If you’ve not been in living in a cave for the past few years, there’s a good chance you’ve heard about Cryptocurrencies. As to remove ransomware, bribe for a digital scammer or buy illegal stuff from the darknet, people use bitcoin because it won’t show who’s buying it. Now some governments are considering giving Cryptocurrencies a legal status. Why does it have to be this important? Why is it considered a financial instrument in the first place? How did it come to being? Let’s try to understand the philosophy and mechanism behind Decentralisation and DeFi.
Currency
Since the very beginning of civilisation, trading has been a crucial part of human life. Even before currency, people used to exchange goods and services with each other and called it the Barter System. It wasn’t obviously satisfying though. Not everyone was able to get what they want with what they have. It really depended on the need of the other person. One day, Jack, who was a vegetarian, came to the marketplace with a basket of apples. Rose was also there with some fish she baited. She really wanted to get some apples. But when she came to Jack and offered her trade, he refused to take the fish as the price. Now Rose has to find someone who possesses something vegan and needs fish all before Jack sells off his apples. What a complicated world! Imagine going to the street and making a dozen trades just to buy some fruits. That won’t be very sweet. Fortunately for us, some ancient kingdoms in China had begun to trade with coins and gold as their price which eventually led to the formation of modern currency. Now we don’t have to worry about the needs of others. Get rich and voila.
Centralisation
Even though the currency is a reliable solution for almost all of our financial needs, it all depends on the stability of the reserve, regulating the creation and circulation of money. Banks and Governments are the ones in control here. They’re not obviously able to determine the value of the currency as they wish, but it is said that it could be manipulated by suppressing information about the economy. We are bound to do all financial deals through these middlemen and under regulations. This obviously provides great security to the transaction, yet again we are captivated under the morals of a foreign brain which might not always work well. What if we’re living under a dictator who doesn’t support basic human rights. What if the government decided to ban some service that is nothing but good for humanity. What if the authorities go nuts and do things based on religious prophecy? This is where you’ll have to come up with your own solutions.
It is easy not to build things by yourself. People tend to rely on ready-made objects rather than creating them themselves, which is perfectly natural. But sometimes, blindly following the system will not end as we expect. We’ve seen people suffocating under constitutions filled with chaos. Dictators and corrupt government officials are poisoning their education systems. Even the news doesn’t go without getting filtered. Finance, Education, Information and everything else is controlled by the authorities. If the universities in India were making the right research before publishing the syllabus every year, we wouldn’t have to learn Visual Basic and Oracle DB just to forget after the exam. They don’t bother and we are not able to make them. This is why tech people are raging with the whole concept of decentralisation, which puts the control back in our hands.
Decentralisation
There’s no perfect solution for solving all these problems. But adding a little more transparency in the system may help us understand the deals better. Being able to see what’s happening inside will definitely help us make less biased decisions. And the awareness that everyone is watching, will make the system cautious from being corrupt. There are many tools, created on this philosophy, that we can use in everyday life for sharing information, having conversations or even sending money. Peer-to-peer technologies are getting the attention of tech people more than ever. With the emergence of BitTorrent, people started using p2p applications even without knowing it. More people are coming to these technologies because it brings more freedom.
DeFi – Decentralised Finance
The first thing that might come to mind when we hear about decentralised financing is bitcoin. Big discussions are going on around Bitcoin and Cryptocurrencies nowadays. Tech giants like Tesla are investing in cryptocurrencies and people are raging to make some quick money. For some, this is just a new way of gambling. Still, the potential of cryptocurrencies is growing as you read this. Even though everyone knows about it, no one really understands what’s going on or what it really is.
There’s a lot of speculation around DeFi and bitcoin. Some believe it’s the future and some say it is just a bubble. Either way, millions of dollars are being transacted through this technology. Recently, Russia gave legal status to cryptocurrencies like bitcoin. That indicates cryptocurrencies are not going to burst anytime soon in the future. Now, why is it so important? Why is it said to be secure? How does it differ from the mainstream money reserve? Well, the answers to these questions were the reason it was built and is still growing strong.
Bitcoin – What and How
Bitcoin is one of the most popular cryptocurrencies in the world. Even though there are many people involved with it, no one actually bothers knowing about its underlying mechanisms. The reason it is so desirable is the fact that it is nearly impossible to tamper with the bitcoin network. No authority controls your transaction, yet it stands strong in terms of security.
The bitcoin system collects computers that run its code and stores the blockchain that stores the transaction ledger. Each computer in the system is called a node. Every node has its own blockchain, in which all the record of all previous payments is stored. This data gets updated every time a user makes a transaction in each node, and the system will validate the new data with each node present in the network. If some fake data comes in, if the data doesn’t match with the majority of the node’s blockchain, it won’t be added to the block. So if a hacker wants to add some fake transactions to the ledger, he’ll have to possess control over a minimum of 51% nodes in the bitcoin network, which might cost even more effort and money. So tampering with the network is considered to be impossible, thus it becomes the safest financial instrument in the digital world.
Blockchain – How it all began
Blockchain technology was introduced back in 1991 by two researchers – Stuart Haber and W. Scott Stornetta. But it wasn’t really popular until Satoshi Nakamoto – a pseudonymous person or persons – came up with a practical implementation of the technology – bitcoin.
As per Wikipedia: The blockchain was invented by a person (or group of people) using the name Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrency bitcoin. The bitcoin design has inspired other applications and blockchains that are readable by the public and are widely used by cryptocurrencies.
Blockchain – How does it work
While cryptocurrencies are gaining popularity, blockchain – the technology behind it is not as much desired by ordinary people. They tend to believe that it can only be understood by Maths nerds who graduated from MIT. Well, congratulations you don’t have to. Here we’re going to figure it out in simple English. It may seem a little complicated at first, But once you get the gist of it, all the core concepts around it are pretty simple.
A blockchain, hence the name is a chain of blocks. It is a specific type of database that stores information in blocks which are then chained together. Now, what’s a database? It’s just a way to store large amounts of data on a computer – like the details of all students in a school or all employees in a company. The main difference between a typical database and a blockchain is the way the data is structured. SQL Databases usually store data in tables just like in spreadsheets. There are NoSQL Databases like MongoDB and Redis which use different approaches in storing data. In a blockchain, the new data, coming in, is entered in a new block and once the block is filled, it is then chained onto the previous block. Thus the blockchain attains a chronological order. The data in a blockchain is immutable, so it is not possible to tamper with it.
Blockchain could be used in different ways that could be beneficial for society. A good example of that is blockchain being used as a way to record votes in a democratic election. Since the data is immutable in Blockchain, it will make it hard for fraudulent activities to occur.
Blockchain vs. Bitcoin
How is blockchain related to bitcoin? Are those the same? The goal of a blockchain is to allow data to be stored and distributed, but not edited, which is exactly what is desired for a cryptocurrency like bitcoin. In the research paper by the pseudonymous creator of bitcoin – Satoshi Nakamoto – referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” The key thing to understand here is that Bitcoin merely uses blockchain to record a ledger of payments securely and transparently.
Future of DeFi
Many people say that the future of the economy is going to be based on Decentralised Finance. Some countries are starting to accept cryptocurrencies as a legal payment method. Tatarstan, a Russian republic, has already begun researching and conducting large campaigns on cryptocurrencies and DeFi. Having seen all these with the huge investments made by companies like Tesla and Micro Strategy in bitcoin, DeFi seems to be strengthening its roots.
Meanwhile, some argue that it is just a bubble and it’s just a matter of time before it bursts. As in the equity market, cryptocurrency is not backed by any asset that provides value from the real world. So there’s a chance that crypto might collapse one day. But right now, DeFi is standing strong that it will not go away anytime soon.
Maybe it is just a bubble, maybe not. Maybe it will continue as a parallel financing system in the future. In case cryptocurrencies are going to collapse, the scope of blockchain and decentralisation is still not going to fade. The technologies behind DeFi could be revolutionary in many fields like education and communication. It has taught us the possibilities of decentralisation. Let’s hope it will be used for building a better future for humanity.