What are Cryptocurrencies and Bitcoin?
- Crypto In A Nutshell
- Nov 1, 2020
- 5 min read
Updated: Nov 14, 2020
1. What is cryptocurrency?
Cryptocurrencies, not physical coins or currency, are digital tokens. They are a type of digital money that enables people, via an online system, to make payments directly to each other. They were set up without the need for banks to allow person-to-person transactions.
Garrick Hileman, co-founder of ARC, an asset-backed digital currency, proposed defining the cryptocurrency as "invisible money".
The main difference between "standard" money and cryptocurrency is that the government does not legally accept or regulate cryptocurrency. With it, you do not pay taxes and you can not settle any debts with it in court. Now at least.
2. How many cryptocurrencies are there?
There are many different crypto-currencies, just as there are many different conventional currencies in the world (Australian dollar, Euro, Japanese yen). In fact, there are over 5,000 cryptocurrencies listed on Coinmarketcap, but Bitcoin is the world's most dominant virtual currency today and still accounts for the largest percentage of value, according to coinmarketcap.com figures, on June 6, 2020 at a time when it hit $7,542.
You can build a new cryptocurrency at any moment, and Bitcoin is the largest cryptocurrency in the world, followed by Ethereum, Tether, XRP, Chainlink, Bitcoin Cash,...
3. Bitcoin
If you are a beginner and you're wondering what bitcoin is? If so, you have come to right place, this simple explanation for a child may help you!
Let's get started!
We are sitting on a bench in a park. It is a brilliant day. I've got an orange with me, and I'm giving it to you.
You've got one orange now and I've got none. It was straightforward, right?
Let's look at what happened carefully:
My orange was put into your side, physically. You know this has happened. I have been there, you have been there, you have touched it.
To help us make the move, we did not need a third party there. We didn't need a judge to sit on the bench with us to check that the orange had gone from me to you.
That orange is yours! Since I don't have any left, I can't give you another orange. I can no longer manage it. The orange has finally left my possession.
Now you've got complete power over the orange. If you like, you can give it to your friend, and then that friend can give it to a friend of his, and so on.
But that's what feels like an in-person exchange. It's really the same, I suppose, if I give you a banana, a book, a quarter or a bill of a dollar...
Back to oranges
Now, let's say I have one digital orange. I'll give my digital orange to you here. Ah! Ah! It's getting interesting now.
How do you know that the digital orange that used to be mine is yours now, and yours alone? For a second, think about it. It's more difficult, right? How do you know I didn't send the orange as an email attachment to my sister first? Or a friend of yours? Or even my friend?
I might have made a few copies on my machine of that digital orange. Maybe I put it up on the internet and it was downloaded by one million people.
This digital exchange, as you see, is a bit of a challenge. It doesn't look like sending actual oranges when sending digital oranges.
Actually, some brainy computer scientists have a name for this problem: it is called the problem of double-spending. Don't think about it, though. All you need to know is that they have been puzzled for quite a while and they have never solved it. Till now.
But let's try on our own to think of a solution.
Ledgers
Perhaps these digital oranges in a ledger need to be monitored. It's essentially a book where all transactions are tracked-an accounting book.
This ledger needs to exist in its own world and have someone in charge of it, since it's digital. Someone could keep track of the digital oranges we have. Awesome-we have solved that!
Problems
There's a little bit of an issue though:
1) What if more were generated by someone who I mentioned above? Whenever he likes, he could just add a few digital oranges to his balance!
2) It's not the same as on that day when we were on the bench. It was then just you and me. But it seems that a third party is involved now. How can I hand my digital orange over to you in the normal manner?
Is there any way for our park bench transaction to be closely reproduced digitally?
The solution
What if we gave everybody this ledger? Instead of a ledger that runs on someone's machine, it's going to live on everyone's computers. It will record all the transactions that have ever existed, from every moment, in digital oranges.
You can't trick it. I can't give you digital oranges that I don't have, because then, on the device, it wouldn't line up with someone else. It will be a hard system to beat. Especially if it gets really high.
Plus, one person can not regulate it, so I know that there is no one who can just decide to give himself more digital oranges. At the beginning, the system 's rules were already established.
And, like the apps used on your mom's Android phone, the code and rules are open source. Or kind of like Wikipedia. It's there to preserve, protect, enhance, and search for smart people.
You may also be active in this network, checking the ledger and ensuring that it all checks out. You could get like 25 digital oranges for the problem as a reward. Currently, that's the only way in the system to produce more digital oranges.
I made it quite a bit easier... But the structure I described remains. It is called the protocol of Bitcoin. And the Bitcoins inside the device are those digital oranges.
What does the public ledger enable?
1) It's open source, do you recall? At the beginning, the total number of oranges was specified in a public ledger. I know the exact sum that exists. I know they are restricted within the system (scarce).
2) I now know the digital orange has certifiably left my hands and is now fully yours when I make an exchange. I wasn't able to tell that about digital stuff before. The public ledger will update it and check it.
3) I didn't need a third party to make sure I didn't steal, or make duplicate copies for myself, or give oranges twice, or thrice... since it's a public ledger.
Exchanging a digital orange inside the device is now just like exchanging a real one. It's as good as watching a physical apple leave my hand and fall into your pocket right now. The exchange involved just two persons, much as on the park bench. You and me, to make it valid, we didn't need a judge there.
In other words, it behaves like a physical object.
But you know what’s cool? It’s still digital.
Now we can accommodate 1,000 oranges, or 1 million oranges, or .0000001 oranges. I can submit it with the click of a button, even if I was in Vietnam and you were all the way to New York, I can still drop it in your digital pocket.
I can also ride on top of these digital oranges with other digital stuff! It's, after all, interactive. Perhaps I can connect some text, a digital note, to it. Or maybe I should connect items that are more relevant, such as a contract or a stock certificate or an ID card...
You know more about Bitcoin than most.
References:
Emily Perryman, 2018. “Mommy, What is Bitcoin?” How to Teach Kids About Cryptocurrency”, https://cryptonews.com/exclusives/mommy-what-is-bitcoin-how-to-teach-kids-about-cryptocurrenc-1185.htm
Toni Hetherington and David Swan, 2019. “What is cryptocurrency and how does it work in the digital world?”, https://www.kidsnews.com.au/money/what-is-cryptocurrency-and-how-does-it-work-in-the-digital-world/news-story/7f8105dbed5eb13916b379fab8b6c437
Nik Custodio, 2014. “Still Don’t Get Bitcoin? Here’s an Explanation Even a Five-Year-Old Will Understand”, https://www.coindesk.com/bitcoin-explained-five-year-old
By Laura M, 2020. “What is Cryptocurrency? Your Complete Crypto ABC”, https://www.bitdegree.org/crypto/tutorials/what-is-cryptocurrency
2018. “Cryptocurrency Terms You Need Know, Explained In Simple Words”, https://www.xpressmoney.com/blog/industry/cryptocurrency-terms-you-need-know-explained-in-simple-words/
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