What is Cryptocurrency?
Want to understand crypto assets? Or perhaps you’re just crypto-curious. Regardless, you’re in the right spot.
Want to understand crypto assets? Or perhaps you’re just crypto-curious. Regardless, you’re in the right spot.
So how do I learn crypto?
Good news! We’re here to help. We recommend starting with an overview of the Web3 ecosystem. If you’ve already got a good understanding of Web3 then keep reading as we dive into cryptocurrency itself.
We recommend doing a once-over scroll of this article, then reading through it more comprehensively.
Cryptocurrencies
Cryptocurrencies are forms of digital money that provide you with ways to transact or “exchange value” online without a trusted intermediary like a bank. A more precise definition is decentralized digital money secured by cryptography and operating on blockchain technology. If you’re thinking “wow, that’s a mouthful”, you’re not alone - the words we use to describe crypto can sound complicated - but we promise the fundamental concepts are simple. Let's tackle it one piece at a time.
Why is crypto important?
Cryptocurrency, or “crypto” for short, is integral to exchanging value in the Web3 ecosystem. This is because, for the literal first time in history, it's possible to transfer value (in the form of crypto) across the internet trustlessly. This means that the participants in a transition don’t need to know or trust each other for the transaction to successfully happen. This ensures that you can move money globally, almost instantly (settle in seconds not days), 24/7, for low or no fees without using intermediaries such as a payment processor or bank. Pretty snazzy, right?
If you were thinking to yourself, “well I can pretty much do that with my digital dollars right now, what gives?”, we’ve got two thoughts for you. The first is to zoom in on the “pretty much”. Right now in the traditional banking system transfers can take days to settle, are often blocked by governmental borders, and are subject to high fees. The second thought is that “pretty much” seems fine in many parts of the world, but with many governments restricting online access and compensation, free, fast, and secure value transfer is imperative to all global citizens.
We’ll step off of our soapbox for a moment and take a look at the various concepts in cryptocurrency.
Remember, cryptocurrency is decentralized digital money secured by cryptography and operating on blockchain technology.
What is money?
We’re going back to basics here. To really understand cryptocurrency and what problem it’s trying to solve, we need to unpack what money (digital or otherwise) really means. In our society, we usually think of dollars or gold as money, but dig a little deeper and the definition becomes a bit more nuanced.
Money serves three basic functions. First, it serves as a medium of exchange. Salt bricks, beads, cows - all of these were early forms of money. Way back in the day people would barter for the goods and services they needed: a cow for a wagon, a bushel of beads for a house. You can imagine this was a messy way of doing business. Now we use various currencies as our money. Yen, Lira, USD, and a hundred more traditional currencies are now globally accepted forms of money.
The second function of money is as a unit of account, which is a consistent means of measuring the value of things. We say things like “I paid $0 dollars to read this article”, or “I paid $15 dollars for Zoom this month”, rather than “I paid one pizza for my Zoom subscription”. This function of money is fairly intuitive.
The third function of money is as a store of value. When we save money (god forbid) under the mattress, or (god forbid) in a bank accountwe’re storing value for a later date. That’s it (this one is actually that simple).
Not all money is created equal. Certain money is a better medium of exchange (USD for example), while some excel as a store of value (gold is popular in this realm).
What is centralization?
Centralization is the management of a system by one central entity. For the past hundred years or so we’ve used a monetary system that is managed by central banks. Each country has a bank that issues a country-based currency, which then flows out to a series of smaller banks and then on to individuals. All transactions are tracked and managed on ledgers by the smaller banks which then eventually percolate up to the central bank. This means we rely on the banks to verify each and every transaction in order to make sure that no one is spending more than they have.
What is decentralization?
Cryptocurrencies, on the other hand, are usually not issued or controlled by a central bank or government entity, they are “decentralized.” Decentralization transfers the tracking of transactions from one central entity to many distant but connected individuals. We go into more detail about what decentralization is and why it’s important in our article about Web3.
But how can all these computers agree on transactions and how do we know the network is secure?
Glad you asked.
What is blockchain?
With cryptocurrency, all transactions are verified using a technology called a blockchain. Similar to a bank’s balance sheet, a crypto blockchain is a long list of transactions, only here they are chunked into batches, verified for accuracy, and then linked to the batch or “block” that comes before it.
This chain of information is decentralized; stored in computers across the world. In order to make blockchains secure, no company, country, or entity is in control of the blockchain code. Anyone can run a currency’s blockchain code on any computer. The more computers that run a blockchain’s code, the more secure the blockchain.
It’s worth noting that blockchains exist on a spectrum of decentralization. Similar to how decaf coffee is not 100% free of caffeine, many blockchains are working on true decentralization but haven’t quite achieved it. Even with large node networks (the computers that store the blockchain), most blockchains are updated and maintained by a small group of developers.
Note: Each individual cryptocurrency has its own blockchain - a record of every transaction ever made using that currency.
This global participation piece is worth repeating one more time. With blockchain technology and the accompanying decentralization will come major changes to our day-to-day lives. The fact that you’re here, learning this stuff right now will pay off massively down the road.
What is a consensus protocol?
On a blockchain, computers agree on the truth of a transaction using something called a consensus protocol. It varies from blockchain to blockchain but generally, there are two types: proof of work, and proof of stake. We’ll go into the intricacies of this in a later post, but for now, just know that this process verifies the truth of every single transaction that happens on the blockchain network.
But if blockchain is so revolutionary, why haven’t we done it before now?
Glad you asked.
What is cryptography?
Cryptography refers to math and algorithmic-based secure information and communication techniques. Basically, it’s using math to make secure communication. Merkle Trees, Blind Signatures, PGP, Public Key Cryptography, Smart Contracts, and Elliptic Curve Cryptography (say that 10x fast) are each revolutionary discoveries built upon years of prior research that has enabled current blockchain technology. Bitcoin’s creation in 2009 really set the stage for the explosion of currencies that have come since.
Ok, we’ll admit it - we spent a lot of time talking around the building blocks of cryptocurrency but we didn’t dive into any particular one. But we promise those fundamentals are super important!
What is Bitcoin?
Bitcoin was built in 2009 as a world reserve currency and a direct response to the 2008 global financial crisis. It’s the OG digital currency (there were others preceding it, but nowhere near as widely adopted). Bitcoin uses a consensus protocol called “proof of work” or “PoW” for short.
What is Ethereum?
Released in 2015 and billed as the world's public decentralized ledger, Ethereum is actually much more than just a blockchain - it’s a computer network that anyone can build on. The associated token is called ETH and it is used to transact on the network. This cryptocurrency uses a consensus mechanism called “proof of stake” which, similar to Bitcoin, uses the Ethereum network to validate transactions. We’ll take a closer look at proof of stake and consensus protocol mechanisms as a whole in an upcoming article.
Note: These two cryptocurrencies form the basis for almost everything that has come since. Most current cryptocurrencies have either tried to replace them or have built on top of them.
What is a stablecoin?
Last but not least let’s touch on a broad category of cryptocurrencies called stablecoins. These are currencies that were built using blockchain technology but are pegged or tied to the value of an external factor - most commonly to the US dollar or gold. This means they are less volatile than other cryptocurrencies, which can swing wildly in value. Think of them as your aunt Sarah, who comes to every family gathering with the exact same mashed potatoes dish. Bland, but predictable! Compared to many other cryptocurrencies, the even-keeled nature of stablecoins makes them a better choice for daily transactions.
Is cryptocurrency the future of finance?
Simply put, cryptocurrencies provide equal opportunity regardless of country, class, or race. They are the first true alternative to our current centralized system and provide a range of advantages over it. Cryptocurrency is internet-native money that is faster, cheaper, easier, and more secure than anything we’ve seen before.
We believe that cryptocurrency and blockchain will be as revolutionary as email (and arguably even more important than sliced bread). It’s highly likely that in 5-10 years most businesses will be tightly integrated with blockchain technology - that’s why hopping aboard the train now is so important.
Whew, you made it. Sally forth and rejoice in a nuanced cryptocurrency dinner-table conversation.
At SquareWon our mission is to help you learn about crypto and blockchain in a simple, fun, and easy-to-understand way. We’ll have many more articles and explainers diving into each of the concepts above that will take you from zero to crypto-hero in no time.
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