What is the origin and meaning of crypto?
What are the basic functions of cryptocurrency?
How are blockchain distributed ledgers used to make sense of money?
“Crypto?... Do you mean magic internet money? Isn’t that all just a scam?”
While you may have heard something like this in your introduction to cryptocurrency, or maybe even asked these questions for yourself, neither is true. Sure. There are scams out there in the realm of cryptocurrency, like in any field involving money or valuables. But as for the concept of cryptocurrency itself, it is actually a pretty impressive technology that evolved from a more historical idea. Let’s talk about the basics.
The Meaning of "Crypto"
To better understand cryptocurrency, we should first learn the basic meaning of “crypto-.” This word comes from the Greek word “kryptos,” which means “hidden.” The term "crypto" is truly short for cryptography. Cryptography is about “hidden” or secret writing through encryption: which means taking plain text or information and hiding it. This encoding, or "encrypting,” is done in a way that makes it unreadable by anyone except the person it is intended for. With a special process or key, the recipient can then decode the hidden message through decryption.
Among the first uses of such cryptography were delivering secret messages in times of war, so the opposing parties could not decipher their enemies’ plans. Julius Caesar sent cryptographic messages by using a predetermined shift in the alphabet around 100 BC: no technology needed! The concept is simple, but the coding and mathematics that secure modern cryptography can be quite complicated. We’ll explore more about cryptography itself and understanding encryption and decryption in future lessons.
The “crypto” of cryptocurrency today is secured by complex algorithms, or procedures. The algorithms for securing cryptocurrency are essentially a series of complicated mathematical problems, which must be solved by computing devices. They are extensive in several ways, including using very large numbers, which prevents them from being guessed or generated without having the specific code, or key, and computing power needed to solve them.
These cryptocurrencies, or digital currencies, are built and transacted on blockchain technology.
What is Blockchain?
Blockchain offers an unchangeable (immutable) record keeping system of transactions, and is a type of “distributed ledger” technology. This is among the most basic and fundamental aspects of blockchain, which powers Web3, and allows for the transacting of cryptocurrencies and NFTs. When a person initiates a transaction, predetermined algorithms allow it to be carried through, tracked, and recorded on the blockchain.
A distributed ledger is a digital system for recording the transactions of these assets, where all transactions and their details are recorded in multiple places at the same time. Unlike traditional databases, distributed ledgers have no single location for storing data or administration services.
What this means is that no one individual or device on a network is responsible for recording those transactions, nor is able to change them: they are immutable. However, distributed ledgers can be centralized or decentralized: though blockchain is a way to implement distributed ledgers and make them decentralized, not all “distributed ledger technology” (DLT) necessarily uses blockchain technology!
When we consider the possibility of transacting and storing currency or digital assets online, it becomes obvious why an immutable, distributed ledger is critical: it’s important to document when ownership of assets was established, that they’re still retained, and we don’t expose ourselves to the “double-spend” problem. When using a bank card, for instance, a transaction may be “approved,” but later incur an overdraft fee afterwards.
This happens because the funds were not actually available at the time of this transaction. Transacting in cryptocurrencies using blockchain technology was built to resolve this, among other issues. In fact, it’s not just a key component of Web3. Blockchain, itself, was actually created for Bitcoin: the first cryptocurrency.
Today, there are thousands of cryptocurrencies! But not all of them are known, nor created equally. In fact, many more are unknown than those that are reputable in the space. However, new technology is being developed and tested on an ongoing basis. This quest for innovation brings bad actors and failed attempts, but also solutions to problems using blockchain tech that may have never before been imagined!
blockchain: a shared digital record (ledger) of information, recorded in a way that makes it difficult or impossible to change, hack, or cheat the system, because it is duplicated and distributed across a peer-to-peer network.
cryptocurrency: a digital asset, or currency, that uses blockchain technology and is secured by advanced cryptography. The way these assets are built makes certain that cryptocurrency coins and tokens can't be spent twice (double-spent) and their ownership can be proven, even without a central authority, like a bank. The first cryptocurrency was Bitcoin, for which the blockchain was created.
distributed ledger: a digital system for recording the transactions of assets, in which the transactions and their details are recorded in multiple places at the same time, and may be centralized or decentralized.
web3: a variation of the internet, where information and data on the web is created and owned by its users, and run on blockchains
QUIZ - How did you do retaining this information?
- True or False: There are scams in every industry, including cryptocurrency.
- What is the historical meaning of the term “crypto-”
- What is used to secure the “crypto” of cryptocurrency today?
- Complex algorithms
- A special website
- A shift in the English language
- Special puzzles and captchas
- Which type of technology are digital currencies built and transacted on?
- Infrared technology
- AI technology
- Blockchain technology
- Virtual Reality
- What is an unchangeable (immutable) record keeping system of transactions called?
- Distributed ledger
- Decentralized finance
- True or False: Distributed ledgers can be centralized or decentralized
- Which of the following do distributed ledgers help to fix?
- Excessive monitoring
- Building on Web3
- Transaction fees
- How many cryptocurrencies exist today?
- Only Bitcoin
- A few dozen
- Which of the following is associated with cryptocurrency?
- Secured by modern cryptography
- Immutable record of transactions
- A solution to the “double-spend” problem of virtual transactions
- All of the above
- True or False: All cryptocurrencies are created equally.