Introduction to Cryptocurrency
New to crypto? Check out this super simple 6 minute article.
Cryptocurrencies aka crypto have been the hottest news in tech and finance. You can regularly find them being mentioned on the news, while binging on Netflix and maybe from a skeptical friend telling you about bitcoin’s price exceeding $6,800.
I really only discovered this odd, new money in the spring of 2017, and immediately was overwhelmed by dozens of technical terms.
I’ve since come to the conclusion that there are 2 reasons crypto has not expanded 10X:
1) There are hundreds of misunderstood terms used to describe cryptocurrencies and blockchain.
2) There are very few user-friendly apps and websites that allow people to purchase cryptocurrency.
If more people understood the benefits of a cryptocurrency, I’m confident they would want to participate. If there were more really sexy websites and apps for crypto, I’m sure more people would be buying them.
That’s why I’ve been hard at work trying to solve problem #1 above with my cryptocurrency dictionary. In my opinion, few if any will embrace this new digital currency without having a better understanding of it.
In the next few minutes, I’d like to help you with that.
Let’s Cover the Important Terms
Cryptocurrency — Cryptocurrency is an electronic money created with technology controlling its creation and protection, while hiding the identities of its users.
Crypto- is short for “cryptography”, and cryptography is computer technology used for security, hiding information, identities and more. Currency simply means “money currently in use”.
Cryptocurrencies are a digital cash designed to be quicker, cheaper and more reliable than our regular government issued money. Instead of trusting a government to create your money and banks to store, send and receive it, users transact directly with each other and store their money themselves. Because people can send money directly without a middleman, transactions are usually very affordable and fast.
To prevent fraud and manipulation, every user of a cryptocurrency can simultaneously record and verify their own transactions and the transactions of everyone else. The digital transaction recordings are known as a “ledger” and this ledger is publicly available to anyone. With this public ledger, transactions become efficient, permanent, secure and transparent.
With public records, cryptocurrencies don’t require you trust a bank to hold your money. They don’t require you trust the person you are doing business with to actually pay you. Instead, you can actually see the money being sent, received, verified, and recorded by thousands of people. This system requires no trust. This unique positive quality is known as “trustless”.
The first cryptocurrency was bitcoin.
Bitcoin
Bitcoin is the first digital cash created in 2009. It was made by an unknown person or group who went by the name “Satoshi Nakamoto”.
Bitcoin is unique because it does not rely on government/bank created money. In addition, transactions occur directly between pseudonymous people (their real names are not known), meaning there are no banks or middlemen.
Each transaction is recorded on a digital record kept by many people across the world known as the “blockchain”. The data on the blockchain is publicly available and stored on many computers. Because there are so many copies being simultaneously maintained, the transaction and banking data is very safe, and virtually impossible to manipulate.
Individuals protect their bitcoins using their digital wallet. A wallet is software that can only be accessed by using a key, which is a long string of letters and numbers.
Bitcoin’s price has risen into the thousands of dollars, but you can still own bitcoin by purchasing a fraction of it for dollars.
Blockchain
Blockchain is technology for creating permanent, secure digital recordings that don’t rely on any single person or group. Blockchains can record any information, though the first example was created to record bitcoin transactions.
Imagine the blockchain as a book of records. Each page in that book, is a block, and can record anything. Blocks are created one after the other, chained to each other creating what we know as the blockchain.
Multiple blockchain records are maintained simultaneously by many of unrelated individuals and their computers, making it cloud storage on steroids. Updates are seen immediately and manipulation is extremely difficult/impossible. This positive quality known of many people keeping their own copies of the blockchain is known as “distributed”.
There are hundreds of blockchains created by many groups to records all sorts of information including art, medical records, computer information and much more.
But if a blockchain is not distributed among many individuals and instead run by one government, organization, group or person, than it is not at a blockchain at all. A centralized system like that is simply a database.
Smart Contracts
A smart contract mixes blockchain technology with contracts to make a more efficient and affordable system of doing business.
In a smart contract, two people doing business agree to exchange money for something else. if the requirements set by both parties of the contract are met on a date, it activates, delivering what was purchased. If the requirements are not met, the contract deactivates and returns whatever it was storing.
For example, Alice wants 1 bitcoin from Bob and Bob wants $5,000. Both Bob and Alice agree that on January 1, 2018, both the bitcoin and cash will be deposited to the accounts linked with the smart contract.
On January 1st, the contract looks to see if both people fulfilled their obligations. If so, it will release the payment and bitcoin to their new owners. If not, the bitcoin and money are returned to their original owners.
Because the contract is publicly available and unalterable, it is very easy to keep both Bob and Alice responsible for their end of the deal. If anyone somehow violates the agreement, the proof of what they should have done is easily obtained.
Mining
Mining is the process of registering transactions on the blockchain.
Because this requires computer work, any computer that completes this process is rewarded with digital money. Different cryptocurrencies use different mining processes, and with over 1,000 cryptocurrencies and many more being created each month, new ways of mining are constantly being explored and discovered.
Bitcoin uses a complicated math puzzle, and the first person to solve it receives a reward in brand new bitcoin. Mining is how new bitcoins are made.
Want to know more?
You can find the free PDF with all instructions and 4th grade stick-figures at:
About Decryptionary
My mission with Decryptionary is crypto made simple.
Decryptionary is a cryptocurrency and blockchain dictionary. It contains over 200 simple definitions, and awesome 4th-grade, stick-figure images to make this complex subject easy as pie.
Decryptionary is more than just a dictionary. It also has simple walkthroughs and word lists to make sure you really understand the basics of crypto.
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