Crypto – A Simple Introduction

Cryptocurrencies give us a way to share and store digital information without a trusted third party.

They do this by adding a new layer to information networks – a layer of value and currency.

Our financial system and the internet are information networks. For example, your internet search history is data that’s stored and sent over the internet information network, and the banking system is an information network that transfers money. Blockchains, the technology behind cryptocurrencies, make it possible to build information networks without a centralized entity like a bank or internet company.

How will this manifest itself?

A New Financial System

Dollars, euros, and yen have value because they are maintained by national governments, and the citizens of the world consider them to be valuable. These currencies used to often represent claims to physical assets, like gold. Today, they’re something different: fiat currencies.

“Fiat” in Latin means ‘let it be done.’

Why does fiat money have value? Because governments and their citizens say that it does.

This first encounter with the concept of money jars people. Currency is something that we take for granted. Without it, we’d still be trading physical goods with each other, and having a tough time getting what we want. Human civilization created money as a way to track the value that individuals and businesses added to society.

Money is not simply pieces of metal or paper.

Money is a story.

It’s one of our most important shared stories. Although it doesn’t physically exist in the sense that atoms and gravity exist, it’s one of the most real things in our world.

There are, however, certain principles that money should have. You can find a complete list of ‘sound money principles’ here, but some qualities of good money include being scarce, hard to copy, easy to transport, and trivial to store.

Bitcoin, the world’s first widely adopted cryptocurrency, innovated by providing a digital good that also had sound money principles. Its key differentiator from other attempts at decentralized digital currencies is that it solved a set of important problems in the space (namely, something called the ‘double spending problem‘). It is designed to be used without the need of a centralized third party like a government or bank.

We can now use digital currency without needing the central banking system. There are many reasons why cryptocurrencies like bitcoin, ethereum, and zcash make this possible. All you need to know for now is that currency can exist outside of the traditional financial ecosystem.

Cryptocurrencies also make new forms of finance and banking possible. There is decentralized software that will issue you a loan without a bank, or allow you to trade assets without a central exchange. The tech stack of the current financial system is slow and outdated. Fintech companies like Robinhood, PayPal, and Stripe have built great user experiences on top of this stack. However, blockchain technology can rip it out completely, and offer replacements that are higher performance and more decentralized.

Applications

Most writing on crypto focuses on its ability to create new forms of money. However, crypto has the chance to go beyond money, and expand into other internet applications. Investor and crypto veteran Naval Ravikant identified this long ago (read his twitter thread for more insight).

A New Internet

The internet is a combination of many networks. Internet service provider (ISP) networks, social networks, or file storage networks, are each run by powerful companies who invested incredible amounts of capital into building the network.

For example telecom & internet companies had to lay down the wires to build an internet network, Google had to build data centers to store it’s search results, and Facebook had to spend millions to acquire new users.

The companies that control these networks are some of the most powerful people in society.

What crypto does is change the ownership model of these networks. Rather than a credit market owned by bankers, you might have a totally decentralized credit market form in parallel through applications like Compound. Instead of a social network that’s owned by a corporation, you might have an open source social network owned by those who use and maintain it.

You can expect crypto to provide alternatives to every digital network. Social media, internet services like hosting, and even energy markets could find themselves infiltrated by blockchain based alternatives.

What You Should Know

Crypto allows us to transmit digital value and information in ways that are not managed by centralized third party institutions or companies.

Finance without central banks. Social networks without corporations. Currencies without governments.

It will take time for crypto to rival the power of these other institutions, banks, and companies. As this shift happens, wealth will be captured by a different type of person, and the power of trusted third parties will decrease. Centralized institutions may always exist, but we now have the option of decentralization.

Further Reading

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