1.2. 0. Functions of a Blockchain
Each Central Bank has three major functions:
• Produce Money
• Release Money]
• Regulate Money
By these three activities – production, release, and regulation – a Central Bank is able to control the circulation of money in a country. Thus, fiscal policies are enacted to help Central Banks achieve this objective.
These are exactly what a Blockchain does but in a better way. Let’s explain it step by step:
1.2.1. Produce Digital Money
A Central Bank produces money by the process of printing and minting. Likewise, a blockchain produces digital money (cryptocurrency) by a process referred to as mining.
What digital mining is, its various types and how you can make money from it are discussed in Secondary SOC.
1.2.2. Release Digital Money
A Central Bank does not just release money into the society. It checks its economic indices like the inflation rate to determine how much of the printed and minted money will be released into the society.
In the same way, the blockchain does not just release its digital money into the Crypto Market, rather the digital money is released batch by batch in a specified time, and each batch is referred to as a block.
For instance, a block of Bitcoins is released after every 10 minutes by the Bitcoin Blockchain while the Ethereum blockchain releases a block of Ether every 12 seconds.
1.2.3. Regulate Digital Money
One key function of a Central Bank is to regulate the amount of money that circulates within a country. The Central Bank does this through the commercial banks, who act as the middlemen between the consumers and the Central Bank. This is the fiat banking system.
When you trade, send, or receive money, it ends up in a commercial bank, which verifies that the money is indeed authentic and not counterfeit and that the transaction is genuine. The commercial banks therefore store the details of the consumer.
A blockchain does a similar thing but in a better way. The digital money produced by the Blockchain is released to consumers. However, unlike the banking system, there is no commercial bank or any other middleman.
The crypto user deals directly with the blockchain. Thus, when you trade, send, or receive cryptocurrency, the money passes through the Blockchain for verification to be sure it is genuine and not through any middleman. This is called a Peer-to-Peer (P2P) transaction.