GS 3 – SCIENCE AND TECHNOLOGY
Context:
By 2025, millions globally (including in India) are investing in cryptocurrencies. Several firms even accept crypto payments. However, experts caution that without understanding the technology behind crypto, investments may amount to speculative gambling rather than informed investing.
What is Cryptocurrency?
- Nature:
- Purely digital; cannot be seen or touched.
- Stored in virtual wallets.
- Uses cryptography for securing transactions.
- Decentralisation:
- Not issued or regulated by central banks (RBI, SEBI, or any government).
- Operates via a network of nodes (computers) verifying and recording transactions.
- Key Feature: Eliminates intermediaries → direct, secure, transparent transactions.
Blockchain – The Backbone of Cryptocurrency
- Concept: A digital public ledger comparable to:
- Traditional Ledger: Sequential, page-linked accounts book.
- Google Sheet: Shared access across the globe, transparent and non-editable.
- Structure:
- Each “page” = Block (set of transactions).
- Each block is sealed, time-stamped, and linked to the next using a unique hash.
- This creates a permanent, tamper-proof chain of blocks → hence Blockchain.
- Access & Transparency:
- Everyone in the network can view entries and add new transactions.
- No one can erase or alter past records.
How Blockchain Transactions Work
- Example: Ram sends a coin to Shyam → transaction recorded in the block.
- Shyam sends the same coin to Nitish → added to the same block.
- Once block fills, it is sealed → linked to the next block via hash.
- Each new entry updates the ledger across the network (like a shared sheet).
- Result: Decentralised, transparent, secure system without central banks.
Why This Matters for Investors
- Cryptocurrencies work without a “driver” (central bank).
- The foundation of value and trust lies in blockchain validation.
- Investors must know how coins are created and validated (mining/consensus mechanisms) before treating crypto as an investment.
- Without knowledge, it is gambling, not investing.