Evolution of methods of payments

● Barter system

People used to exchange one type of Goods and Services with another type of Goods and Services. 

Problems:

1. No common measure of value was there. It was difficult to decide that how many Apples would be enough for buying 1cow.

2. Seller and buyer needed to coordinate with their respective Goods and Services. For example, if one needs a cow and has surplus apples, they need someone in need of apples and cows in excess.

3. Transportation could be difficult. One may not be able to carry the good everywhere.

● Commodity money:

A valuable commodity is used physically to exchange goods. The commodity holds its value even after it's melted down. For example, People started minting coins made of various metals like Copper, Silver and Gold.

Problems:

1. Metals can be heavy to transport.

2. Carrying Gold coins can be unsafe for your well-being. Anyone could rob or even murder you for this expensive metal.

3. Uncertainty about purity of the metal.

● Commodity backed money:

Commodity is not exchanged directly. In simple words, govt asked its people to keep their Gold safe with them, in exchange of which, govt issues receipts in the form of notes. Also called Gold Standard system.

Problem: Govt can't print money according to its wish. It's limited to the amount of gold it holds.

● Fiat Money:

The currency is the legal tender. Fiat literally means "an order". Here, govt, by its decree or order, guarantees the value of the money. For example, in India, money issued by RBI is considered as the liability of the central bank, that's why the Governor promises the holder of the particular currency note to pay the amount of money printed on the note. Fiat currency consists of notes or base metal coin. It can also be used in the form of bank balances or records of credit card transactions.

Problems:

1. Control is only with the central authority like the government. It can anytime devalue the notes to zero. For example, Demonetisation in 2016.Digital transactions performed with the help of UPI or digital wallet can solve this problem to an

extent. If our money is lying with the bank and we are only transacting virtually, we are little at

risk with value of physical notes going down to zero.

2. Govt can print any amount of money as we have seen in Venezuela or Zimbabwe. This can cause too high inflation in the country. People of Zimbabwe were seen going with a cart full of notes to buy a loaf of bread.

3. Security of data: Data is the new oil. Digital platforms have loads of financial data

of millions of users that can be misused by them. Anyone can hack into their

systems and sell the data in the dark web also.

4. No 24/7 access to money.

5. One has to spend money and time to deposit or withdraw money to or from the

banks.

6. Limits on amount transacted.

7. Too much paperwork.

8. Slow international transactions.

9. The ultimate problem of having a central authority to control all of the money in

the economy:

a. There is little transparency. The owner of the money has no control over how the bank decides to use their money. It can make ill informed decisions and mislend hard-earned money of its clients. It leads to losing

thousands of crores of money. To rescue the bank and poor citizens, govt

can again print more money and cause inflation.

b. Also, govt having the supreme control can anytime ask for the details of financial records and launch investigation into the activities of the users.

Future of the money:

Cryptocurrency: It's a digital or virtual currency that is secured by cryptography. With the help

of technology like Blockchain, it decentralises the money.

There exist more than 4000 cryptocurrencies today. Bitcoin(BTC) can be called the biggest of

them with 1 bitcoin having worth more than 43lakh rupees today. Other cryptocurrencies would be Ethereum, Tether, Monero etc.

Why so valuable?

Rarity makes Gold valuable. There is limited amount of Gold in the whole world. Similarly, there

are only 21M Bitcoins to be mined. These are expected to be mined by 2140.

What's cryptography?

It is the method of encryption and decryption to secure the communication from third parties

with ill intentions. For example, BTC system uses the SHA-256 algorithm for its transactions.

What's Blockchain?

Blockchain is a system of recording information in a way that makes it difficult or impossible to

change, hack, or cheat the system. It involves adding the transactions, after validating acrossmultiple computers on the Internet, into a digital ledger or container called block and creating a chain of blocks. It contains every single piece of information of every bitcoin transaction.

Data is not stored at a central location. Every new block update is reflected across all the

systems on the network.

It was created by the unknown persons behind the online cash currency bitcoin, under the

pseudonym of Satoshi Nakamoto in 2008.

How does one obtain cryptocurrencies?

1. Accepting the cryptocurrency as form of payment by selling the goods.

2. Exchange of cryptocurrencies with traditional form of money. Means, one buys

cryptocurrency through an exchange platform.

3. By mining, one can earn cryptocurrency without having to put down money for it.

After receiving, one can store it in a digital wallet or on one's computer also.

What to do with cryptocurrencies?

One can use these to sell and purchase just like the real money.

It can also be called cash of the Internet since a high amount of online transactions tske place in

cryptocurrency.

How does a transaction happen?

The process needs the transaction details like whom to send the currency to and how much

Like the transactions on a UPI platform, say PayTM, it uses a public key of the user, similar to

the UPI ID or QR Code. It can be shared with everyone involved in the transaction.

Another key is the private key or digital signature like the UPI Pin or password that is

confidential to the user.

With the help of Blockchain technology, the information is sent to multiple computers across the network for verification. After approval, block is added to the chain and no alteration in the chain is possible now.

Advantages:

1. All information is public and transparent w/o revealing the identities of buyers and

sellers.

2. Money is decentralised. No one entity has control over the monetary system. The value

is strictly decided by the law of supply and demand. The owner decides where the

money goes, not the govt or banks.

3. Anonymity is maintained. Freedom for anyone to use. No need for a PAN card or other

IDs. No one authority can track the transactions because no identity of user is known.

4. Highly secure. Blockchain makes it nearly impossible to counterfeit or double-spend.

5. It's a global currency to invest in. Anyone, anywhere can hold any value.

6. No transaction costs or wastage of time.

7. 24/7 access to the cryptocurrency owned.8. No limits on purchase or withdrawal. 9. Fast international transactions.

Disadvantages:

1. Concern regarding illegal activities because of lack of identity.

2. Lack of regulation.

3. It's not too common in our country. Little flexibility as of now since not many business platforms accept it as mode of payment.

Above problems can be solved once the government brings policies in place since the popularity of cryptocurrencies is increasing. Many countries have made it legal already. It has also found supporters in the likes of Bill Gates and Elon Musk. The power of cryptocurrencies lies in its security and decentralised nature and with the help of Blockchain can prove to be the next big thing.