With the recent explosion in the interest in Bitcoins and the attendant smaller coins, there are several misgivings that surround the evolution and future of the Digital Currency System (DCS). This article is a semi-scholarly attempt to dispel some of those myths. It is semi-scholarly from the stand point that it addresses some of the underlying technical principles, and simultaneously tries to make it informative for a lay person. The article first describes a brief history of the modern banking system, followed by some of the technical details of the digital currency operation, such as, block chain, mining, and currency exchanges. The objective here is to provide sufficient information such that it fosters interest in the reader to reach out to Platinum Trading Institute (PTI) mentors for further edification.
1.0 The Modern Currency System (MCS):
The bartering system for services and goods seem to have come to an end simultaneously in India and Greece, circa 600 BCE with the introduction of stamped metal coins. Middle east also saw the use of silver and silver coins in and around the first century A.D. with gradual evolution into the first paper currencies introduced by Chinese in the 7th century A.D. In a further evolutionary cycle, the current Modern Banking System was developed in Genoa, when Casa di Giorgio founded the first bank to repay the Genoa’s debts to its eight most powerful speculators, who had loaned enormous amount of monies to the City. Since then, the banking system has evolved into the behemoth – that we know today.
The success of the MCS is rooted in what is called the fractional system of banking, where a local or the sovereign bank controls the flow of monies through fractional lending. This process, in general pumps monies into the economy – fueling the business engine of the community, nation, or the world. The primary disadvantages of the MCS are:
- It is a centralized system, where the Reserve Bank or a Sovereign Entity of a country controls the flow of monies,
- That entity may decide to take out monies from the circulation, for example, India’s recent decision to demonetize large currency bills overnight, and
- Sometimes, the ‘Value” of a Nation’s currency is pegged to artificial bench marks like Gold, or US dollar.
2.0 The Digital Currency System (DCS):
In contrast to MCS, the DCS is NOT controlled nor dependent on any local or sovereign entity. On the other hand, the DCS depends on a series of computers, a complex algorithm originally conceived by a scientist Hitoshi, data miners, and an intricate coin identification system to affect a digital transaction. The process is succinctly described by the following chart.
The chart introduces several new terms that are explained here. Once a Peer to Peer (P2P) transaction occurs, it is done through a client account – which is protected by a virtual wallet, or a private key and a public key generated to protect the digital assets. Next, the request is transferred to the Bitcoin network, where the users in the network – the miners – pick up the request for processing. The miners are typically large computer processing units that churn out the complex ‘Hitoshi Algorithm’ to generate the coin (Bitcoin), which is packaged in to data blocks. The mining process is extremely computer power intensive, and often requires energy usage that may equal a small city’s daily power requirement. Thus, mining though can be done by anyone – it is practically not feasible for without deep pockets. Next, the data blocks are assigned a randomly generated header, which is matched by a miner with a nonce. The nonce is a 32-bit Bitcoin field that contains several leading zeros, which eventually gets a hash. This is a unique alpha numeric code set at a value below a pre-targeted difficulty level. Eventually, each hash, thus generated, verified, and accepted by the Bitcoin network is rewarded with bitcoins. A critical feature of this process is that the hash values are next appended to the subsequent block’s header, thus generating a Block Chain. These Bitcoins are then either sold to or sold by Digital Currency Exchanges, who are Market Makers in the Digital Currency – just like any equities sold in the open financial markets.
The Block Chain is an interesting concept. It is a revolutionary technology that is finding its way into many segments of the economy. Conceivably, all future transactions, record keeping, and record swapping will be based on the Block Chain Technology. A prime advantage of this technology is the fact that no one person or an entity has a control of ALL your financial, personal, or medical records. All the information is distributed over hundreds – if not thousands of computers – making the “hacking” virtually impossible. Think of it as your health history consisting of hundreds of tests, medications etc. being distributed among the computers residing in the offices of a dozen or so doctors. No one specialty doctor has access to the information from the other doctor – unless permitted by you. Thus, the Block Chain Technology driven DCS is safe, impervious to hacking, and insulated from the vagaries of decisions made by any given sovereign bank and/or entity.
Evidently, understanding the DCS operation is difficult, and often overwhelming. That is the reason, why at Platinum Trading Institute (PTI), we have crypto traders and mentors who are eager to help you navigate through basic understanding of the crypto currencies and Digital Currency System. And, in fact this is the best time to learn cryptocurrency trading, as it is in the infancy stage and offers ample opportunities for some spectacular gains. Our aim at PTI is to provide you with sufficient basic information, such that, you will NOT be intimidated by the terms like Hitoshi Algorithm, data blocks, or nonce or a hash.