A Beginner’s Crypto FAQ
The “crypto” space is untamed but lately the controversy has been heating up. And for good reason. From presumptuously referring to crypto as Web3 to countries adopting Bitcoin to NFT insanity to nocoiners & skeptics to hacks and scams, it’s almost impossible for a beginner to understand, let alone trust, anything they read about crypto.
Here is my feeble attempt to cut through the BS and provide a practical basis for when you are bombarded with diametrically opposed claims about crypto.
What is a Currency?
What is a Cryptocurrency?
What is a Crypto Token?
What is a Non-Fungible Token (NFT)?
What is a Smart Contract?
What is Web3?
What is a Crypto Wallet?
What is a Crypto Exchange?
Should I Invest in Crypto?
Can Crypto Tokens Just Be Copied and Pasted?
Do Crypto Tokens Have Anything “Real” Backing Them?
Are Crypto Tokens Just “Artificial” Scarcity?
Does Crypto Keep My Transactions Private?
Is Crypto a Bubble That’s About To Burst?
How Much Power Do Blockchains Use?
Do I Lose My Crypto if the Power Goes Out?
Why Are There So Many Crypto Hacks?
Why Are There So Many Scams in Crypto?
Are There Any Good Things in Crypto?
What is a Currency?
Currency is a medium of exchange for goods and services. In short, it’s money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment. Currency is the primary medium of exchange in the modern world, having long ago replaced bartering as a means of trading goods and services. [Investopedia]
This might seem obvious but it’s worth stating before defining Cryptocurrency.
What is a Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology — a distributed ledger enforced by a disparate network of computers. [Investopedia]
Investopedia’s definition of “cryptocurrency”, which does a great job of characterizing how people typically use the term, leads to a lot of confusion! It says “many cryptocurrencies” which implies that many cryptocurrencies exist.
But there are not “many cryptocurrencies” that meet the definition of a currency. In fact there are very few.
How many “cryptocurrencies” are you aware of that are generally accepted at face value as a method of payment for goods and services? It’s subjective but I would argue Bitcoin (BTC), maybe Ethereum (ETH), and a few stablecoins (USDC, USDT, etc…). Even those are limited in where they’re accepted for goods and services.
Bitcoin, for example, is well established as a method of payment. You can find lists of businesses that accept Bitcoin on SpendMeNot, ICOHolder, 99Bitcoins, Cointelegraph, and many more websites. In El Salvador, where Bitcoin is legal tender, I easily bought food, drinks, gifts, and other goods with Bitcoin. I even got cash (USD) from a Chivo ATM by sending it Bitcoin from my phone. It’s hard to argue that Bitcoin isn’t generally accepted as a payment method.
When people talk about investing in cryptocurrency they are often not talking about currency at all. They are just talking about tokens.
This is an important distinction because being a generally accepted method of payment implies there is sustainable demand for the token as a currency. Just being used as a medium of exchange is a valuable service in itself.
What is a Crypto Token?
The term crypto token refers to a special virtual currency token or how cryptocurrencies are denominated. These tokens represent fungible and tradable assets or utilities that reside on their own blockchains. [Investopedia]
Like the cryptocurrency definition above, this definition of “token” is a source of confusion and in my opinion partially wrong. If we adhere to the definition of a currency, which we should, then most crypto tokens are not currencies. We shouldn’t call a token a “special virtual currency” if it’s not a currency!
A crypto token is any tradable asset implemented with public-key cryptography. In today’s context we can usually assume the token is fungible and on a blockchain.
The term “crypto token” is broader than the term “cryptocurrency”. Cryptocurrencies are tokens. Crypto tokens can look and act like cryptocurrencies but if they are not a generally accepted method of payment in a sizable and diverse ecosystem (like Bitcoin, for example) then they are not a currency.
Crypto tokens might only be useful for a specific purpose such as being essential to a valuable application or granting rights to govern a project. These are called utility tokens. Crypto tokens (of which there are many thousands) are far more numerous than cryptocurrencies (of which there are very few). Anyone can create a new crypto token.
This is an important distinction because a token’s value is determined by its usefulness (demand) and its scarcity (supply). If it doesn’t have value by virtue of being adopted as a currency or being a utility token then it might not have any value at all. Some non-currency tokens have a legitimate use and a sufficiently limited supply, and hence value. Others might be what we call Ponzi schemes.
What is a Non-Fungible Token (NFT)?
Non-fungible tokens (NFTs) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can serve as a medium for commercial transactions. [Investopedia]
An NFT is a token that represents something unique, as opposed to regular crypto tokens which are fungible. “Fungible” is just a fun way of saying that all instances of a token are considered identical or interchangeable, like a commodity. NFT’s are not interchangeable. NFT’s are more like paintings, baseball cards, tickets to a concert, or real estate.
NFT’s are effectively digital deeds that prove you own something. They can be bought and sold like traditional deeds or certificates of ownership.
An NFT is a proof of ownership of something, rather than the thing itself. While NFTs today are commonly used to prove ownership of digital art, the NFT is not the art itself. It’s a certificate of ownership that proves you own the art.
A regular NFT has only one owner. A “fractional NFT” can have more than one owner.
What is a Smart Contract?
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. [Investopedia]
Investopedia’s definition is pretty good but smart contracts aren’t just limited to agreements between buyers and sellers. More generally, they are agreements between multiple parties that result in the the exchange of value — usually tokens. Smart contracts can execute to completion immediately or they can store value (in the form of tokens) and finish executing at some point in the future — for example, an escrow contract.
Most smart contracts run on Ethereum but there are many Ethereum-compatible blockchains that can also run “EVM” smart contracts, as well as smart contract platforms that aren’t Ethereum-compatible such as Solana, Cardano, and Polkadot. You can even run Ethereum smart contracts on Bitcoin with RSK.
What is Web3?
Web3 is the web we all know and love with the addition of smart contracts which are built on blockchain technology. Your Web3 wallet is your identity. You don’t need permission from anyone to use it (such as Google, Amazon, or Twitter). Smart contracts provide a way for you to do business and exchange value with others across the internet directly, without needing a trusted intermediary (such as a bank, broker, or government). Read more here.
The term Web3 is misleading. Many think the “3” in Web3 is a product version implying it outright replaces Web2, making Web2 obsolete like the next iPhone does to the previous model. In reality it’s more like the next big layer on the web. Web3 is built on Web2 just like Web2 is built on the original Web (the World Wide Web). We still use the original Web today. Web3 doesn’t replace Web2. Web3 augments Web2 by adding smart contracts on top of it. [Yours Truly]
“Web3” and “crypto” are often used interchangeably. There is no official definition for either term but “Web3” tends to be used more when referring to the internet of applications built with smart contracts whereas “crypto” tends to be used more in reference to buying, selling, and trading crypto tokens.
What is a Crypto Wallet?
Crypto wallets keep your private keys — the passwords that give you access to your cryptocurrencies — safe and accessible, allowing you to send and receive cryptocurrencies like Bitcoin and Ethereum. [Coinbase]
The term “crypto wallet” is confusing because is makes you think of a real wallet that you put money in. A crypto wallet, on the other hand, is your identity on Web3. It’s more like your Google login or Twitter handle than an actual wallet.
Crypto/Web3 wallets use digital signatures based on public key cryptography to prove your identity. Your private key is stored securely in your wallet and is like your password. You must protect it.
Never ever share your private key (your seed phrase). No honest person will ever ask you for your seed phrase.
Your public key is used to create your crypto “address”, which is is your identity — your name on the blockchain. This address is like an email address, username, or bank account number. You share it with others so they can send you stuff.
Wallets are either “custodial” or “non-custodial” which is determined by who holds the private key. If your wallet is entirely controlled and self-hosted by you, as with MetaMask, Trezor, or Ledger then it’s a non-custodial wallet. If your wallet is on an exchange such as Coinbase or Kraken then they have custody of your private key so it’s a custodial wallet.
If you use a custodial wallet that means you’re trusting an intermediary (the exchange) to hold your assets and you must ensure you really do trust them. You probably wouldn’t send all your money to a bank on the other side of the world that isn’t accountable to you or your government so you probably don’t want to send all your crypto assets to an exchange like that either.
Many of the benefits of crypto and Web3 are lost if you use a custodial wallet. It’s considered better practice to store your crypto assets in a non-custodial wallet. But you must make sure you have your private key securely backed up. Often this means writing it on paper and storing the paper in a secure place.
What is a Crypto Exchange?
A crypto exchange is a platform for buying and selling cryptocurrencies. Some crypto exchanges offer a variety of products and services, while others exist purely for buying and selling digital assets. You should consider your individual financial goals and risk tolerance when making decisions about which exchange to use. [Gemini]
Exchanges are where you trade crypto assets. Some exchanges also allow you to trade traditional money like US Dollars for crypto assets.
Exchanges are either “centralized” (CEX) or “decentralized” (DEX) which is determined by where they exist. Decentralized exchanges are actually smart contracts that exist on the blockchain. Centralized exchanges are traditional tech companies that you can send your crypto assets to and exchange them off the blockchain. When you send assets to a CEX they go into a custodial wallet on that exchange whereas DEXs allow you exchange assets on-chain, directly from your non-custodial wallet.
Should I Invest in Crypto?
Trick question. You don’t just invest in crypto. Crypto is digital asset class with a staggering variety of tokens that you can buy. And new tokens are popping up all the time. When you buy tokens you are buying specific tokens not “crypto” in general. There can be crypto index funds but they have downsides and they aren’t what people are typically buying.
There is a huge difference between buying Bitcoin, which is established as a currency in multiple markets, and buying a little-known token that’s being promoted by your favorite celebrity or YouTuber. It’s similar to the difference between buying Apple stock and being an angel investor for a startup in a garage somewhere in another country.
There is a possibility of making bigger gains with the startup but there is also a much higher chance of losing everything you invest.
Additional risk is introduced because you probably don’t know who the people behind the token are, or whether they’re acting in good faith. At least when you invest in a garage startup in your own city you know where they live. With most crypto tokens you have no recourse at all if it turns out they are unethical. And too many of them actually are unethical! It’s an unregulated global market. It attracts a lot of scammers.
If you aren’t willing and able to protect yourself then you’re likely to lose. If you aren’t sure then you probably aren’t able.
[This is not investment advice]
But if you’re going to buy crypto as an investment then you should do so with the same caution you use with any other investment. The fact that Bitcoin (BTC), Ethereum (ETH) and a few tens of other large-market-cap tokens have done very well since they started does not mean that other tokens will too. It’s far more likely most of the smaller tokens won’t survive.
Yes, you can buy crypto tokens as an investment. But if you’re going to do it, do it wisely. Know what you’re buying. Read the project’s white paper thoroughly and critically. Understand the token’s utility and why there will be sustained demand for it. Understand its tokenomics. Look for audits of the smart contract code by reputable auditing firms. Observe the team operating in public. Then make a decision whether you think it’s a good investment, keeping in mind that even after all your due diligence it still might fail because startups often fail.
Don’t buy crypto tokens because a celebrity or social media influencer told you to. They’re acting in their own self-interest. Don’t buy crypto tokens you don’t understand because you’re afraid of missing out on the next Bitcoin or Ethereum. If you don’t understand them then you have no reason to believe they’ll make it. Don’t ever forget that a token you don’t understand might have little or no real value, and it might be a scam.
[/This is not investment advice]
Can Crypto Tokens Just Be Copied and Pasted?
No, not in any way that would impact their value. A misleading/uninformed criticism of crypto tokens is that they can be replicated with copy and paste like other digital data. In reality, only the token holder can prove ownership of a token because only they have the private key which is necessary to digitally sign for it.
It is easy to create a new kind of token, which is an entirely separate asset. But when a new company is listed on the NASDAQ it doesn’t dilute the value of Apple. Litecoin was a modified copy (called a “fork”) of Bitcoin and Dogecoin was a fork of Litecoin. Neither of these “copies” diluted the value of Bitcoin any more than a new currency in another country dilutes the value of the US Dollar.
Ethereum has made the process of creating new kinds of tokens even easier by managing them within smart contracts on Ethereum instead of having to create a whole new blockchain. But Bitcoin’s limited supply (scarcity) and continued demand (use as a payment method with market adoption) are what make it more valuable and those copies less valuable (or, for some, not valuable at all).
NFTs are like digital deeds. Proving ownership of digital art has been their biggest use case so far. It’s easy to copy/paste or screenshot the digital art but that has nothing to do with the NFT. The NFT is a certificate of ownership of the art, granted by its creator. The art (image file) can be copied but the NFT can’t be copied or transferred without the consent of the owner. NFTs do not enforce copyright but they could be used to demonstrate ownership in a copyright lawsuit.
The NFT art craze is not about copyright and preventing people from making copies. It’s about status. An NFT is the digital equivalent to owning the original of a painting. Reprints can look identical to the original but they don’t have the same value. I can take a high-resolution photo of an original painting with my iPhone and enjoy its beauty for free but I haven’t taken anything away from the original owner. NFTs are a secure mechanism to prove ownership of something with your digital signature. They’re not the thing itself. They’re just digital deeds.
You may disagree with the actual value of digital art NFTs or crypto tokens. You can argue that they are currently overvalued due to hype. But saying that they can just be copied and pasted is nonsense.
When someone tells you crypto tokens can just be copied and pasted, kindly ask them to copy and paste a Bitcoin, an Ether, or an NFT, and then sell it on an exchange. If they can’t then you have your answer.
Do Crypto Tokens Have Anything “Real” Backing Them?
It depends entirely on which token. Bitcoin, a cryptocurrency (it meets the definition of a currency), has value because it’s been sufficiently adopted as a payment method and a non-inflationary store of value. Utility tokens have value because they are essential to a valuable protocol or service that drives demand for them. NFTs have value because they prove ownership of a collectible or grant rights to do something. Some tokens, unfortunately, have no sustainable value and are a Ponzi scheme.
Crypto critics argue that tokens have nothing “real” behind them because they are virtual, and as a result they are fake or a scam. But you can’t make that argument about crypto tokens in general. It depends on the token. If the token is widely used as a currency then it inherently has something real behind it — it’s value as a medium of exchange. If the token is essential to a revenue-generating protocol or service then it’s backed by the protocol or service much like a stock’s value is backed by the company. If the token represents ownership in a painting then it’s backed by the reputation of the artist who created it.
Tokens that don’t have anything real behind them are created by unethical people and promoted as scams. But that says nothing about legitimate tokens that have real-world use and sufficiently limited supply.
Are Crypto Tokens Just “Artificial” Scarcity?
Yes but with a caveat. Typically when we think of artificial scarcity, it is enforced by a company or a government. Crypto tokens create artificial scarcity that is enforced automatically by the decentralized blockchain network. When a company or government creates artificial scarcity they can unilaterally increase the supply. Blockchains such as Bitcoin are designed to make it incredibly difficult, effectively impossible, for anyone to unilaterally increase the supply. The supply is limited by the protocol.
Regardless of whether the scarcity is artificial, it is effective and reliable. The supply of a token is defined by its tokenomics. For Bitcoin, changing the rate of new coin creation would require consensus and action by a very large portion of the decentralized Bitcoin network. It’s far easier for the US Central Reserve to increase the supply of US Dollars, as we are reminded year after year when prices of goods go up.
When criticizing crypto tokens for “artificial scarcity”, keep in mind that many products we use every day are also sold on the basis of artificial scarcity. Some examples are software and entertainment (copyright), pharmaceuticals and technology (patents), news and commentary (paywalls), jewelry and clothing (luxury goods), and the US Dollar (fiat currency). Virtual or information-based assets are typically sold on the basis of artificial scarcity. This isn’t a new or sinister concept.
On the contrary, crypto tokens’ artificial scarcity is based on hard math and enforced by a decentralized network so it’s far more reliable than artificial scarcity created by companies and governments who can unilaterally increase the supply to their own benefit.
Be careful though. Some crypto tokens are designed so that one person or a small group can unilaterally increase the supply as needed, unlike Bitcoin and Ether. For those tokens, you are at the mercy of the people who have the power to mint. They’re like the Federal Reserve of the token. It’s important to understand the tokenomics of a token before you buy it as an investment.
Does Crypto Keep My Transactions Private?
No. At least not on the very popular blockchains such as Bitcoin and Ethereum. This is one of the biggest misconceptions I hear about crypto. In reality the whole blockchain is public and can be read by anyone. You get pseudonymity but not privacy. There are privacy-oriented crypto tokens such as Monero and Zcash but they aren’t anywhere close to Bitcoin and Ethereum in terms of adoption.
People often assume everything is encrypted and private because cryptography is involved. Wrong. Not at all.
The cryptography in crypto is referring to digital signatures not encryption. Digital signatures are the inverse of encryption in public key cryptography. Your private key is used to prove that you signed a transaction not to decrypt some encrypted data.
If you want to transact privately on the major blockchains you have to use an additional privacy solution such as Tornado Cash or zk.money. Otherwise it’s all out in the open, aside from a thin wall of pseudonymity.
Is Crypto a Bubble That’s About To Burst?
It depends what you mean by “burst” but I would not be surprised if a correction occurs. I have no idea how big but it’s hard to believe anything that’s grown as fast as crypto and has this much hype isn’t overinflated some. When all of a sudden the super bowl is all about crypto and every celebrity is promoting a token or releasing their own NFT, I suspect there is probably room for a correction. But that doesn’t mean it goes away. It doesn’t even necessarily mean it will take a big hit. It could correct only a little. Or I could be wrong and it just continues to skyrocket. Who knows? But I would expect corrections from time to time.
There is intrinsic value in blockchain, crypto, Web3, DeFi, etc… It’s not going away, no matter how much crypto cynics would like to see that happen. As with any significant breakthrough technology that bootstraps an entire industry, there will be booms and busts. The internet had them too. The important thing is to keep your head on straight and use common sense. Think critically about what anyone is telling you. Especially when it involves parting with your hard-earned money! There are no easy get-rich-quick schemes, at least not without taking significant risks. If it sounds too good to be true then it probably is. Use good judgement and common sense.
How Much Power Do Blockchains Use?
There are different kinds of blockchains. One way to categorize them is by their “consensus mechanism”. The two most common are called “Proof of Work” (PoW) and “Proof of Stake” (PoS).
Proof of Work blockchains consume a lot of energy, which is by design. Their security increases the more work they do. Bitcoin and the Ethereum (currently) are both PoW blockchains. Bitcoin consumes about as much energy as a small-to-medium size country and Ethereum about half of that. Ethereum is in the process of converting itself into a PoS blockchain which will consume a small fraction of the energy it currently does.
Plenty of articles exist that go into great detail. For example:
How Much Energy Does Bitcoin Actually Consume?
Why does Bitcoin need more energy than whole countries?
How Much Energy Does Bitcoin Use?
Ethereum energy consumption
So Bitcoin uses a quite a lot of energy. Whether it’s worth that much energy depends on your priorities and values. It uses much less energy than the traditional global banking system it hopes to replace but it doesn’t provide all the same services. It uses more energy than some countries but more people use it than live in those countries.
Ethereum also uses a lot of energy but is transitioning to PoS as a solution.
Do I Lose My Crypto if the Power Goes Out?
No, you don’t lose your crypto tokens if the power goes out. You do lose the ability to make transactions until the power comes back on and you’re back online. The same is true of bank accounts and credit cards.
If the power goes out globally then the blockchain networks would halt and no one would be able to make transactions until the network was restarted.
Even in a prolonged, global internet outage, the complete record of who owns what would remain in tact on all the blockchain (full) nodes around the world which have persistent storage (hard drives). If the network were never restarted then the community could still use the existing record as a starting point for a new system.
Why Are There So Many Crypto Hacks?
Hacks in crypto happen for the same reasons they happen in any IT space but there are some aspects of crypto that make it a particularly enticing target for hackers. Crypto is a young, unregulated space where a tremendous amount of money is at stake and the user experience isn’t very good. I’ll elaborate.
Crypto is young and immature. Opinions vary on whether it’s still “the early years” (IMO it is) but it’s clear that crypto isn’t functioning like a mature industry today. It is the wild west. Whether or not you believe it will mature eventually, it’s important to know what you’re getting into now.
Crypto is mostly unregulated. Most blockchains don’t reside in any specific jurisdiction so regulating them is challenging. They’re designed to be permissionless, trustless, and immutable so that they are resistant to being controlled by central authorities such as oppressive governments. Crypto also tends to move faster than governments do so efforts to regulate are usually behind the curve.
The user experience in crypto is bad. In some cases really bad. In order to achieve the goal of being secure without relying on a central authority the user experience has been sacrificed and is nowhere near what we’re used to on the traditional web. Hopefully this will improve sooner than later.
A tremendous amount of money is at stake. According to Time, the overall market cap hit 3 trillion USD at the end of 2021. According to Defi Llama there are several billion USD total value locked (TVL) in DeFi protocols. With this much money at stake there is a huge incentive for hackers.
All these factors combine to create a very enticing target for criminals to attack. Being immature and unregulated, the crypto space is also an enticing place for not-so-experienced developers to build a new application and promote it without taking the appropriate steps to responsibly design and secure it. Even when well intended, if a product is exploited due to carelessness and it costs users money, most people would agree that’s a bad thing.
To avoid being a victim in the wild west, you have to protect yourself. Don’t use applications or DeFi protocols that you don’t understand. The trustworthiness of these applications depends on their source code being available and peer reviewed. Very few people are actually capable of reviewing the code themselves. Assuming you’re not one of them, stick with apps that you are confident have been well reviewed by those who are capable. Look for audits from reputable auditing firms. Look for an active user community that has been using the app for a long time without it being compromised.
Pay attention to what’s happening in terms of hacks and exploits on Web3 so that you’re aware of what to watch out for. One of my favorite resources is Web3 is going great which is thorough and well maintained, if you can look past the smug arrogance and sarcasm to the useful information.
Education is the best defense against this kind of evil.
Or choose to not partake at all, which is a perfectly acceptable choice. The honest people in the crypto space, of which there are very many, do not want you to be a victim either.
Why Are There So Many Scams in Crypto?
First read “Why Are There So Many Big Crypto Hacks?” because the reasons are the same. I like to distinguish slightly between scammers and hackers because, for reasons I struggle to articulate, I hate scammers even more than hackers. But both are criminal behavior that has the same outcome — people get hurt.
If you dive into crypto you will deal with scammers. They’re everywhere, like the 11th plague. If you post a question in a popular crypto Telegram group you’ll be direct-messaged (DMed) by a scammer shortly after who will try to send you to a phishing site that will steal everything from your wallet. Legitimate team members will not DM you. Your social media feeds will be littered with “influencers” shilling the next get-rich-quick token they’re being paid (directly or indirectly) to promote. You’ll be shilled tokens that are actually Ponzi schemes.
Make no mistake. There is a lot of bad shit in the crypto space. If you enter the space you will be exposed to it. If that’s not something you are willing to deal with then do not enter. You will have to educate yourself. You will have to protect yourself. You will have to develop a Spidey sense, much like when you hike in the wilderness or visit a city with high crime.
What’s the solution to this problem? Probably some combination of technical advancements, regulation, and user education. But education is the one I believe in the most and the only one that you can do for yourself.
Are There Any Good Things in Crypto?
Yes. There is a lot of good in crypto. Crypto (the industry built on blockchain) is the result of a breakthrough innovation, Bitcoin, that has dramatically changed, and is still changing, the competitive landscape in fintech and similar industries. I’ll cover examples below but first it’s worth looking at the original problem Bitcoin was built to solve. From the Bitcoin white paper, it is:
Bitcoin: A Peer-to-Peer Electronic Cash System
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.
The problem Satoshi Nakamoto intended to solve was:
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.
…
Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.
The initial problem was that the financial system depended entirely on third parties serving as trusted middlemen. The proposed solution was peer-to-peer electronic cash.
Satoshi’s solution worked. Today, the world has peer-to-peer electronic cash that is globally accessible to anyone with an internet connection. With the success of the Lightning Network, Bitcoin transactions are now instant and effectively free. So that’s one good thing — a very big one.
Inspired by Bitcoin, Vitalik Buterin created Ethereum which extended the idea of a decentralized currency to smart contracts which can perform general computations securely and trustlessly. Ethereum has led to a decentralized world of finance that provides global access to modern financial services without the need for a trusted intermediary.
Smart contracts have become the basis for Web3, the next major layer on the web that adds trustless, peer-to-peer, decentralized applications on top of Web2.
Utility/governance tokens, ICO’s and IDO’s have provided a mechanism for open source software projects to be well-funded from the start — something that was previously mostly limited to proprietary startup companies. They’ve also provided a way for non-accredited investors (those who aren’t already rich) to participate in high-return (although also high-risk) investments which has resulted in generational wealth for some.
DAO’s have provided a new type of organization that’s less top-down and more grass-roots, governed directly by the members and community rather than by a board of directors. It turns out the board of directors is a trusted intermediary between stockholders and managers that can be removed.
NFTs have provided artists and creators a way to capture the lion’s share of the value they create instead of conceding most of it to the publishers and platforms that control distribution. As NFTs are actually digital deeds, not just pictures, there are exciting new use cases for them such as domain names, anonymous KYC, real estate, tickets, and many more.
People in developing countries who previously didn’t have access to reliable money or financial services now do. I’ve met quite a few people in Central and South America who attest to that. In countries that have experienced severe inflation, such as Venezuela and Argentina, Bitcoin has helped ordinary people avoid losing their life savings.
Even in the USA and Europe, where there is arguably the least need for more sound money, people are turning to decentralized finance (DeFi) as a way to earn actual interest on their money and stay ahead of rising inflation. Older people might remember that there was a time when banks paid you interest for the privilege of using your money. DeFi does that now.
You can agree or disagree with whether these examples are actually good for society or even realistic but it’s clear that a lot of people do agree, and they are voting with their money. No one forces you participate in crypto but it’s nice to have the option.
There is a lot of good in crypto and tremendous potential for more good. But that does not excuse the bad. I cringe when I see large amounts of money lost in hacks due to irresponsible code. I cringe when I deal with scammers on an almost daily basis, or see someone promoting a scam, or a very risky investment being promoted as a sure thing. I cringe when I see celebrities promoting risky, sometimes silly, investments to their unwitting fans. Even the prince of crypto is concerned and would like to see the Jedi take a more aggressive stance against the dark side of crypto. I agree.
If you’re a beginner, I hope this FAQ helps you understand what crypto really is and what it isn’t. I hope it helps you see more clearly, past the extreme propaganda being pushed from both sides. Education is crucial. In crypto, they’re always telling you to do your own research (DYOR), which is good advice in crypto and in all aspects of life. But it never hurts to have a nice guide along the way.
I intend to update this FAQ from time to time so please give feedback! Reach out to me on Twitter or LinkedIn, or comment below. Is there an important question I missed? Completely disagree with everything here? Still confused? Let me know. Most importantly, be informed before you put money into something you don’t understand. Educate yourself and be safe.
