Authority on all things Bitcoin, Rhys Thomas, takes us back to basics to answer the question we're all afraid to ask at this point: what is crypto?
We’ve all been there, haven’t we? A mate says “my crypto looks good this week,” and shows you an app with a bunch of spiky neon lines. Your other mate nods and says something about the stock price on ‘WonkaCoin’ or some shit. You sit there silently wondering wtf is going on.
Sound familiar? You’re in the right place.
Free from the fuckery of finance-bro doublespeak, here’s your no-judgement introduction to what crypto actually is.
Crpyto: An Overview
So, crypto as a word is shortened from cryptography – the study of secure communications (complex maths equations, basically) that form the backbone of cryptocurrencies, blockchains and the rest. When we mention crypto though, it’s more of a shorthand for cryptocurrencies (various types of digital money) and their blockchains (we’ll get to that in a second). This stuff in itself is a bit of an online universe.
Cryptocurrencies are the coins and tokens your mates keep happy and/or sad crying about. Bitcoin and Ether are the big two cryptocoins, but hundreds of others exist too, and they’re known as altcoins. These are sent from person to person to buy things and transfer money — a bit like cash is — but they’re also held as assets in a similar way to, say, gold.
The Origins of Crpytocurrency
The whole thing started as a bit of a political movement, people taking a look around and saying ‘hang on, if I’m sending someone a fiver, why do I have to go through a bank and a payment company? And why is my money regulated by the government?’ among other questions. So, they set about making a way of using the internet to pay people anonymously, securely and in a way that makes it near impossible for anyone to fudge the numbers, without the need of any middle men. Essentially, it’s a movement looking to decentralise money – taking the power back, they might say. Naturally, this was (and still is) used on the dark web and elsewhere for scoring drugs and other illegal items, given the transactions are generally untraceable by anyone except the sender and receiver. This also makes crypto a bit of a haven for scammers.
Gear aside, crypto has become a lot more mainstream. Some countries, such as Ukraine and Panama, are making a move toward using Bitcoin as legal tender, following El Salvador’s decision to do so on September 7, 2021. Other countries like the UK and those closer to home are looking to make their own ‘online currencies’, with Sweden currently leading the way. Given these online currencies are centralised however, many crypto users would say they go against the whole ethos of cryptocurrency.
While there are plenty of other coins that do just as much, and offer more than Bitcoin does, it warrants a little chapter of its own in any beginner’s guide to crypto. The idea of using encryption to make transactions anonymous has been around since the 1980s; it was used with and alongside electronics through that time, but the first real cryptocurrency as we know it today was Bitcoin, which was first released to the public on January 3, 2009.
Most cryptocoin and blockchain creators publicly release white papers (a sort of guide and philosophy on how to use the product and why it was made), and Bitcoin’s creator Satoshi Nakamoto (it’s an alter ego, nobody actually knows who Nakamoto is) released one in 2008. This is partly why it’s the biggest and most widely used crypto, it’s been around the longest. It’s also gained far more value than any of the others, with one coin being worth £43,900 at the time of writing. This would mean that if you bought £100 worth in 2009, you’d have £4.3 million now – hence all the millionaires you hear about, and the general sense of optimism with newer coins these days.
The Inner-Workings of Crypto (Blockchains Etc)
Knowing a little about how the technology works is pretty important when it comes to the differences between coins, but before that: blockchains are basically the mechanics of this stuff. A blockchain is a series of digital blocks which contain specific amounts of currency and store the information of the sender and receiver to effectively create a watertight transaction between parties. In the case of transferring cryptocoin, sometimes additional data such as bank balances is also contained within the block. Essentially, a block is an ultra-secure digital safe that stores data, and is untamperable. A bunch of these blocks are connected via a chain: blockchain.
A lot of companies have their own bespoke blockchain, designed by software engineers and other bright sparks. They’re usually free and open-source so that other people can make things using the same technology, a bit like Android. Bitcoin has its own blockchain, as does Ethereum. In fact, most of the big coins do, but there’s also many coins that are run on other companies’ blockchains. For example, many popular altcoins (a term which refers to all cryptocurrencies other than Bitcoin) are run on Ethereum, which is the native blockchain of the second-most valuable currency, Ether. So, how do these blockchains work, and why are some different to others?
In short, different blockchain owners have different ideas about one aspect of how a blockchain should function, and also technology has improved a lot in this area across the last decade creating a demand for newer blockchains which make use of new tech capabilities. So Bitcoin — the OG — uses something called Proof of Work (PoW) which functions by making all the computers that are mining (essentially solving a puzzle) work on the same equation simultaneously and the quickest person wins (they catch the bag for it). In crypto, the puzzle is a complex mathematical equation where getting the right answer effectively unlocks one of the aforementioned blocks (or to clear up the mining analogy, is the digital equivalent of digging a diamond out of the ground) This old-school PoW method is long. It’s also bad news for the planet as it’s using massive amounts of energy by duplicating effort on a single equation and having the miners (also known as nodes) race against one another rather than working individually to mine different blocks. Then you have Proof of Stake (PoS) which Ethereum uses (having previously used PoW), which chooses someone to solve the puzzle based on how much stake (i.e how much of that cryptocoin) they have offered as collateral. So the more the person puts down, the larger the proportion of power they have. Ethereum’s change away from PoW is a key reason why it is seen as being better than Bitcoin in the long-term (other reasons include Ethereum’s blockchain being more useful; you can use it for NFTs and more). Blockchains developed more recently use Proof of History (PoH), which essentially just uses a series of timestamps so that everyone knows what’s happening at every stage. This system means computers don’t need to tell each other who gets to solve a puzzle, so it saves energy and is quicker. Solana is one example of this.
Extras: Moonshots, NFTs, and dApps
In case these words crop up — and if conversation with literally anyone over the last few months is anything to go by, they will — here’s a little bit on what they are…
A Moonshot occurs when you put some money on a coin that’s worth almost nothing (e.g. a hundred quid on a coin worth 0.1p so you own 100,000 of them) and then suddenly that value rockets (up to something like a quid in this instance) meaning you’ve gained a huge profit (in this case £100 has become £100,000). Therefore Moonshots are coins that you could potentially stick some cash on and basically hope increase in value loads (sometimes you can have an educated guess but it’s basically like backing Leicester to win the league pre-2016).
NFTs are basically digital art with proof of authenticity and ownership stored inside a block in a blockchain. Most of these are on Ethereum’s blockchain technology in some form. dApps are apps that are decentralised (so not controlled by a select group or person) and people like them because they offer potential to cut out middlemen. For example: imagine Uber, but all the money goes to the driver because the platform technology is open source.
So, there you have it: Crypto 101. No more pretending.
- 8 minute read