Blockchain Technology: Prospects and Challenges

[op-ed snap] The age of crypto-economics

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Mains Paper 3: Science & Technology | Awareness in the fields of IT, Space, Computers, robotics, nano-technology, bio-technology

From UPSC perspective, the following things are important:

Prelims level: Attached newcards

Mains level: We have done many newscards on the bitcoins and blockchaing technology. But this newscard is somewhat different, as it discusses some unknown facts(both positive and negative) about the technology.

What is the issue?

  1. The Finance Ministry recently issued a statement warning against investing in bitcoin and other cryptocurrencies (CCs)
  2. [op-ed snap] The money trail: on the need for investor awarenesss on cryptocurrencies

What are Central Bank Digital Currency (CBDCs)?
Why are they becoming famous?

  1. The world’s top central bankers have finally realised the futility of trying to control CCs
  2. They are preparing to join them, by issuing their own Central Bank Digital Currency (CBDCs)
  3. A CBDC is a complex tool whose functionality is still being researched
  4. Main issue with CBDCs: There is one flaw endemic to any CBDC: the contradiction between the centralising tendency of a CBDC and the decentralising technology that underpins cryptocurrencies

Problem of double spending

  1. In order to be functional, a virtual currency must solve the problem of double spending
  2. Given that anything digital can be copied, how do you prevent someone from spending the same unit of currency twice?
  3. Solution: The creator of the bitcoins has solved the double spending problem by designing a decentralised ledger that bundles data about transactions into blocks, timestamps them
  4. And links each new block of transactions with the previous one in an immutable chain of blocks that are copied, authenticated, and updated continuously, and publicly
  5. This is done on thousands of computers — the blockchain

Bitcoins are inflation proof(for now)

  1. A major reason for which people find bitcoins attractive is its deflationary nature, which makes it inflation-proof
  2. Since there can only ever be 21 million bitcoins, unlike a fiat currency, it cannot suffer a loss in value due to inflation

How are cryptocurrencies different from fiat currencies?

  1. The blockchain uses economic incentives (payment in the form of bitcoins or other CCs) to motivate members of the network to do the work of validating every transaction
  2. It does away with the bank’s role as an intermediary, and this is what differentiates CCs from (the digital version of) fiat currencies

Importance of Artificial Intelligence and Internet of Things (IoT) for cryptocurrencies

  1. Two domains that would gain immensely from blockchain applications and CCs are Artificial Intelligence and Internet of Things (IoT)
  2. Since in an IoT world, thousands of devices would need to rapidly and seamlessly transact with each other in real time

The way forward

  1. Of course, as happened in the early days of the Internet, some of the claims being made about blockchain are plain silly
  2. It is true that the technology’s peer-to-peer orientation renders it more democratic
  3. Even the World Wide Web was supposed to be a decentralised, democratic space where everyone was equal.
  4. We all know how that turned out (Net Neutrality Debate in India)
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