Over the evolution of humanity, the way humans conduct transactions has changed a lot.In ancient times salt was exchanged for goods and services. Now, the concept of cryptocurrency is popular. Before getting to the concept of crypto, it is important to know the major milestones of the transaction system and how they work.
- Barter: It is a system in which goods and services are exchanged for goods and services.
- Coins: Coins came into effect because some goods were challenging to retain for a long time. For example, perishable food items were difficult to keep fresh for days. The coins were made out of precious metals. Also, the circular shape was most practical because it was easier to mint and less likely to wear down unevenly.
- Paper money: The purpose of paper money was to replace a large number of coins in a transaction. It used to be backed by some amount of gold. Now, it is only backed by faith in the government!
- Checks: It is the commercial document that guarantees an authorized person is paid a certain amount.
- Cards: It began as loyalty cards where exclusive customers had access to a certain line of credit.
- Digital payments: With the development of the internet, goods, and services were sold through a new communication channel. Currently, it is possible to pay through a digital wallet or phone.
The idea of a decentralized type of currency gave birth to cryptocurrency. In simple words, it is a virtual currency that is secured by cryptography. Let us say you want to send a secret message to your friend. So, you hire a language translator. The language translator converts the message in some unknown language. Then you send the translator to your friend. The translator converts the message back to the language your friend understands. Cryptography works similarly. The data is encoded using a secret key. Both the data and the secret key is sent to the receiver for decryption.
The concept of cryptocurrency is based on blockchain, which makes it very secure. Simply, blockchain is a ledger distributed among nodes of a computer system. Let’s say you go to a concert with three of your friends. They do not have their wallet. So, you pay $50 for each of their tickets. The next day you ask them for $60. Your argument is invalid because they each have a copy of their bill. However, if you manage to change the bill to $60 for two of your friends, you can prove that your fourth friend is lying. Blockchain works similarly. All four of you have details of the transaction. If anyone wants to tamper with the transaction, they have to change the data of more than half of the network. Also, the way the blockchains are made adds security to the transaction. The data of a transaction is stored in a block. Each block is dependent or chained to the previous block unless it is the first block. Let us assume there are three data blocks A, B, and C. A is the first block, B is the second block, and C is the third block. If you change the data in block A, the chain between A and B is broken. If you change the data in B so that it matches A, the chain between B and C is broken. So, if you change any data on a block you have to change the data in all the blocks that come after it. Plus, you have to match it with your friend’s blockchain, or it will be invalid.
Although money and cryptocurrency look similar, they have a unique concept behind them. Both have their pros and cons. Both their values depend upon supply and demand. One of the major advantages of cryptocurrencies is that there is no middle man involved. It makes the transaction faster and secure. The idea behind the cryptocurrency is amazing, but it has a major flaw. The process of blockchain creation is complex. It requires very high computing power, which causes high carbon emissions and energy consumption.