Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
SHARE:
What exactly is the future - Bitcoin or Government Digital Cash
Read more on - Polity | Economy | Schemes | S&T | Environment
- The story: In 2021, Bitcoin's value fluctuated so wildly that many wondered whether it could be the centre of the cryptocurrency utopia imagined by its rebel creators. It seems more likely now that people’s power will bow to sovereigns’ might, as sovereign digital cash appears on the horizon. They may be the FedCoin, digital euro and China’s e-CNY.
- Crazy rush: The mania that gripped decentralized cryptocurrencies heightened the attraction of the coming rivals: digital cash, issued by central banks. These tokens will be staid, centralized and state-controlled. That may be what potential users desire in an Internet of Things (IoT) world where machines need to settle claims with one another all the time, without contributing to global warming. Bitcoin is criticised as emitting too much of carbon, in the mining process, to be planet-friendly.
- Official electronic coins: These will be a new type of central bank liability alongside physical cash, though they won’t be a novel asset class. The good thing about that they may not be speculators' delight. So they may make far less onerous demands on energy resources than cryptocurrencies do.
- Since cryptocurrencies are based on blockchains, in the absence of a trusted intermediary, the “mining," or proof-of-work protocol that keeps the blockchain secure from double-spending attacks, requires hardware that consumes huge energy.
- Both Bitcoin and Ethereum consume electricity that can light up millions of households.
- How official better than crypto: The official coins using any distributed ledgers will only be held by a select group of intermediaries with the central bank’s permission. While the Bitcoin blockchain sees a race to solve puzzles faster than malicious actors, the nodes in the government coin network can lock their own funds to back legitimate transactions.
- This approach is the "proof-of-stake", and will need a fraction of the energy "proof-of-work" needs.
- Ethereum may make the switch, and the cryptocurrency Ether will replace hardware and electricity as the investment needed to secure the network. Validators will earn fees by locking up at least 32 Ether as collateral ($72,000 in May 2021). So if they misbehave, go offline or fail to do their job, the processors can lose their collateral.
- Centralisation: A central authority can run such a network better. A holder’s identity is inevitably required for verification of balances on a digital ledger. And for any coin holder, the one man who has the legal identity is the government. Central banks that aren’t constrained by how much fiat money they can create out of thin air use that flexibility to do deficit financing, by printing notes (the RBI calls it the GSAP). A “bitcoin-ized" economy can be dangerous because of finite money supply. Why? Because if you fix nominal variables, real output has to adjust to absorb any economic shocks.
- Anonymity: The idea of 'perfect anonymity of cryptocurrencies' is impractical, as it comes with high risks of money laundering and terror financing. Governments do not want to keep snooping on all online transactions, but they won’t give up their right to know who is behind all those pseudonyms when they want to. So the interest worldwide in digital cash is quite high now.
- History of Bitcoin: If cryptocurrency adoption is a headache for governments, an overwhelming popularity of digital cash could also be an issue. Banks could lose deposits should customers prefer having a direct claim on their monetary authorities. Lenders financing long-term loans with short-term market liquidity might get into trouble later. Earlier, ignoring these risks led to a point where subprime mortgage-linked banking losses had to be socialized, and that brought techno-anarchists like Satoshi Nakamoto who created a payment system based on cryptographic proof instead of trust. Bitcoin was born, in 2009. In ten years, the rising influence of blockchain technology in the traditional financial system has been spectacular. Digital cash with in-built, self-executing software code will alter the future of money in a way that cryptocurrencies never could. Tokens will win, and trust won't lose.
- Knowledge centre:
- Proof of work - Proof of Work(PoW) is the original consensus algorithm in a blockchain network. The algorithm is used to confirm the transaction and creates a new block to the chain. Instead of allowing blocks to be created freely, proof-of-work requires that CPU resources be spent on a time-consuming problem first. This process is called mining. Proof that CPU resources were spent is included in the block itself, allowing anyone to verify that work was actually done.
- Proof of stake - The Proof of Stake (PoS) concept states that a person can mine or validate block transactions according to how many coins they hold. This means that the more coins owned by a miner, the more mining power they have. It is a type of consensus mechanism used by blockchain networks to achieve distributed consensus. Proof-of-stake comes with a number of improvements to the proof-of-work system: (i) better energy efficiency – you don't need to use lots of energy mining blocks, (ii) lower barriers to entry, reduced hardware requirements, (iii) stronger immunity to centralization – proof-of-stake should lead to more nodes in the network, (iv) stronger support for shard chains.
* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your
own subscriptions. Copyrights acknowledged.
COMMENTS