Cryptocurrency explained LVL 1
Every time I raise the cryptocurrency subject with friends and family, I notice a minor change in their facial expression; the one telling you that they gave up trying to understand, but they’ll listen to you anyway.
Amongst the ones who don’t understand cryptocurrencies, there are three types of individuals: The willing, the stubborn, and the uninterested. And as you can imagine, this article is dedicated to the willing, because the stubborn won’t want to listen, and the uninterested is, well, uninterested.
This gets us to a question you would naturally bring up, and that would make for an interesting insight:
If the individual is willing to learn about cryptocurrency and its mechanics, how come he or she still doesn't understand it? Especially nowadays, when we have explanatory articles, podcasts, and videos flooding the internet?
The answer is simple; talking about technology is talking about something that has no emotions — something we, Humans, can hardly relate to — which explains our difficulty to understand it. And so, the author who will be able to win the mind of its readers/viewers will be the one able to embellish technology concepts with storytelling and give meaning to technical words.
But hey, enough with the small talk, and let's get down to why you’re really here…
1. What is cryptocurrency?
Let me put it this way;
If fiat currencies ($, €, ¥, etc.) are used by Humans to pay amongst themselves, cryptocurrencies are used by computers to pay amongst themselves.
The major difference is that fiat money is controlled by a central bank — since they are the ones who print it — and its respective government, whereas cryptocurrencies have no central authority.
But Jon ?! Since we’re the ones who build and use the computers, doesn't that means that we can control cryptocurrency?
Yes and no. About 12 years ago, in 2009, a person with the pseudonym Satoshi Nakamoto made public a project of his: Bitcoin. One of Satoshi’s main objectives was to find an alternative to a traditional financial system he deemed broken (I wonder what happened in 2008 that made him think that way?). The solution he found was to configure Bitcoin in a way that would divide the operational responsibility amongst all and anyone who has a computer. This means that no one person or entity can have controlling power over Bitcoin, because — by design — it requires the involvement of many to be able to verify and log a transaction.
Verify and Log a transaction?
Yes, you see, the main use of Bitcoin or any other cryptocurrency for that matter is to make payments. As opposed to financial service corporations (VISA, PayPal, Banks…) which employ people under one roof to secure and maintain their private tech infrastructure, Bitcoin’s transactions are recorded and audited by miners scattered all around the world. In principle, a miner can range from being one person with a computer to being a group of people with a lot of computers, and they don't even need to know each other.
… ok, but what’s the job of a miner exactly? and what do you mean when you say: “in principle”?
The same way central banks print money, miners contribute to the creation and emission of new crypto coins. How? By putting to use the computational power of their machinery ( computers, specific mining hardware…). Let me explain further; miners have one job to do, improve as much as they can the power of their hardware so they can compete with other miners and be the first to mine a block.
Wait, what ??
When someone pays with Bitcoin, for example, a transaction is created. Now you need something to log the transaction somewhere, so it creates proof that this transaction happened (Proof of Work).
This “something” is your piece of hardware working non-stop trying to put transactions together — in a block — , verifying their legitimacy, and then figuring out the right password (target hash) that allows the new block to be made official (mining a block).
And the “somewhere” is what we call a Blockchain, which is basically a chain of mined blocks filled with transactions (and ohh, in general, each cryptocurrency its own blockchain).
The first machine that succeeds in inserting a new block into the blockchain gets rewarded with a certain amount of its cryptocurrency. So if you mine Bitcoin, you’ll get rewarded with a small amount of new and freshly generated Bitcoins.
Hmm ok, I think I get it. One more thing though, you still didn't tell me what you meant by “in principle” a few paragraphs back?
Ohh, right, sorry for that! Let me clarify; in principle, a miner can be one person with one piece of hardware, but as the chosen cryptocurrency grows in influence and use, its mining difficulty rises. The miner is therefore obliged to team up with other miners (mining pool), so they can combine their computing power — most of the time in a well-suited facility — and divide the price of the exponential increase in electricity needed.
2. First the “what,” now the “why”
The biggest use advantages of cryptocurrencies such as Bitcoin are the fee reduction, a safe store of value, more control, and the possibility for anyone to transact from anywhere in the world.
- Fee reduction: Technically speaking, you don't need the services of a bank to be able to buy, store and sell cryptos. Taking third parties out of the equation will naturally make transaction fees go down. Having said that, it is common as a first step to use your bank credentials to transfer or convert some of your traditional currency into cryptocurrencies (Coinbase is a good medium to do so).
- Safe store of value: “Safe” is a big word because the crypto market is still evolving, and the prices are amazingly volatile. But in the long run, Bitcoin, more than any other coin, has the potential to take gold’s place as the best store of value (which accounts for a natural transition from traditional and tangible commodities to digital and intangible commodities).
- More control: This follows what I said two paragraphs back. Since no third parties are involved in storing and managing your money anymore, you find yourself having greater control over your crypto transactions. All you need is an electronic device and a crypto wallet (I use Exodus for the ones interested). One more thing to keep in mind; with more control comes more responsibility, which means that you’ll be solely responsible for securing your stored funds. Being careful is not always enough to prevent theft.
- For anyone to transact from anywhere in the world: Since all you need is an electronic device such as a phone — much more accessible than a bank account — to be able to deal with cryptocurrencies, the power to pay and get paid is given to the marginalized and the socially excluded.
3. Interesting facts
Those facts I am about to give you will answer some remaining questions you might have, and if not, well… it's still interesting to know!
- No one knows who Satoshi Nakamoto is, he/she might be one person or a group of people.
- This beloved Satoshi Nakamoto is the biggest holder of Bitcoins, with an estimated 1.1 million ₿ (Bitcoin’s price is at 57,000 American $ as we speak… I’ll let you do the math).
- Bitcoin will reach its cap limit of 21 million coins issued around the year 2140. (we’re at 18,635,425 Bitcoin issued at the time of this writing)
- Bitcoin is the father of all cryptos, but this doesn't mean that all cryptocurrencies have the same use case. If Bitcoin is used to make online payments; Ethereum is used primarily to share data (smart contract), Ripple to help traditional financial institutions reduce their cross-border fees, and Polkadot to link different blockchains together. Don’t worry, no one knows them all, but researching the one you want to invest in is highly recommended.
- To access your crypto wallet, you need a password (private key), and to transfer cryptos from your account to another, you need an identification number (public key). But hey, if you lose or forget your private key, you lose your funds forever.
EndNote: My aim with this article is for you to understand what cryptocurrencies are on the surface. I want you to have an idea about the subject at hand because it will, slowly but surely, be part of your life. There is, of course, a lot of information that I have omitted for the sake of clarity and fluidity… the crypto topic goes deep. For instance, it would be interesting to write about the blockchain mechanics — being the underlying technology powering cryptocurrencies — and its wide use possibilities, or the evolution of the crypto market. But this would need a wholly new article of its own. Anyway, I hope you enjoyed the article as much as I did!