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Xpedition Week 1: Intro to Cryptocurrency

History of Cryptocurrency

On 12 September 2008, the world was taken by storm with the collapse of prominent bank, Lehman Brothers. As it later spiraled into a financial crisis that dragged the entire globe, collared workers, retirees, and other ordinary folks were wiped out of their savings overnight. What came as a rude and crashing shock to the ordinary was in fact, a well-planned and calculated move by the top management of the bank and the U.S. government weeks before. This highlights a serious issue with transparency (or rather, the lack of) that comes with banks. Essentially, the trust that people used to have with banks was broken as the incident exposed a series of flawed processes like unregulated and unchecked risk management, compliances, and poor investment decisions that was not made known to the very people who placed their savings with the bank.

In light of such, an alternative is presented — Cryptocurrency (also known as cryptos, or altcoins). Similar to real-world currencies like the Chinese Yuan and the US Dollar, cryptos serve as a medium of exchange. First started by Satoshi Nakamoto, crypto was designed to provide the security, transparency, and most importantly, individual agency that is devoid in central banks and federals. In other words, individuals like you and me have the power and authority to dictate how we grow our own assets, and we can get the full rate of returns instead of a meagre interest rate given by banks even till today.

Blockchain Mechanisms

At its core, cryptocurrency relies on blockchain technology that is highly secured and almost un-hackable. This is made possible thanks to the 5 components of a blockchain, namely Cryptography, P2P Network, Consensus Mechanism, Ledger, and Validity rules. This article will not go into detail about these components (for our detailed-oriented fans, simply refer to ‘FYI’ at the end of this part for more information) but just know that these 5 components which make up blockchain provides the very ability of blockchain technology to be the future of our world.

To start off, a blockchain is a type of database which allows sharing and modification between multiple parties under a safe and secured environment. When information is being inputted into the blockchain, they will be stored together in groups known as blocks. When the blocks are filled, a new blocked will be created and chained to the previous block, forming this data chain known as “blockchain”. From there, users can then independently verify the state and integrity of a blockchain. In order to update any data in the blockchain, the owner of that data must add a new block on top of the previous block, creating a very specific chain of code. If something even as small as a comma gets altered from how it appears in a previous block, an error would occur. This means that every single alteration or change to any piece of data is tracked and absolutely no data is lost or deleted. Such data structure poses a tough challenge even for the best hackers, thereby making blockchain technology extremely intricated and protected.

This diagram below summarizes how a blockchain network works:

FYI: 5 components

  1. Cryptography: Use of a variety of Cryptographic techniques including cryptographic one-way hash functions, Markle trees and public key infrastructure
  2. P2P Network: Network for peer discovery and data sharing in a peer-to-peer fashion
  3. Consensus Mechanism: Algorithm that determines the ordering of transactions in an adversarial environment (ie assuming not every participant is honest)
  4. Ledger: List of transactions bundled together cryptographically linked ‘blocks’
  5. Validity Rules: List of transactions bundled together in cryptographically linked “blocks”

Advantages of Blockchain

Now that we learn how blockchain works, why should we adopt it? Essentially, blockchain technology serves as a disruption to what we have always relied on — business of trust. As mentioned in the very beginning, the principle of trust can be violated right under our noses and not everyone has the capability to tide through a Lehman (or any other) collapse time and again. Thus, blockchain technology which operates on a decentralized, self-regulating system works without any authority. With blockchain technology, there is a reduced need for trust between stakeholders as a secure value transfer system takes place. To achieve this, a fault-tolerant consensus mechanism is used to achieve an agreement. The consensus protocol will happen in stage 3–5 of Figure 1 as shown above. Granted, there is no perfect consensus protocol, and these protocols need to make a trade-off between consistency, availability and partition fault tolerance. Nonetheless, these protocols are still the most effective in today’s terms. Some popular blockchain consensus protocols are proof of work (PoW) as well as proof of stake (PoS) (which will be further discussed in the following weeks, so do stay tuned!).

Beyond the issue of trust, blockchain technology also allows for greater efficiency in terms of the streamlining of business processes as well as easing auditability. For instance, blockchain can reduce lengthy paperwork processes and bridge the gap in services that currently require a middleman like insurance and legal services, thereby bringing the service closer and more direct to the ordinary consumer without adding unnecessary costs. Moving away from the pragmatic business applications of blockchain technology, blockchain can also be relevant to more humanitarian affairs. For example, many refugees today lack the basic right to live independently because they do not even have documented proof of their existence. With blockchain technology, digital identity systems can be created and secured, allowing these people to live in dignity.

Now that we have a better understanding of the blockchain technology behind cryptocurrency, we should be able to see how blockchain technology drives for a better future that we envision. Do check out our Xpedition Week 1 postings on Twitter and Instagram and follow us for more upcoming educational content!

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