Explaining Cryptocurrency To You Like You Are Seven.
A very simple cryptocurrency explanation for beginners
Does cryptocurrency seem mysterious to you? Is it a difficult concept to grasp? There are many courses and articles out there that teach about cryptocurrency, but most of them are steeped with technical terms that leave you in an even bigger muddle than before.
Despite the recent drastic drop in its value and uncertainties in the market, Cryptocurrency has over the years gained worldwide popularity and sparked a lot of interest among the masses. There have been positive mentions by prominent people like Ellon musk that have stirred curiosity in people and created the desire to learn about cryptocurrency as an investment option. If you are one of those people or just a curious fellow passing by, let’s dive right in
MEANING OF CRYPTOCURRENCY
Imagine the Scenario below
Hannah, a seven-year-old, needed a necklace to wear for her birthday party in the evening. Her mom took her to the mall and gave the cashier $100 for a brand new necklace. Hannah’s mom used money as a medium of exchange, or, as a currency for the necklace.
Now let’s reimagine this scenario differently
Hannah’s mom uses cryptocurrency, say Bitcoin in exchange for the necklace. In essence what Hannah’s mom has done is use cryptocurrency as a medium of exchange, or as a currency to pay for the necklace.
And that’s exactly what cryptocurrency is: a medium of exchange like money. However, it lacks physical embodiment. Whereas the cashier espied the dollar note and touched it before putting it in the cash register, with cryptocurrency, it is a virtual transaction. She will receive a digital currency.
Since its inception in 2009 by an anonymous person named Satoshi Nakamoto, there are about 7,300 cryptocurrencies in existence but the popular ones, and the ones you most likely have had of include, Bitcoin, Ethereum, Z-cash, Solana.
FEATURES OF CRYPTOCURRENCY
At the party, Hannah has candy, and her friend John doesn’t. John asks her for the candy and she gives it to him. Right now, Hannah has no candy and John has candy. Hannah smiles and is happy because that operation went smoothly. This was different from the time John also wanted candy from her but her aunt was present. Her aunt told Hannah to give her the candy to confirm if it had expired or not, or if it was real candy before giving it to John. Her aunt had also bit off a huge chunk of the candy in the process of confirming if it was real! The whole process took ten minutes, as opposed to the second she had just had with John without her aunt’s interference.
From the scenario above, let us assume that candy is the cryptocurrency, the aunt represents a bank, Hannah is the sender and John is the receiver. We can then deduce a few features of the cryptocurrency as listed below;
1. Cryptocurrency operates independently of a bank. ( Hannah gave her candy to John directly without the interception of her aunt, who in this case is “our bank”).
2. There is little to no transaction cost, as compared to the cost of the transaction incurred when using a bank. ( The aunt bit a huge chunk of the candy).
3. International transactions are faster, they can take minutes or seconds as opposed to bank transactions that may take half a day. (The transaction between Hannah and John took seconds when the aunt was not involved).
Other notable features
4. There are no limits on purchases and withdrawals.
5. You have 24/7 access to your currencies. The absence of a bank makes it possible for you to access your currency anytime you like.
6. There is a limit to how many units can exist. Unlike money that is printed upon the decree of the government for various economic reasons, the amount of cryptocurrency is predefined. For example, the maximum number of Bitcoin that can be issued is 21 million units.
7. Uses cryptography to perform its transactions. ( This is a method that uses encryption and decryption, i.e. converting data into a code and then reconverting it back to its original readable format) to secure communication in the presence of third parties with ill intent.
Understanding the terms of Cryptocurrency
Before delving into the transaction process let us first get familiar with the following three terms.
· Crypto wallet — It is like a regular wallet that stores physical currency when you’re not using it, a cryptocurrency wallet is a place to store your digital currency.
· Public key/wallet address — A public key is like your bank account number. You can share it with other people or institutions, so they can send money to you or take money from your account when you authorize it
· Private Key — A private key is like your bank account password or the PIN to your debit card.
HOW A CRYPTOCURRENCY TRANSACTION TAKES PLACE
Now that we know cryptocurrency transactions are virtual transactions, let us visualize the following scenario
Hannah has a digital candy that she wishes to send to John. She performs the transactions swiftly without the involvement of her aunt.
Hannah and John had a seamless transaction without the involvement of their aunt, the central authority.
However certain questions may arise from the above scenario in the absence of a central authority to monitor the transactions
1. Since Hannah gave John a digital candy, one that John could not see or touch, how confident is John that Hannah had not made copies of the digital candy?
2. What if other people have already downloaded the candy?
3. Who will monitor and check whether Hannah has the digital candy in her wallet and the correct information to send to John a digital candy?
This means there needs to be some sort of accounting process to keep track of the transactions, i.e. we need a ledger. In this scenario, a digital ledger and because of its sensitivity, needs to live in its own place, and have someone in charge of it.
But giving that much power to one person makes the process no different from the normal banking process. The person/institution in charge of this public ledger might at his own discretion add more digital candies anytime he wants.
To eliminate this situation, the digital ledger is decentralized. This means that there exist copies of this ledger around the world and anyone who is interested can get a copy. Each owner of a copy, cross-checks, approves and records every transaction.
Therefore let us reimagine the scenario above in the following light:
Hannah wants to send John a digital candy, she performs the transaction. There are several kids around the world who own copies of the digital ledger on their phones and who are bookkeepers, they are responsible for confirming the details. They then confirm if Hannah has enough digital candies to send to John, approve, authorize the transaction and record it in each copy of their ledger.
Fascinating isn’t it?
We can then confidently state that there is no way to forge a transaction, if a person tries to alter a ledger then it won’t match with all the ledgers and will be rejected.
This process is known as Blockchain technology. And essentially, a blockchain is just a distributed ledger that exists in all computers in a peer-to-peer network and is made freely available for possible modifications and redistribution.
This distributed ledger also contains all transactions from the beginning of time. Once data has been recorded in it, it becomes difficult to change.
To end this session on a light note here is a FUN FACT ABOUT CRYPTOCURRENCY.
The first commercial cryptocurrency transaction was for pizza.
On May 22, 2010, a man in Florida paid 10,000 Bitcoin for two pizzas. This is generally recognized as the first commercial Bitcoin transaction. At that time, that was roughly $40 dollars!
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