Guides > Introduction To Cryptocurrency

  1. What is cryptocurrency?
  2. Why do we need cryptocurrency?
  3. What makes cryptocurrency better money?
  4. Who invented cryptocurrency?

TLDR; If a new form of money was invented today it would be impossible to manipulate and usable by everyone on earth without any middleman or anyone’s permission.

What if we reimagined money for the world we live in today? A better money would still be portable, fungible, divisible, durable, transferable, scarce and verifiable but it would also solve some of the “modern money problems” by adding a few new properties:

  • Digital – Digitally native yet highly secure money enables programmability and near instant global usage
  • Permissionless – Money should be universally accessible by anyone who wants to use it
  • Trustless – You shouldn’t have to trust anyone or go through middle men to use your hard earned money
  • Immutable – It shouldn’t be possible for anyone or anything to reverse your transaction or manipulate the money supply

Digital Money

Computers are really good at making copies of things. When you send someone a file you both end up with an exact replica of that file. With one click, you can make a perfect copy of every file on your hard drive. If money was digitally native the same way files on a computer were, digital money would be the antithesis of scarce.

Only a small percentage of today’s money exists in its physical form of coins and bills, the rest is already digitally stored by banks using technology designed for creating and storing copies of things.

The banks record transactions in a digital ledger as debits and credits every time you make a deposit, withdrawal, swipe your debit card or issue a transfer from one account to another. This data is stored in a private database only visible to the bank to ensure nothing happens without their permission.

When you transfer money from one bank to another, the first bank promises the receiving bank that they’ve debited your account. If bank number two trusts bank number one, the money is credited to the account in the receiving bank. This process of debiting and crediting accounts is known as double entry accounting.

In many cases, especially with international transfers, this process of interbank communication can take several (business) days to complete. That delay is known as settlement and in many cases involves phone calls, faxes and emails back and forth between the banks while they decide whether they trust each other, which seems outdated.

With cryptocurrency, everyone becomes their own bank. The creation and issuance of new currency, the creation of accounts, the storage of all transactions and the network facilitating the transactions are all governed by software run by everyone on the network – including you. By making money “digitally native”, cryptocurrency can instantly be sent anywhere in the world without middlemen skimming fees and causing delays.

Permissionless Money

To open and use a bank account you need the bank’s permission. But every day, banks discriminate against people for a slew of reasons mostly due to heavy regulations forced upon them by The Fed. These regulations lead to massive amounts of “unbanked” people globally who can’t access basic financial services like credit cards, savings accounts, etc.

Even worse, banks are custodians of your money meaning they hodl onto it for you and give you permission to use it. But what if the bank allows you to open an account, make a deposit, and then they change their mind and freeze your funds? Or maybe you travel to another country and swipe your card to pay for dinner only to find that your transaction was declined without warning.

You shouldn’t need anyone’s permission to access your hard earned money. With cryptocurrency anyone can run the software which makes them their own bank and have the power to use their money as they see fit.

Trustless Money

To open a bank account, first you have to establish trust between you and the bank. This is done by providing multiple forms of identification, a utility bill, etc. Then, every time you want to use your account you have multiple “lighter” ways of re-establishing trust like:

  • Appearing in person and showing the bank teller your ID which they compare to your face (manual Face ID!)
  • Signing a check containing your account number (because signatures are top secret and can’t be forged?)
  • Swiping your debit card and punching in the 4-digit pin associated with your account
  • Logging into an online banking interface using the username/password associated with your account

With cryptocurrency, trust is delegated to public-key cryptography within the software. Without getting to technical, this form of advanced mathematics allows you to create a digital signature which anyone can use to verify you are the owner of password-protected information, but without requiring you to enter or disclose the password.

The password is known as a private key and everyone using cryptocurrency is responsible for creating and protecting their own private keys. If someone has your private key, they can sign cryptocurrency transactions on your behalf. If you don’t hodl your private key, you don’t have control of your cryptocurrency–it’s as simple as that.

This signature piece is new to finance and is combined with the account being debited and the account being credited to create “Triple Entry Accounting”. Triple Entry Accounting is being hailed as one of the most transformative innovations in finance since, well, double entry accounting!

In cryptocurrency, all transactions including the sending account, receiving account and cryptographic signature are publicly visible by anyone who wishes to verify them. No one needs to trust each other in order for the system to function.

Immutable Money

Ever wondered why our grandparents could buy a bottle of Coke for a nickel but today a Coke costs over a dollar? A big reason for this is that our money supply is easily and regularly manipulated and diluted through interest rate cuts and quantitative easing. One of money’s most important properties is scarcity, but does this graph of Currency in Circulation look like it’s going to reverse direction anytime soon?

Currency In Circulation

So 100 years ago $1 would buy you 20 Cokes and today you’re lucky if it buys you one. You can see now how today’s money is a terrible store of value. You’re better off storing your wealth in cans of Coke!

This Coke example is referred to as “purchasing power” and is measured by the Consumer Price Index. The CPI has been on a downward spiral for over 100 years, most notably since the US went off The Gold Standard in 1934.

Consumer Price Index

With (most) cryptocurrencies, the total money supply and the process for fairly and predictably distributing the currency is coded into an algorithm which can’t be changed. Once the last coin is issued, there will never be another one. In fact, since the supply is capped and (irresponsible) people may lose their private keys, the supply is actually shrinking. This causes “deflation” which increases the value of the remaining crypto in circulation–including yours.

But the money supply isn’t the only immutable, unchangeable, irreversible and un-manipulatable aspect of crypto. Once confirmed by the network, crypto transactions themselves can also not be reversed (except for in the very unlikely event of a 51% attack, but that’s for a future guide).

Credit cards certainly made shopping easier than using cash, but that 16 digit number you happily share with every website you shop at and every barista you bump into is an insanely insecure way to protect your money! Most US consumers have been victims of credit card fraud, and because of this all credit card transactions must be reversible. If you notice a charge you didn’t make (or you want to screw someone) you simply call your bank and they reverse it.

But what happens if you’re the merchant? You sell something for $100 and ship the product only to find out 6 months later that it was purchased with a stolen credit card and the money is yanked from your bank account (plus a $25 chargeback fee).

When used properly, no one can ever spend or steal your cryptocurrency so there’s no reason for transactions to be reversible. Since transactions are irreversible, you can rest assured that if someone sends you crypto it can’t be frozen or taken from you.

Even though we knew better money should be digital, permissionless, trustless and immutable, no one had figured out a way to make it work. That is, until a mysterious person calling themselves Satoshi Nakamoto unveiled his latest creation – Bitcoin.

Next: Who invented cryptocurrency?

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