These days, everyone is trying to understand cryptocurrency. Cryptocurrency is digital money that is designed to be secure and anonymous. Most of us would be able to recognize Bitcoin as one type of cryptocurrency. Last year, the value of Bitcoin and many other cryptocurrencies appreciated significantly, though some governments and skeptics have described some cryptocurrency offerings as a Ponzi scheme. Bitcoin was established in 2009 as the first cryptocurrency. Currently, more than 1,000 cryptocurrencies are on the market. All are based on blockchain technology. Blockchain uses distributed computers to store a record of transactions and verify new transactions, without the participation of any organization for validation.
Cryptocurrency has become a hot topic. In 2017, many investors backed cryptocurrency rather than investing in penny stocks, mutual funds or other financial instruments. We have seen many new cryptocurrencies launched in the market. Bitcoin touched U.S. $20,000 in December. Ethereum, Ripple, Dash and Litecoin are other top cryptocurrencies that moved up fast in 2017, although all have declined in value in January to date.
The technology behind cryptocurrency
Let us further examine the technology of blockchain. Is it reliable? Is it difficult to hack? Blockchain is created on distributed ledger technology, which securely records transactions across a peer-to-peer network. The blockchain technology was created by Satoshi Nakamoto for trading Bitcoin. We can now see its potential reach far beyond cryptocurrency.
A distributed ledger is a record of transactions that is shared and synchronized across many computers without centralized control. Each party owns an identical copy of the record, which is automatically updated as soon as any additions are made. In blockchain, every participant can see the data and verify or reject it using consensus algorithms. Approved data is entered in the ledger as a collection of “blocks” and stored in a sequential “chain” that cannot be altered. Bitcoin and Ethereum are based on public blockchain. Anyone can read public blockchains, send transactions to them and participate in the consensus process.
The future of cryptocurrency
In my view, public blockchains in their present form might not survive. Their future form could be controlled consensus in a private, distributed ledger network. There could be many rules in a private network, one of them being that no transaction is valid unless a minimum of four participants approve it, or a central bank like Reserve Bank of India signs for each transaction. Each participant in a private network can have a legal agreement of commitments to the other participants. This trend may force banks and governments to adopt country-specific cryptocurrency.
One enterprise software firm, R3, has come up with a distributed ledger made up of many nodes which would allow for a single, global database. This single ledger would record transactions between organizations and people. This platform might fulfill financial institutions’ dream of secure and consistent transactions.
In 2018, the cryptocurrency market will continue to grow as more capital is invested. Cryptocurrency-based funds may be launched. For scalability and performance, more platforms will be born. New regulations may surface to manage cryptocurrencies as they become part of our financial system.