Crypto made simple: What is crypto?

Crypto can refer to a specific cryptocurrency, such as Bitcoin (BTC), or it can encompass the entire crypto ecosystem, which includes cryptocurrencies, web3, dapps, DeFi, and NFTs. This ecosystem is built on blockchain technology.

You don’t have to be overwhelmed learning about crypto. Understanding the basics will help you navigate the crypto space more effectively, which will save you time and money.

Crypto made simple

Crypto makes it possible to:

A cryptocurrency is a digital currency that uses cryptography and blockchain technology to secure its transactions and other data, and to control the creation of new coins or tokens.

Cryptocurrencies are built on decentralized systems, meaning that they operate on a network of computers rather than a single central server. They are not under the control of any individual, government, or institution, such as a central bank.

The first cryptocurrency, and the most famous, is Bitcoin (BTC), which was invented in 2009 by Satoshi Nakamoto, whose identity has never been revealed.

Examples of other cryptocurrencies are Ether (ETH), BNB Coin (BNB), Tether (USDT), and USD Coin (USDC).

There are also thousands of other cryptocurrencies, all with different use cases, and some with absolutely no use case at all. (Looking at you, $BABYDOGE.)

How does crypto work?

How does crypto work under the hood? The technology that underpins crypto is blockchain. Blockchain technology is a type of distributed ledger technology (DLT).

What is distributed ledger technology (DLT)?

A distributed ledger is a record of data that is stored on multiple computers. You can have an unlimited number of computers that all contain copies of the same ledger.

A ledger is a record of accounts, also known as transactions. For most of human history these transactions, money in and money out, were written down in a physical ledger, a type of physical book with lined paper and different columns.

Then, with the advent of computers, ledgers became digitized. Instead of having just a few copies, it was possible to have lots of copies with a few clicks of a button, and to store these copies on many computers. Thus, the database was born.

Distributed means having copies of the same ledger, or database, in multiple locations.

Going back to paper ledgers, if you had two giant books of accounts that contain the exact same information, it would qualify as a distributed ledger.

A single computer with a copy of the ledger is known as a node. The network is all the computers, or nodes, that have copies of the ledger.

Even if one node in the network goes down, or is corrupted, there are many other nodes that have accurate copies. This ensures data resilience.

What is blockchain technology?

Blockchain technology is one type of distributed ledger technology.

A blockchain is a decentralized ledger that keeps track of all transactions that take place on a particular blockchain network.

It fixes what’s known as the double-spend problem by ensuring that the same unit of crypto (e.g. 1 BTC) can’t be spent twice.

In a blockchain, transactions are grouped into blocks, and each block is added to the end of the chain.

A block contains a unique code called a “hash” that identifies it and links it to the previous block in the chain. This creates a timestamped, secure, and transparent record of all transactions that can’t be altered or reversed.

The blockchain operates on a network of computers, called nodes, that work together to verify and validate transactions.

When a transaction is made, it is broadcast to the network, and the nodes work to validate the transaction and add it to the next block in the chain. Different blockchain networks have different ways to validate data, and these ways are known as consensus mechanisms.

Each node in the network has a copy of the ledger, which is constantly updated as new blocks are added to the chain. This decentralized structure means that there is no single point of failure and transactions can be processed and verified without the need for any intermediaries (like governments or banks).

If you’re interested, you can read more about blockchain technology here: What is blockchain technology?

What are some advantages of crypto?

Crypto is different than the traditional financial system by design, and offers some compelling advantages. Concepts in crypto made simple:

Decentralized

In crypto, decentralization means that no single person or authority (like a government or bank) has control over the processes and information of a blockchain network.

Instead, rules of a blockchain network are governed by code, which verifies that data is valid and correct.

Data is stored on a distributed digital ledger, which is hosted by nodes (computers) on a peer-to-peer (p2p) network.

If one of the nodes goes rogue, it is excluded from the network and its benefits (like mining fees or validation rewards).

Decentralization provides several benefits, including a trustless environment and improved data integrity. In a decentralized system, there is no single point of failure.

Trustless

Trustless means that parties who participate in a system (such as a blockchain network) don’t need to trust each other, or even know each other, to transact with each other.

Trustless systems allow peer-to-peer transactions that are verified by mechanisms (such as cryptography and code) that don’t require human or institution intervention.

This is in contrast to the traditional financial system, where you have to trust that your bank is doing the correct math, not misappropriating your funds, and will give you your money back when you ask for it.

Immutable

Immutability means forever – if something is immutable, it can’t be canceled, changed, or reversed.

Blockchain transactions are immutable. Once they’re recorded on the ledger, they are permanent.

It’s not technically impossible, but it’s extremely difficult to change data once it’s been recorded in a block.

Immutability is one of the key benefits of blockchain technology, because it makes data less vulnerable to hacking, maintains data integrity, doesn’t require extensive auditing, saves a lot of time, and is tamper-proof.

Self-custody

Self-custody is having complete control over your funds.

This is in contrast to trusting a bank or other third party to custody your wealth.

In crypto, you can get a self-custody wallet to store your crypto. From this self-custody wallet, you save the secret recovery phrase.

As long as you keep your secret recovery phrase safe, you’ll always have access to your crypto.

Pseudonymous

Pseudonymity means your personal identity is not tied to your actions on the blockchain.

Most blockchains are not anonymous, but pseudonymous, so you will have a persistent identifier (like your address) that can be seen on the blockchain.

But unless you reveal that a particular address belongs to you, your identity will not be tied to your transactions.

Transparent

Transparency refers to the fact that, on most blockchain networks, information is publicly available.

You can see movement of crypto from one address to another, so it is possible to trace where funds came from.

In contrast to what the media says, money laundering with crypto is not actually easy, because of this transparency.

Inclusive

Unlike the traditional financial system, all you need to participate in crypto is a mobile phone and an internet connection.

Crypto makes it possible for more people to participate in financial systems around the world.

You’ll often hear the phrase “banking the unbanked”. Barriers to getting a bank account can be insurmountable. The traditional financial system requires identity verification and a home address.

On the other hand, crypto makes it easier for unbanked and underbanked people to get access to more financial services than they would

otherwise.

What are some challenges in crypto?

Crypto is still in its early stages, and faces some technical challenges and growing pains.

Blockchain trilemma

The blockchain trilemma is the concern that any blockchain can do only two of the following three well: decentralization, security, scalability.

In this context, decentralization refers to how distributed the network is, i.e. how many nodes it has, and how many different miners are working to stabilize the network. Even in blockchains control can become centralized, like when one company or group controls a lot of the mining or validating power.

Security refers to being resistant to attacks, such as 51% attacks that allow a bad actor to take control of the whole system. If you can control more than 50% of a blockchain’s total network hashing rate, then you can make your own rules, such as double-spending as many coins as you want.

Scalability refers to the number of transactions a blockchain can support, as well as the speed at which it can process transactions.

Blockchains like Bitcoin that do decentralization and security well tend to lag behind on scalability.

Emerging solutions attempt to find a balance between the three. These solutions include consensus mechanism changes (like Ethereum’s switch from proof-of-work to proof-of-stake), sharding, and layer 2 networks.

If you’d like to learn more about the blockchain trilemma, you can visit Binance Academy’s article: What Is the Blockchain Trilemma?

Ponzis, scams, and hacks, oh my

Maybe the biggest challenge facing crypto is the prevalence of scams and hacks throughout the ecosystem.

Scams run the gamut from ponzi scheme tokens to phishing emails to rugpulls, and more.

There are more ways to lose money in crypto than in, well, just about anything else. And the immutability and pseudonymity of the blockchain make it extremely difficult to catch bad actors or return funds to their rightful owners.

Crypto still has a bit of the wild west about it, and this can hinder widespread adoption.

If you’re not careful, you might miss the technological revolution for the get-rick-quick schemes. The danger is that it could be like missing out on the internet because of Pets.com.

You can find our guide to crypto scams here: What are some types of crypto scams?

If you learn enough about crypto to understand how to navigate the ecosystem, and take precautions, it can be as safe as using the internet.

A brief history of crypto

Crypto has only been around since 2008, but it already has quite the history, filled with colourful characters and more scams than you can shake a stick at.

Here’s a very brief history of the major events in crypto history:

2008: The publication of a white paper by the pseudonymous Satoshi Nakamoto introduces Bitcoin, the first decentralized cryptocurrency, and outlines its underlying technology, the blockchain.

2009: Bitcoin becomes the first cryptocurrency to be created and used in a real-world setting. Satoshi Nakamoto sends the first Bitcoin (BTC) transaction to Hal Finney, an early adopter of the technology (who some think was Satoshi).

2011: Mt. Gox, originally a platform for trading Magic: The Gathering cards, starts the first crypto exchange. Customers can now buy and sell Bitcoin.

2013: The first initial coin offering (ICO) is held, allowing startups to raise funds by issuing their own cryptocurrency. Fast forward a few years and most ICOs turn out to be scams.

2014: Mt. Gox’s hack is revealed, the first in a long series of major crypto platforms going bust. Between 650,000 and 850,000 BTC was stolen from Mt. Gox’s hot wallet over a period of several years.

2014: Ethereum is created, providing a world computer to run smart contracts and decentralized applications (dapps).

2017: Crypto experiences a major bull market. Bitcoin reaches an all-time high of nearly $20,000.

2018: Crypto experiences a major crash, with the value of all cryptocurrencies plummeting (what goes up must come down). Most cryptocurrencies never recover.

2019-2021: The market stabilizes, and adoption continues to grow, with major companies such as Tesla and PayPal announcing support for Bitcoin.

2021: Another bull market. Bitcoin reaches an all-time high of around $69,000.

2022: Crypto winter starts. Terra collapses and UST loses its peg, eventually going to zero. FTX implodes, taking billions in customer funds down with it. Voyager, Celsius, Blockfi, and others declare bankruptcy. BTC goes down to ~$15K.

2023: Crypto goes mostly sideways, with BTC ranging between 20-30K. Is it all over? Or is it just beginning? (Can the answer be both?)