurrency. Tether, Bitcoin, and Ethereum-the top-three traded bitcoins value at 88.12, 37.27, and 18.29 billion US dollars, respectively, according to Statista.com.
- The number of people who own blockchain wallets has risen to 78.85 million as of November 2021. This is up by 10 million from February 2021.
- com says that the total investment in the blockchain system and cryptocurrencies have been $8.7 million to date in 2021, including venture capital and private equities.
- The number of cryptocurrency users has increased to 200 million users from 100 million within four months, as reported by Mint.com in a 29thJuly 2021 article. Significant investments, relaxation of restrictions, and increasing popularity led to a rise in value and a subsequent increase in transactions.
All in all, cryptocurrency is a rising star and brings a fair share of promise and perils. However, threats such as their highly volatile nature, lack of intrinsic value, and the chances of technical flaws remain as causes of concern. Such risks can alleviate substantially, with more significant investments and broader acceptance, from major avenues such as MNCs (JPMorgan, Citigroup, Chase) and governments.
The opportunities to reduce friction and costs, the promise of enhanced security, and streamlined financial operations make cryptocurrency a bulwark of change, which will usher in a brighter future!
And, with that, we round up this article. Hope it an informative read for one and all.
Author-Bio: Henry Tesfaye is a mathematics teacher and occasional blockchain miner from Kentucky, the USA. He teaches maths at a public university and also at Allessaywriter.com, an online academic assistance service.