Episode 2 – What is a cryptocurrency?
“Does this sound familiar? You’ve heard about blockchain and crypto and it’s gotten you excited. This is the future of money! You say to yourself and you tell your friends about it. But they’re sceptical, they’ve heard it’s a scam. But what is a cryptocurrency? They ask. You throw a bucket of buzzwords at them – decentralised, fiat, money printer, consensus and before you know it they’ve walked away shaking their head and convinced you’re crazy. But fear not, School of Block got you covered. In this episode we’re going to drill straight down and give you the lowest low down imaginable. Ready? Let’s get facted.
Before we can properly wrap our heads around what a cryptocurrency is, it helps to know what currency is in the first place. And you’re in luck because we created a whole video about that already, so feast on the delight that is ‘What is Money?’ which you can find here [points screen right] and if you’ve already seen it then let’s crack the crack on.
Now of course there are some technical differences between ‘currency’ and ‘money’ primarily to do with one being an intangible concept and the other being the physical item we use to transact with but fundamentally:
A currency is a medium of exchange. A good one is accepted by all parties in a given system.
It’s also: divisible, durable, verifiable, fungible, portable, non-inflationary and difficult to forge.
How do the US dollar, the euro or the pound stack up against these criteria? Well, these traditional currencies are all we’ve had for hundreds of years so we’ve learnt to accept their flaws. What are they? Well, whilst forgery and theft have been high on the list for centuries, the more pressing flaw in our post pandemic world is inflation.
Not just that, but there’s a lot of friction in our use of those currencies. Intermediaries taking their cut are numerous, whether that’s bank charges, visa/mastercard fees or even foreign exchange rates. Never, ever change your money in an airport if you can help it. You’ll end up with half as much as you started with.
So as you can see there’s a gap – for a secure, frictionless, non-inflationary currency that’s accepted around the world. And funnily enough, there’s thousands of them out there already – but not all of them pass that first test – a medium of exchange accepted by everyone.
One of them is very much getting there though. Bitcoin. And if one can then that opens the door for many more to follow.
Okay, so there are now over eight thousand cryptocurrencies compared to 180 regular ones, many of them are dead or just memecoins which is a joke coin set up just for lolz. Yeah these really exist and the largest of them, DogeCoin has a marketcap of over $300m dollars. But that’s a whole video all by itself so we’ll leave that for another time. But of the legitimate ones there are in fact huge differences between them, at technological, philosophical and governance level and most aren’t actually pushing to replace money for starters. But they do all share the same basic traits.
Let’s start with a definition: A cryptocurrency is a digital or virtual currency, secured by cryptography, which makes it nearly impossible to counterfeit or double spend.
How does this work? Well, you’ve most likely heard of a ledger before – it’s a simple balance sheet to record the flow of money and it’s usually housed in a safe accessible by only one person. Now imagine a ledger containing every transaction ever made in the currency of your choice, and there are not one but hundreds of thousands of identical copies of that ledger stored around the world. And that ledger is public and viewable by anyone, anywhere. Every new transaction must be approved and verified by all copies of the ledger before being accepted as a matter of record.
This is a distributed ledger and it is the fundamental infrastructure underpinning all cryptocurrencies. Another thing to bear in mind is this — imagine you’ve just been sent like the most well funny cat meme and you’ve just got to share it with all your mates. [Robin on phone religiously sending the image to everyone]. You get a copy, you get a copy, you get a copy, you ALL get a copy! Digital files are extremely easy to replicate and when I said digitally I make a new copy and I keep the old one. Now obviously if money is just a digital file and I start sharing it digitally then well… You get $100, You get $100! Which, is a problem. And it has a name: the Double Spend problem. Digital technology is this great rushing river of movement, allowing everything to go wherever it wants. Solving the double spend problem is like trying to stop a tsunami with a toothpick. But that is exactly what Satoshi did in the Bitcoin whitepaper. And it’s one of the most important principles behind the fidelity of Bitcoin as a digital currency.
“We propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions…”
The timestamp server, within a peer-to-peer network. So easy to say now but this was profound. Up until Satoshi’s innovation, the double-spend was the Achilles’ heel of digital currency transactions – it simply wasn’t possible for a digital system to prove two, or more, different people didn’t spend the same digital money without the use of an intermediary. Despite advances in payment tech and services all internet-based transactions still required a trusted third-party such as a bank, government or a credit card company. Not anymore.
A further defining feature of crypto currencies is that they are generally not issued by any central authority – governance is managed by thousands of individual stakeholders, who generally run those nodes or mine the currency in the first place.
So what are the advantages of cryptocurrencies? Well, there’s a few.
- They’re theoretically immune to government interference or manipulation
- They’re frictionless. No grubby intermediaries getting their fingers in your pie.
- You don’t need a bank to manage your funds. They are entirely in your control.
- International wire transfers are a glacial rip off compared to the high speed and low cost of global crypto payments
- No-one can spend the same money twice
- Most cryptocurrencies are transparent, with the blockchain and all its transactions being publicly viewable
- And they’re inflation resistant. In the case of bitcoin, the supply is capped at 21 million. There will never be more bitcoin than that.
But if you’re watching this film, you probably also think they’re a bit scary. Why?
Well to quote the wonderful John Oliver: Cryptocurrencies represent everything you don’t know about money combined with everything you don’t know about computers. But here’s the magic. You don’t actually HAVE to understand the tech to use them, the way you don’t need to know what VISA’s back end is doing when you tap your card on the reader.
Security fears do still exist though – this is still a young space and hackers do happen. Self-hosting a crypto wallet can lead to human error and there’s no doubt that market volatility can be savage but with the advent of stablecoins alongside simpler, more robust wallet solutions things are becoming easier for the regular Joe, or Joanna.
BUT you don’t need to be Nostradamus to see that physical cash is dying. And this has only been accelerated by the global pandemic. I can’t remember touching physical money even once last year. Digital payments are dominating transactions, even in person and not just online.
And if the value of your currency that’s making those payments is dwindling with every squirt of quantitative central bank easing – do you think maybe it’s time we started looking at money in a different way?
Don’t be scared. Be smart. And now you have the perfect answer: A cryptocurrency is a digital or virtual currency, secured by cryptography, which makes it nearly impossible to counterfeit or double spend.”