Finance Minister of India Nirmala Sitharaman has talked about bringing digital currency in the country in her budget speech. This digital currency of RBI will be based on blockchain technology. It will be named Central Bank Digital Currency. Prime Minister Narendra Modi says that this will give a big boost to the digital economy. This digital rupee will provide many opportunities to the fintech related sector. Let us know what is Blockchain technology. We can call Blockchain a series of different blocks, information is stored in these blocks. The purpose of using blockchain is to time stamp digital documents so that it is not possible to backdate them or tamper with them.
What is a Central Bank Digital Currency?
This will be the first of its kind virtual currency of RBI which will replace hard cash. The government has announced the release of digital rupee at a time when many private virtual currencies including Bitcoin are present in the market. CBDC will be a legal tender. There will be a backup of the country’s central bank behind this. It will be like common currency, but in digital format. In simple words, we will be able to use digital currency as our normal money, only the money will be in digital form.
What is Blockchain Technology?
Blockchain technology is a platform where not only digital currency but anything can be made digital and its record can be kept. In simple language, Blockchain is a digital ledger. Whatever transaction takes place on it, it is visible on every computer connected to the chain. It is called the backbone of cryptocurrencies. But it is used not only in cryptocurrencies but also in many other areas. It is a secure and decentralized technology which is almost impossible to hack.
How does blockchain work?
Blockchain allows digital information to be recorded and distributed. Now, Blockchain is a record of transactions that cannot be changed, deleted or destroyed. Its very trending and now Blockchain is also known as Distributed Ledger Technology (DLT). Blockchain first appeared as a research project in 1991 but was used in Bitcoin in 2009. Now it is being used for many other purposes along with cryptocurrencies.
How is it different from a database?
Blockchain and databases have a lot in common. Database is a collection of information of any system. Blockchain is also like a database. But it collects information under many categories. These groups are called blocks. These blocks are connected to many other blocks, which form a chain of data. That is why this system is called blockchain. Unlike normal databases, there is no single authority controlling blockchain. The idea behind this was that only the users would run it.
How did the name Blockchain come about?
Blockchain is made up of two words. First is Block and second is Chain. Block refers to a number of data blocks in blockchain technology. Meaning that data is kept in these blocks. Different boxes contain currency i.e. data, and they are connected to each other. A long chain of data is formed. As new data arrives, it is recorded in a new block. As the block fills up, it is appended with new data. In this way all the blocks remain connected to each other.
What is the relationship between blockchain and bitcoin?
Cryptocurrencies around the world, whether it is Bitcoin or Ethereum, all use the technology of blockchain. Does blockchain technology reduces fraud and improves efficiency? The first and most famous application based on blockchain is Bitcoin, the world’s most famous peer-to-peer digital currency. Bitcoin is created and controlled on the technology of blockchain. Unlike traditional currencies, you can transfer Bitcoin, based on blockchain technology, to anyone and anywhere without requiring permission from banks or governments.
Digital currency based on blockchain technology like Bitcoin or Ethereum does not care whether you are a human or a machine in the transaction. Based on blockchain technology, thousands of bitcoins are able to verify the validity of payments equally at the same time, hence there is no need for banks or any third-party middleman for its operation. Blocks are added to the Bitcoin blockchain every 10 minutes after being verified by Crypto miners with the help of an inbuilt Consensus Mechanism. Each entry in these blocks is secured using Cryptographic Math’s which makes it immutable.
What is the downside of blockchain?
The basic problem of blockchain technology is its control. Any central bank has complete control over the digital currency because the nature of blockchain is decentralized. In such a situation, if RBI brings digital currency in future, then it will be interesting to see what approach it adopts to maintain its privacy and monitor it. If RBI keeps its control over the data of this digital currency, then CBDC, despite being a digital currency, will be different from the basic nature of NFT, because the specialty of digital currency or cryptocurrency is that no one can control or monitor it.