Blockchain Technology and Cryptocurrencies (Bitcoin)
Science & Technology › IT, Telecommunications and Computers · Topic 14.14
A blockchain is a shared digital ledger in which records, called transactions, are grouped into blocks that are linked in a chain using cryptographic hashes, so that earlier records cannot be altered without changing all later blocks. It is kept by many computers in a network instead of one central authority, and new blocks are added by agreement among the participants through a consensus method such as proof of work or proof of stake. Bitcoin, the first cryptocurrency, was described in a 2008 paper by an unknown person or group using the name Satoshi Nakamoto, and its first block was created on 3 January 2009. Its supply is capped at 21 million coins. Ethereum, launched in 2015, added smart contracts, which are programs that run on the blockchain.
5 min read · UPSC Prelims · Science & Technology · IT, Telecommunications and Computers
At a Glance
- Bitcoin paper 2008, Satoshi Nakamoto
- First block 3 January 2009
- Bitcoin supply cap 21 million
- Smart contracts Ethereum, 2015
- India’s CBDC e-rupee pilots 2022
- Exam link UPSC Prelims, Science & Technology: IT, Telecommunications and Computers
Where Does It Fit?
This topic follows the account of cloud and big data. It looks at a way of keeping records without a central authority, which is relevant to finance, land records and supply chains, and also raises regulatory questions. Previous topic: Cloud Computing and Big Data. Next topic: Quantum Computing.
How Does a Blockchain Work?
| Feature | Explanation |
|---|---|
| Block | A group of transactions with a timestamp and a link to the previous block |
| Hash | A fixed length code made from block data by a cryptographic function. A tiny change in the data changes the hash completely |
| Chain | Each block contains the hash of the previous block, so tampering breaks the chain |
| Decentralisation | Copies of the ledger are held by many nodes, with no single owner |
| Consensus | Rules to agree on new blocks. Proof of work needs miners to solve puzzles and uses much energy. Proof of stake selects validators who lock up coins |
| Public and private blockchains | Public ones are open to anyone, as with Bitcoin. Private or permissioned ones are restricted to chosen participants and used by businesses and governments |
| Smart contract | Self-executing code stored on a blockchain that runs when set conditions are met |
What Are Cryptocurrencies and the Indian Position?
- Cryptocurrency: a digital asset that uses cryptography and a blockchain, not controlled by a central bank
- Bitcoin: the first and largest, with a fixed supply of 21 million coins and new coins created by mining
- Altcoins and stablecoins: other cryptocurrencies, and stablecoins that aim to hold a steady value linked to a currency
- Wallets and keys: a user holds a private key to control coins
- RBI 2018 circular: banned banks from dealing with crypto businesses, but the Supreme Court set it aside in March 2020 in Internet and Mobile Association of India versus RBI
- Tax: the Union Budget 2022 imposed a 30 per cent tax on income from transfer of virtual digital assets and a 1 per cent tax deducted at source from July 2022
- PMLA: in March 2023 virtual asset service providers were brought under the Prevention of Money Laundering Act
- Legal status: India has no comprehensive crypto law yet and neither bans nor recognises it as currency
What Else Should You Remember?
- Central bank digital currency: a digital form of a country’s currency issued by the central bank. The RBI began pilots of the digital rupee, or e-rupee, with a wholesale pilot in November 2022 and a retail pilot in December 2022
- Difference from crypto: a CBDC is legal tender backed by the central bank, while private cryptocurrencies are not
- Uses of blockchain: land records, supply chain tracking, certificates, trade finance and voting trials
- Indian examples: states such as Andhra Pradesh and Telangana have tested blockchain for land records and certificates
- National Blockchain Framework: a framework by MeitY for blockchain as a service, and a national strategy was published in 2021
- Energy use: Bitcoin mining consumes large amounts of electricity, and Ethereum moved to proof of stake in September 2022 to cut energy use
- Risks: price volatility, fraud, loss of keys, money laundering and use in ransomware payments, as in Ransomware Threats (Locky, Petya, WannaCry)
- Global approach: El Salvador made Bitcoin legal tender in 2021, China banned crypto trading in 2021, and the European Union adopted MiCA rules in 2023
- G20 work: India’s 2023 presidency pushed for a coordinated global approach to crypto assets
- Decentralised finance: financial services built on smart contracts without banks
- NFTs: non-fungible tokens that represent unique digital items
- Caution: rules are changing, so check the latest law and tax position
Why Does It Matter for the Exam?
- Blockchain features: hash, chain, consensus
- Bitcoin facts: 2008 paper, 21 million cap
- Indian rules: 30 per cent tax, 2020 verdict, e-rupee
- Current affairs link: crypto regulation and digital rupee
- Common errors: calling Bitcoin legal tender in India or confusing CBDC with crypto
As an analytical point, blockchain offers tamper-resistant records, but crypto assets raise risks of fraud and instability. India has taxed them heavily and developed a digital rupee, while keeping a cautious stance on private crypto.
Why Is This Topic Important?
- Technology Hash and chain
- Bitcoin Facts
- India Tax and CBDC
What Came Next?
The next topic covers quantum computing. Next topic: Quantum Computing.
Key People and Terms
- Blockchain Chain of linked blocks
- Hash Digital fingerprint
- Mining Validating blocks for reward
- Smart contract Self-executing code
- CBDC Central bank digital currency
- VDA Virtual digital asset
Exam Corner
Points to Remember
- Bitcoin white paper: 2008; first block 3 January 2009.
- Supply cap: 21 million.
- Tax on VDA income: 30%, TDS 1%.
- Supreme Court set aside RBI circular: March 2020.
- e-rupee pilots: November and December 2022.
Do Not Confuse With
- Bitcoin and blockchain One use versus the underlying technology
- Crypto and CBDC Private asset versus central bank money
- Proof of work and proof of stake Mining puzzles versus staked coins
Memory Hook
Blocks and hashes make the chain, nodes keep the copies; Bitcoin twenty-one million, India’s rupee goes digital.
Mains Angle
Questions ask for features, Bitcoin facts and Indian rules. These points help.
- Technology Decentralised ledger
- Risks Fraud and volatility
- Policy Tax and CBDC
A Question You May Face
An original practice question, not a past paper question.
“Discuss the potential uses of blockchain and the policy dilemmas posed by cryptocurrencies, with reference to India.”
How to Answer
- Technology Blocks and consensus.
- Uses Records, supply chain.
- Crypto Risks, tax.
- Way Rules, CBDC.
GS Relevance
Frequently Asked Questions
What is a blockchain?
A blockchain is a shared digital ledger in which transactions are recorded in blocks linked together by cryptographic hashes and copied across many computers. Because each block carries the hash of the previous one and the network must agree on new blocks, past records are very hard to change, which makes the system tamper-resistant without a central authority.
Who created Bitcoin?
Bitcoin was described in a paper published in October 2008 by a person or group using the name Satoshi Nakamoto, whose real identity is not known. The first block, called the genesis block, was created on 3 January 2009. The supply of Bitcoin is limited to 21 million coins, and new coins are created through mining.
Is cryptocurrency legal in India?
Cryptocurrency is neither banned nor recognised as legal tender in India. The Supreme Court in March 2020 set aside a Reserve Bank circular that barred banks from serving crypto businesses. The Government taxes income from virtual digital assets at 30 per cent with a 1 per cent tax deducted at source, and has no complete law yet.
What is a smart contract?
A smart contract is a computer program stored on a blockchain that automatically carries out the terms of an agreement when set conditions are met, without needing an intermediary. Ethereum, launched in 2015, was the first major platform for smart contracts, which are used in decentralised finance and supply chain applications.
What is the digital rupee?
The digital rupee, or e-rupee, is the central bank digital currency of India, issued by the Reserve Bank of India. It is a digital form of the rupee that is legal tender, unlike private cryptocurrencies. The RBI started a wholesale pilot in November 2022 and a retail pilot in December 2022 with selected banks.
PYQ Practice — Statement Analysis
1 The supply of Bitcoin is capped at 21 million coins.
By design.
2 A central bank digital currency is the same as Bitcoin.
It is state-issued legal tender.
3 The Supreme Court set aside the RBI's 2018 crypto circular in 2020.
In March 2020.
4 Each block in a blockchain contains the hash of the previous block.
Forming the chain.
Past Mains Questions on This Topic
This topic comes under IT, Telecommunications and Computers. UPSC Mains questions asked on the matching syllabus topic, year-wise with marks:
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