There’s a dizzying amount of information out there and some of it is really complex and esoteric. Here’s a straightforward guide from the perspective of a complete crypto novice: what is it and what’s the point?
The first modern cryptocurrency has been around since 2009, and it essentially involves solving a set of mathematical equations to generate a unit of currency. Solving these equations uses quite a lot of computational effort and the different types of cryptocurrency, like Bitcoin and Ethereum, are solved in different ways. There are some other key differences when compared to traditional currency, which is controlled by various banks, and you need to be very careful that you don’t lose access to your digital wallet. In theory anyone can generate this currency, or you can buy it using conventional money. Cryptocurrency is the only way to buy a non-fungible token (NFT), which is a kind of status symbol. There are also some wider implications for society about climate change and the value it adds to our lives.
There are two different mechanisms to prove that you have solved the equations. Bitcoin uses a mechanism called proof of work where an individual has to prove that they have put the computational effort into solving the equations, and it takes a lot of effort to solve them. This creates a competition to be the first to solve a particular set of equations. Other cryptocurrencies like Ethereum use something called proof of stake, where individuals can pledge to produce a certain amount of cryptocurrency. An individual is then randomly chosen to solve the cryptographic equations. Proof of work requires more computational effort than proof of stake because the equations can be more difficult to solve, and because individuals aren’t competing against each other to solve the same set of equations. Instead each individual is solving the equations assigned to them.
Once there is proof that the equations have been solved, this is recorded in a publicly available ledger which is stored on the decentralised network. This is known as blockchain: transactions or blocks are recorded sequentially i.e. a block is added to a chain.
Crypto versus central banks
Instead of relying on central banks to ‘print’ more money, anyone can generate…