23.4 C
New York
Saturday, July 13, 2024

The Intricate Mechanisms behind Cryptocurrency

BusinessThe Intricate Mechanisms behind Cryptocurrency

Recently, amidst currency value depreciation, Bitcoin, one of the most popular cryptocurrencies, is emerging as “digital gold.” If we look at the role of gold in the evolution of the financial system so far, we can understand the true value of Bitcoin as digital gold more accurately.

Going deeper into cryptocurrencies using blockchain technology, Bitcoin stores data in a distributed manner. It doesn’t confine transaction records to a single server but stores them distributed across multiple computers. 

In the case of Bitcoin, it is stored in about 10,000 distributed devices worldwide, making it difficult to hack. At least 50% of the computers must be hacked, making it arithmetically impossible to hack and manipulate data. 

The people who provide the performance of 10,000 computers can’t provide it for free, so Bitcoin is a reward given to 10,000 nodes for electricity, graphics card equipment costs, etc. Blockchain is a block created in a virtual space, and the transaction records we exchange are contained in the block. 

One block contains 1 megabyte, that is, 1500 to 2000 transaction records, and if more transactions occur, they are stored in the next block.

The basic principle that currently moves the economy is Keynesianism, also known as modified capitalism. Keynesianism, which emphasizes an active government role, has become mainstream in the 20th-century economy, as it was a key principle in President Roosevelt’s New Deal policy after experiencing two World Wars and the Great Depression of the 1920s. 

Starting with the abolition of the gold standard triggered by World War I, the gold and silver currency system, which was a stumbling block to free currency issuance, gradually lost its power. 

The Bretton Woods system, the last bastion of the gold-based currency system, also ended with the Nixon shock in 1971. Now, people have no objection to leaving 100% of the currency issuance right to the discretion of the government. 

Also, we do not find it strange that the currency does not preserve value in a situation where the currency value (based on the Bank of Korea’s M2 (broad money) growth rate) is diluted from 3% to 15% every year. 

We think of currency as a medium of exchange, even though currency needs three functions: value preservation, exchange medium, and unit of value measurement.

Economists before Keynesianism focused on the essence of money. William Stanley Jevons, a 19th-century British economist, divided the process of a thing becoming money into four stages: collectibles, value storage means, exchange medium, and unit of value measurement. 

When a thing interacts with humans and rises to the unit of value measurement, it finally becomes “money.” 

In this light, gold, which was used as currency from the birth of human civilization until the early 20th century, played a role as the anchor of world finance for a long time because it interacted organically with our economic activities and was relatively scarce. 

However, modern people do not feel the relevance of the financial system and gold. After the gold exchange system was abolished by the Nixon shock in 1971, the central banks of each country reduced the role of gold, and 5,000 years of history disappeared in 50 years.

Bitcoin was designed to preserve the monetary aspect of gold’s physical properties and supplement the lacking parts. First of all, Bitcoin is superior to gold in that it implements the physical properties required for currency function performance, such as durability, divisibility, homogeneity, substitutability, and scarcity, in the digital space using encryption technology. 

Also, Bitcoin is a digital asset that exists in a permissionless network that does not depend on intermediaries, so it can also trade more efficiently than gold. In terms of scarcity, unlike the supply of gold, which increases with the rise in gold prices, the amount of Bitcoin mining is fixed at 21 million, regardless of price movement. Therefore, Bitcoin is digital gold.

Check out our other content

Check out other categories:

Most Popular Articles