Hi everyone, this is my homework post for Professor @levycore who has delivered an excellent lecture on Blockchain and Cryptocurrency.
What is the Fundamental difference between Cryptocurrency and the conventional financial system?
Cryptocurrency is a digital currency, which has no real entity but virtual. These Cryptocurrencies are digital assets which are based on blockchain and decentralized in nature. Unlike currency used in conventional financial systems that is controlled by a central authority or Government, cryptocurrencies are not controlled by any central authority. There are some key differences between these two systems and I am going to explain them briefly below.
Decentralized system is a system in which there is no central controlling authority and cryptocurrencies are decentralized in nature. It means, user is the owner of his asset and he has absolute control over his assets.
On the other hand, in conventional financial system, funds of a person are under the control of financial institutions like Banks. So, it can be termed as Centralized system.
2. Transactions Speed.
Transaction speed in cryptocurrency is very fast and when a transaction is made between two users, it completes in matter of seconds. It does not matter that a transaction is cross border or domestic and it is completed very fastly.
In conventional financial system, there is lot of time required before the transactions are completed. In case of cross border transactions, it can take hours to complete the transaction.
3. Transaction Fees.
There is also difference in transaction fee. Transaction fee is very low in decentralized blockchains. It means in cryptocurrencies, transaction fee is low.
On the other hand, in conventional financial system, transaction fees are high as compared to decentralized system.
4. Identification of Users.
When a transaction has been completed, the parties cannot be traced in cryptocurrencies. Transaction is completed between unique addresses and real identity of the users cannot be revealed.
While in conventional financial system, user’s identification can easily be traced. KYC is the essential requirement of these institutions.
There are many other differences but for now, I have explained some basic differences.
Why is a decentralized system needed?
The following characteristics of decentralized system has got attention of the masses and due to which, in my opinion, a decentralized system is needed.
A decentralized system is deemed to be more secure as compared to other conventional financial systems. Users feel more secure while investing in such projects that are more secure and a decentralized system is very secure for the time being. People are attracted by this feature and more and more institutions are adopting these decentralized systems.
2. 24/7 operations.
There is no central authority to control decentralized systems and this is run by the users. In this context, these systems are open and work every time. Decentralized systems are operated 24/7 and that’s why more users are being attracted to this system.
3. Absolute Control.
In decentralized system, user has the absolute control over his assets unlike conventional financial system, where institute is the owner of the asset deposited with them. User has to follow the procedures to access his assets. This feature of decentralized system is also very attractive to users and this system is being adopted at large.
4. Cross border transactions.
There is no hurdle in cross border transactions and these transactions can easily be completed without any restrictions. Decentralized system is being adopted by institutions who are involved in cross-border transactions and it is very appealing to them.
What affects the value of cryptocurrencies?
Demand and supply is the main rule that is followed in order to determine the value of cryptocurrencies. When supply of any asset is more than demand, the value drops, while on the other hand, when supply is limited and the demand is more, then the value of asset increases.
Social media is also playing a vital role in affecting the value of crypto assets. Good or bad news on media can affect the value of any asset. For example, Elon Musk tweets have increased the value of Dogecoin very recently. So news can play a big rule in affecting the value of cryptocurrencies.
Whales are the biggest holders of the crypto assets. Whenever they move, they can affect the market very strongly. These whales can influence the market at any time due to the fact that they hold a huge part of the crypto assets.
Why can’t be everyone a miner?
Mining is a process where the validity of a transaction is carried out by different nodes on the network. These nodes are the miners that come to an agreement about the validity of a transaction. After validation, these transactions are recorded on the blockchain and the miner is rewarded with newly mined cryptocurrency. In this process, mining is used to create new cryptocurrency. This process requires special devices like Computer, GPUs and ASIC, that are very costly and specially programmed for mining process. These devices are very costly and not everyone can afford to purchase these devices.
Moreover, to operate these devices, too much energy is required and it is also very costly. These devices use too much energy while operating and it can be very costly.
These devices also generate heat while operating and the temperature increases. So, in order to maintain the temperature at a certain level, Air Conditioners or other cooling devices are also required and it is also very costly. Maintenance of these devices can also be very difficult.
It can be said, that to earn through mining, is a very costly process and one has to invest too much money to be able to earn. Everyone cannot afford to purchase these devices and fulfill other requirements to be able to earn through mining.
Why can cryptocurrency transactions be called more transparent?
Blockchain is a decentralized public ledger and it consists of blocks that are used to store transactions after validation by nodes on the network. When a transaction is recorded and saved in blockchain, it can easily be viewed by anyone and can be accessed by any user. Transactions are not kept hidden and can be accessed by anyone. So, it is called more transparent in this way. These transactions, once recorder, cannot be altered though but every user can view these transactions. So, it can be said that blockchain transactions are more transparent as compared to conventional financial system.
Development of Cryptocurrency in Pakistan.
Digital currencies are not considered legal in Pakistan right now by central bank. No institution has been authorized or licensed for the issuance, sale, purchase, exchange or investment in any virtual currencies or coins. It might be matter of time when it will also be allowed in Pakistan as cryptocurrencies are gaining popularity day by day.
To conclude, it can be said that it is the era of digital technology and cryptocurrency and blockchain systems are gaining popularity and institutions are planning to adopt this technology due to its features of enhanced security and transparency.
Thanks in anticipation.