Blockchain technology, used by the first cryptocurrency, has become popular and has changed how we view the world. It is becoming increasingly popular.
It is still not clear if Satoshi Nakamoto is a single individual or a group, as the conceptualization and development of a cryptographic digital currency remain unknown to date.
The idea of verifying and authenticating each transaction on a decentralized financial network without the need for a trusted third party while maintaining the anonymity of the users and the transparency of transactions has mass appeal.
Today, based on blockchain technology, several developers have created alternate coins, or altcoins, after being inspired by Bitcoin.
Why are Cryptocurrencies so Popular?
Each transaction is recorded and time-stamped like a ledger, similar to books or accounts. Every transaction is recorded in the form of cryptographic records that are spread across the decentralized financial network.
As we mentioned earlier, all cryptocurrencies work on blockchain technology, which has its fair share of advantages and limitations.
Blockchain technology has four distinct advantages compared to traditional transfer of funds, as observed in traditional financial institutions, and they are as follows:
Decentralization: Compared to traditional financial institutions, where each transaction is monitored by a third party like the central bank, The decentralized network eliminates trusted third parties while maintaining trust in the network.
The fact that each transaction is replicated over the network, verifying and authenticating it, makes it completely immune to any distortion in the actual transaction. Each transaction cannot be manipulated while comparing it with a trusted third party that can do so.
Users’ anonymity: every crypto user is provided with two keys, one private and the other public. You receive cryptos through a private key, while a public key is used to send cryptos to others. These keys are alphanumeric. Thus, when someone trades cryptos on the decentralized financial, or DeFi, network, these transactions are recorded on nodes.
The identity of the crypto user can be traced if you know their private keys, public keys, or both. Thus, the identity of the crypto users is assured, while the transactions carried out by them are for public viewing.
Consensus Mechanism: Instead of each transaction being authenticated and verified by a single trusted third party, the DeFi network allows several ‘nodes’ to do the job as each transaction is replicated on these ‘nodes.’
So if someone manipulates a single transaction, they can easily be detected.
Execution: Blockchain technology is based on a complicated algorithm, a complicated puzzle that needs to be solved. If certain conditions are met, then the transaction gets completed and is recorded in a block. As new transactions again go through these complicated algorithms, they get recorded in a block, forming a chain, thus the blockchain technology.
Similar to a coin having two sides, one positive and the other negative, cryptos also exhibit these qualities. Although cryptos are only a decade old, they still have to go to great lengths to make them one of the most successful financial assets.
Although blockchain allows peer-to-peer interactions, eliminating a centralized, trusted third party where new transactions are added to the existing database, there are some shortfalls observed.
Since it is based on technology, it has certain limitations that can undermine its advantages. Thus, you need to sacrifice certain aspects while developing crypto to make it successful in certain matters.
Scalability: The speed of transactions in cryptos is called scalability. If the block size of the cryptography is large, more security parameters can be incorporated. However, the time for transactions also increases. And if it is small, the transactions are quick, while it can be an easy target for cyber threats.
Ethereum was created to solve the tethering problems that Bitcoin faces. The transaction from proof-of-work to proof-of-stake is quite evident. Bitcoin uses proof-of-work to verify and authenticate transactions, while Ethereum uses proof-of-stake to do the same.
Security: as we mentioned earlier, the larger the block, the more added features can be added compared to a smaller one, which allows faster transactions at the cost of security.
Hackers have always tried to exploit the loopholes in blockchain technology. In 2014, Mt. Gox, the first and largest crypto exchange, was hacked, and hackers managed to steal 850,000 bitcoins, amounting to a loss of 467 million US dollars. In 2016, Dao, the largest crowdfunding platform, lost 75 million US dollars to a cyberattack. These are among a few cyberattacks perpetrated by hackers on a large scale.
Privacy Issues: As we mentioned, the privacy of a crypto user is assured as both the private keys and the public keys use alphanumeric addresses. However, the identity of the crypto user can be traced if you know the private key, the public key, or both.
Since each transaction is open to the public, the identity of the crypto user can be traced. Thus, the safety feature that allows the anonymity of crypto users gets exposed if you know these keys.
Energy Consumption: Crypto Mining uses a lot of energy, both for verifying and authenticating the crypto and for literally mining it. Cryptography is based on complicated computer codes and algorithms, and the computing power used by these mining rigs requires a lot of energy. Thus, such activities are not eco-friendly.
However, the President of El Salvador has come up with an innovative idea as he proposes the first Bitcoin City. The energy required for Bitcoin mining would be harnessed through a thermal generator placed near volcanoes. Thus, harnessing abundant, free, eco-friendly thermal energy reduces overall carbon emissions, which have a negative effect.
Ethical Limitations of Cryptocurrency
Users Privacy: As mentioned earlier, if any one of the keys of a crypto user is known, it can reveal the user’s identity.
Regulations and Law: As cryptocurrency becomes more popular, it has been in the news for all sorts of negative reasons. Scammers and hackers are out there to rip off crypto users through scams and fraudulent activities. The crypto industry is unregulated, even though the crypto exchanges need to be regulated.
Since cryptocurrency is popular and mostly adopted by Western countries, such scams and fraudulent activities cost a lot of money, amounting to billions of dollars lost to these scams and frauds.
These advanced countries are trying to regulate cryptocurrencies to prevent their citizens from falling victim to such scams and frauds.
As the popularity of cryptocurrency increases, many prominent financial institutions like BlackRock are showing active interest in it. The demand for cryptocurrency, which offers immense potential for returns on investments, has forced these institutes to take a closer look and comply with the growing demands of their clients to add cryptocurrency to their portfolios.
Thus, the blockchain has immense potential, and we have just scratched the surface of it.