To understand cryptocurrency we first need to understand what exactly is currency? Currency is just a limited entries in a database no one can change without fulfilling specific conditions. Now the difference between the cryptocurrency is that there is no physical form of the currency it is a digital asset designed to use as a medium of exchange. Development of the cryptocurrency starts in 90’s but was not feasible due to double spending problem which was not solved until Satoshi Nakamoto releases bitcoin which uses blockchain to avoid the double spending. And rest follows, as a result, there are hundreds of cryptocurrency flooding the market. Most of the cryptocurrencies like bitcoin, ether, bitecoin uses blockchain as the underlying technology while some like iota use tangle.
Let’s understand what exactly Blockchain is and how it is used to eliminate double spending. To realize digital cash you need a payment network with accounts, balances, and transaction. That‘s easy to understand. One major problem every payment network has to solve is to prevent the so-called double spending: to prevent that one entity spends the same amount twice. Usually, this is done by a central server who keeps record about the balances. But in a decentralized network, you don‘t have this server. So you need every single entity of the network to do this job. Every peer in the network needs to have a list with all transactions to check if future transactions are valid or an attempt to double spend. If the peers of the network disagree about only one single, minor balance, everything is broken. They need an absolute consensus.
So how you can get bitcoins or ethers etc? There are 2 ways first is to exchange it with you currency like we do with any foreign currency and gets the current value eg: if we exchange $10(USD) to INR we would get around Rs. 650 similarly for 1BTC(bitcoin) we will get around $3700(USD). Another way is to be a miner. Who is a miner you ask? Principally everybody can be a miner. Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent one ruling party from abusing it. Imagine someone creates thousands of peers and spreads forged transactions. The system would break immediately.
So, Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task. In fact, they have to find a hash – a product of a cryptographic function – that connects the new block with its predecessor. This is called the Proof of Work. In Bitcoin, it is based on the SHA 256 Hash algorithm.
You don‘t need to understand details about SHA 256. It‘s only important you know that it can be the basis of a cryptologic puzzle the miners compete to solve. After finding a solution, a miner can build a block and add it to the blockchain. As an incentive, he has the right to add a so-called coinbase transaction that gives him a specific number of Bitcoins. This is the only way to create valid Bitcoins.
Bitcoins can only be created if miners solve a cryptographic puzzle. Since the difficulty of this puzzle increases the amount of computer power the whole miner’s invest, there is only a specific amount of cryptocurrency token that can be created in a given amount of time. This is part of the consensus no peer in the network can break.
We all know the “Digital India” initiative of Indian government and push towards digital transactions is quite eminent. But to truly embrace the digital transactions government has implied to build a centralized cryptocurrency which may be named Lakshmi after the name of Indian goddess of prosperity. According to many economists this is the step many countries will take and physical form of currency or “hard cash” will be quite minimal or even not present in the future. This would make the life of commoners quite easy as well as the authorities to keep in check black money as all the transactions will directly go to the database.
