Building Blocks of the New Digital World.

 

Sometimes, India leads the way in the digital World even in comparison to many first-world countries. There are numerous examples: Digital thrust for Covid Vaccination and certification, cost-effective outreach of digital payments, advanced Internet banking features. Another issue was addressed in this Budget which was not as discussed as the political speeches surrounding the election-charged atmosphere. Budget also had a focus on infrastructure and did not alter taxation giving a feeling that the government had given nothing to taxpayers. On the bright side despite the welfare policies like Grain support and free vaccinations during pandemic, there was nothing taken away from taxpayers.  

But another announcement to tax cryptocurrency income, making India the latest major country to move towards legalizing and regulating the digital asset, really acknowledges new building blocks of the new digital world. At the same time, the country will roll out its own blockchain-based currency, a digital rupee controlled by the Indian central bank, before April 2023.   Earlier Indian Government had criticized cryptocurrencies and proposed that digital coins not controlled by the government — which are all of them — should be banned. 

Now, in declaring a 30 percent flat tax on income from trading cryptocurrency and non-fungible tokens, India joins the likes of the United States, Germany, and many other countries that have given their citizens the green light to trade the digital coins, which has captivated many Indians. It will also join China as one of the few countries to experiment with its own digital coin. In 2021, India’s largest cryptocurrency trading platform, WazirX, hit 10 million users trading $43 billion worth of cryptocurrency, according to the company. There is a phenomenal increase in transactions in virtual digital assets. But this budget recognition is a clear step taken now to make further digital thrust harnessing blockchain technology. This technology, which is the building block of what they term as web3.0, can raise new possibilities in the digital era.  

Just to explain, Blockchain is distributed Information store with strong protections against data alterations and a strong control on how information is added. Each block or store points back to the previous block, that’s why it’s called Blockchain. Once Block is closed and jumbled it is immutable. In a typical proof of work Blockchain, some nodes collect data into blocks, create a hash of that data then search for data values to meet certain condition. When this condition is met the block can be added to Blockchain. Cryptocurrency is the prominent use case of Blockchain technology. EU has backed the IOTA foundation a transnational Blockchain to drive economic development. Blockchain can also be used for asset tracking and ownership information. Global business shipping network launched a blockchain to track shipping containers worldwide. Non Fungible tokens these days are used even by 12 years old users who have created great wealth. A non-fungible token (NFT) is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded. Because each token is uniquely identifiable, NFTs differ from blockchain cryptocurrencies, such as Bitcoin. But Blockchain hand in hand with IoT will open new possibilities.  The concept of the IoT involves the power of the internet to connect every imaginable device, machine, or structural component. Blockchain can be used for proof of authenticity. Academic research papers have predicted that even quantum computers won’t break the Bitcoin proof of work encryption anytime soon. Bitcoin is one of the leading cryptocurrencies. Google has set Blockchain unit. Sequoia Capital in India has invested$450 M in Polygon in India.  Softbank’s Drivewealth has taken on Coinbase for Cryptocurrency trading. Polychain and layer2 services continue to grow.  

But Indian Government should also consider the downsides of Blockchain Technology as of now.  On its flip side cryptocurrencies could facilitate money laundering and terrorism financing. Transparency of data and linked transactions are both strength and a weakness. Private Blockchains violate the original design goal of requiring a multiplicity of users to form a consensus before agreeing to transactions. They are by definition monoculture. There is also a question mark on post-quantum crypto security. Also newer, much less power-hungry, higher performance proof of stake consensus algorithms to replace proof of work is untested in the real world. A consensus algorithm is a procedure through which all the peers of the Blockchain network reach a common agreement about the present state of the distributed ledger. In this way, consensus algorithms achieve reliability in the Blockchain network and establish trust between unknown peers in a distributed computing environment. DeFi thefts crossed$10 Billion. Wormhole hack resulted in losses of $320M. Technology still is not user-friendly as found by an investor who accidentally burnt half a Million dollars sending Etherium to a convertor contract twice. 

Blockchain offers new possibilities like Decentralized Autonomous Organizations which are represented by rules encoded as a transparent computer program, controlled by the organization members. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles. Today, the explosion of Decentralized Finance (DeFi) during 2020, has led to a rise in renewed interest in DAOs. DAO’s financial transactions and rules are recorded on a blockchain. This eliminates the need to involve a third party in a financial transaction, simplifying those transactions through smart contracts. Another possibility is the government using Blockchain for Identity Proof as well as streamlining voting. Blockchain technology as well offers technology for other distributed applications by repurposing smart contract APIs for various uses in IoT, Cloud. One major factor that remains unresolved is who will bear the cost of computation, storage, and bandwidth. 

So as a matured digital economy we need to handle this bleeding-edge technology with care and we as a country have an opportunity to lead the way in a balanced manner.  We caught up with other countries on the digital penetration and the web enabled transformations. As we grew our digital infrastructure, we already have an edge over them in web2.0. Let’s hope we excel in web3 as well.