Basics
- Blockchain recap: A digital, decentralised ledger where transactions are recorded in blocks linked sequentially.
- Verification need: Every transaction must be validated before being added to the blockchain.
- Difference from banks:
- Banks → verified by officials in a centralised system.
- Cryptos → verified by miners/validators in a decentralised network.
- Consensus mechanism: The method by which blockchain participants agree on the validity of transactions.
Relevance : GS 3(Economy – Digital Currencies , Technology – Block Chain
Consensus Mechanisms
- Proof of Work (PoW):
- Miners solve complex puzzles using computing power.
- Winner adds block + earns rewards (coins + fees).
- Secure but energy-intensive, slow, costly.
- Example: Bitcoin.
- Proof of Stake (PoS):
- Validators chosen based on how much crypto they “stake.”
- Honest validators earn fees/rewards; dishonest ones lose staked coins.
- Faster, more energy-efficient.
- Example: Ethereum (post-Merge), Solana.
- Core purpose of both: Prevent fraud, ensure security, incentivize participation.
Other Consensus Mechanisms (Emerging)
- Delegated Proof of Stake (DPoS): Voting system where stakeholders elect validators (EOS, Tron).
- Proof of Authority (PoA): Validators selected based on reputation/identity.
- Hybrid models: Combining PoW + PoS for balance of security and scalability.
Key Factors Before Investing in Cryptos
- Network security: Must have active, decentralised nodes that resist hacking.
- Transaction efficiency: Speed (TPS – transactions per second) + fees (affect usability).
- Market reputation: Coin’s history, community support, transparency of developers.
- Real-world utility: Adoption potential in payments, finance, supply chain, gaming, healthcare.
- Volatility: Prices swing dramatically; not suitable for risk-averse investors.
- Regulatory environment: Varies across countries; legal uncertainty remains a big risk.
Types of Cryptocurrencies
- Bitcoin (BTC): First, most famous; store of value (“digital gold”).
- Altcoins:
- Ethereum: Smart contracts, DeFi, NFTs.
- Solana, Cardano, Polygon: Faster transactions, scalable dApps.
- Stablecoins: Pegged to assets (e.g., USDT, USDC); reduce volatility.
- Utility tokens: Access to services (Binance Coin, Chainlink).
- Governance tokens: Voting rights in decentralised organisations (UNI, AAVE).
- Meme coins: Community/hype driven (Dogecoin, Shiba Inu).
- Sector-specific coins: Gaming (Axie Infinity), supply chain (VeChain), finance (Ripple/XRP).
Opportunities
- Wealth creation: Early adopters of BTC/ETH saw exponential gains.
- Financial inclusion: Provides access where banking infrastructure is weak.
- Innovation: Smart contracts, decentralised finance (DeFi), NFTs, tokenisation of assets.
- Portfolio diversification: Non-correlated asset, but very high risk.
Risks & Challenges
- Extreme volatility: Gains/losses can exceed 30% in days.
- Regulatory crackdowns: Uncertain legal status in India, US, EU.
- Scams & rug pulls: Many coins are hype-based, without real value.
- Environmental impact: PoW energy consumption (e.g., Bitcoin mining).
- Custody risk: Losing private keys = permanent loss of funds.
- Liquidity traps: Small coins may lack active buyers/sellers.
Takeaways
- Cryptos are more than speculation: They represent a new financial architecture (DeFi, Web3, tokenised economies).
- Long-term value likely lies in:
- Coins with real-world utility (payments, contracts, decentralised apps).
- Strong developer community + transparent governance.
- Short-term risk: High; better suited for informed, risk-tolerant investors.
- Cautionary stance: Research > Hype. Diversify. Don’t over-allocate.
- Global future: Cryptos may evolve into mainstream finance if regulation balances innovation + investor protection.
