Nature of Bitcoin As Next Generation Money

Nature of Bitcoin as Next Generation
Money
- Aayur Phuyal
email: [email protected]
twitter: twitter.com/aayurphuyal
Today most contemporary financial news including the budget and monetary policies around the world
are debating and streamlining Bitcoin and other cryptocurrencies. Nepal too is controlling withdrawals
from the banks in the fear that its money is gone without account to the cryptocurrency giving further
burden to its already reduced foreign reserve. The dilemma can be accessed as on the one hand the
government is prosecuting the cryptocurrency users and on the other placing a research on its possible
legalization. The use of such currency by China in some specific cities and recent budget out line of
India has given further importance to it. In the context of Nepal, we need an immediate policy on it.
Bitcoin it is a cryptocurrency made using the blockchain technology. First we need to understand the
blockchain technology to make sense of cryptocurrency. Money basically has three roles i) medium of
exchange, ii) store of value and iii) unit of account. Bitcoin checks all the three boxes. The world is
going digital and so is money. Bitcoin offers a new form of ‘digital money’ which many leaders and
nations have not been able to offer since the beginning of human civilization. The whole world
currently uses freely floating Fiat currency. It has many flaws and also lead to huge financial crisis
including in 2008. Since then, a person or a group of person going by the name Satoshi Nakamoto
pioneered the blockchain technology to successfully deploy a currency known as Bitcoin. Because a lot
of cryptography is used to develop the blockchain and deploying the digital currency, the term
cryptocurrency is used.
Cryptographer David Chaum first proposed a blockchain-like protocol in his 1982 which was further
developed by Stuart Haber and W. Scott Stornetta in the 1990s. Satoshi Nakamoto conceptualized the
first decentralized blockchain in 2008 by solving various fundamental problems faced by the
blockchain technology, hence creating the Bitcoin.
In simple terms blockchain is an advance digital ledger system where each ledger or block of data is
connect to another ledger or block of data via a chain in the decentralized network, hence the name is
‘block-chain’. This ledger system is visible to everyone participating in the network, and any changes
made to a previous ledger or block of data is visible by the public making this system more transparent.
Anyone can join the decentralized network; even with smartphone, laptop, or any other computer
which has internet connection. This happens because these ledgers or blocks of data are not stored in a
single server but are stored on the decentralized network.
In 1994, Nick Szabo, an American computer scientist proposed the concept of ‘Smart Contract’. In
2015 with the launch of the Ethereum blockchain, smart contracts became fully functional. Instead of
lawyers, the ‘smart contract’ are written by programmers using computer codes and instead of ‘rule of
law’, the ‘rule of code’ is followed. Smart contracts enables automated transactions to happen when
certain criteria is made without human intervention. Smart contracts open up new avenues for
commercial relationships and increasing range of economic activities between untrusting parties
through the blockchain network.
Till now, we have learned about the advanced digital ledger system linked with each other in a
decentralized network and about smart contracts, these two tools are fundamentals to blockchain. With
these two tools individuals, companies, enterprises and governments can create applications that run on
the blockchain network. Applications made using the blockchain platform are called decentralized
applications or dApps in short. Ethereum, Solana, Tron and Cardano are some of the most popular
blockchain platform where one can make such dApps. All of these platforms have their own native
cryptocurrency which is used to pay for the services provided by the blockchain platform. A lot of
people are only buying these cryptocurrencies and hoping its value will increase without knowing their
actual use cases.
Currently, a lot of financial dApps are launched in different blockchain platform, and are known as
Decentralized Finance (DeFi). DeFi is the movement that leverages decentralized networks to
transform old financial products into trustless and transparent protocols that run without intermediaries.
Traditional financial systems use systems of banks and intermediaries to complete a single transaction
between parties. This can take up several days and comes at a cost. A decentralized financial system is
one where transactions occur between one individual and another individual, with no middlemen. It is
governed by smart contracts, the transactions are nearly instant, almost for free and are borderless. This
poses a threat to the current banks.
Decentralized Applications (dApps) made in blockchain platform can be used in a lot of fields. The
most notable are the financial sector, payment system, supply chain logistics, health care records and
many more.
It is widely believed that free market brings innovations. Bitcoin, blockchain technology and dApps are
all products of the free market. Since, this is a newly discovered field, Central Banks and other Central
Monetary Regulators all over the world are having a hard time regulating it. The current freely floating
FIAT currency’s existence is threatened by the mere existence of Bitcoin and other cryptocurrencies.
Once the parliament creates new laws and regulations regarding this new industry, traditional banking
systems can be replaced by De-Fi. This means Central Banks and other traditional financial institutes
have to start to research and develop products in this new field. They have an upper hand in this free
market as they can integrate the newly discovered distributive ledger technology (DLT) with traditional
banking to compete with the new De-Fi institutes.
Traditional banking is shifting towards a more digital system. In doing this the newly discovered
distributive ledger technology and blockchain technology will play a huge role. The innovation of
Bitcoin paved the way for blockchain technology to emerge in the market, which the traditional
banking industry have to use. Bitcoin will bring drastic changes in the monetary system of the world
just like 'money' which replaced the barter system over the period of time. However, it looks
application of cryptocurrency in the place of money is the future, but digitally divided society,
redundancy of Central Bank's role in monetary policies, unexpected fluctuation of prices of
cryptocurrencies and some other pertinent issues need to taken care by a country like Nepal.

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