Blockchain Basics: Cryptocurrency

My last post received more comments than any post in recent history and they were all about how confusing blockchain technology is (some seemed angrily so!).

Look, it’s impossible to explain blockchain to someone who knows absolutely nothing about modern computing. A sad truth about our world is that if you want to be involved, you have to know a lot more than you did twenty years ago. Further dooming those who have fallen behind is the pervasive attitude of computer nerds which states “it was hard for me to learn, so it should be hard for everyone to learn”. It doesn’t have to be hard, though. Much of the archaic terminology can be done away with; one of my dreams is to teach technically-illiterate people how to think about Information Technology in layman’s terms.

Given my point above, that it’s impossible to explain blockchain to someone who knows nothing about programming or the inner-workings of the Internet, I thought an easy jumping-off point would be cryptocurrency. Not only is it easy to learn, it’s easy to write about, and I’m out of practice! There will be a lot of footnotes in this post because there are a lot of things one could dive deeper on… way deeper… but it would make this a confusing mess. Feel free to read them if you like or just take the terms I use as placeholders for unicorns.

Cryptocurrency

Since I promised this would be a high-level view of this technology, we don’t yet need to dive into the guts of how coins are doled out, how ledgers are written, or how transactions are validated. For now, just imagine there’s a bank teller somewhere doing all that (they work extremely long hours and don’t get paid nearly enough). To start at the absolute fundamentals, one needs to know the difference between commodities and fiat currency.

Commodity Currency

Remember when the U.S. Dollar was backed by the gold standard? Me either, but it apparently was a thing. That’s an example of commodity money: money which is backed up by the supply of a certain tangible (or fungible, which will be important later) good. Gold and other precious metals (or specie when used as currency) have been the most popular, but there’s no reason one couldn’t use unopened bottles of Crystal Pepsi or original 1980s G.I. Joe figurines. Even today there exists a prolific community of elderly women who treat Beanie Babies as specie currency.

Fiat Currency

You’ve no doubt heard the term “fiat money” more than once in recent years and that is all because of our current topic. Fiat currency is backed by nothing; the U.S. Dollar can, more or less, be waved into existence with the magic wand of the Federal Reserve. New money coming into existence regularly one of the (too many for this article) reasons the value of said money fluctuates. Cryptocurrency is also fiat currency because it represents nothing. This has been a perennial criticism of the technology but as many bespectacled virgins have stated over the last decade, that’s… like… no different from regular money. It’s not real, man!1

So What is Cryptocurrency?

As stated above cryptocurrency is fiat currency, but it differs greatly from traditional fiat currency. The main appeal of cryptocurrency is two-fold: its decentralization and its anonymity. I’m not confident the latter will last forever, but it will likely stay decentralized because of how the system is designed. As promised, I’m not going to elaborate on how these properties work but we do have to talk about them otherwise we’re not talking about cryptocurrency.

Let’s return to our lone bank teller who’s handling your transactions. She only has one drawer of money to work with, but it’s a pretty deep drawer. Moreover, when you are dealing with her it’s through a slot in the wall and she can’t see your face. She suffers from deep depression, surely. When you send or receive money, only account numbers are involved; no names or photo ID’s required. But what stops someone from bringing in your account number and having the teller transfer all your money into their account? Secret keys (more commonly referred to as private keys).

Secret keys are even better than a photo ID or social security number because nobody but you should have yours. This creates a problem for cryptocurrency and is the reason it will never replace fungible money… if you can’t keep Grandma Debbie from clicking hyperlinks in emails promising a million dollar vacation in Jamaica, how can you keep her from giving away her private key and losing all of her money to a completely untraceable account? You can’t4. The majority of the world is too stupid for cryptocurrency to become the sole form of currency. That doesn’t make it useless, as we’ll see later.

Bitcoin

Be honest, you’ve heard of Bitcoin. People in countries that don’t have regular Internet access mine Bitcoin (we’ll talk about mining… some day). Bitcoin was released as open-source software2 in 2009 and it created some shockwaves to say the least. Part of this is surely due to its novelty: nothing like Bitcoin had been done before. There’s also a bit of mystery to it: the credited author is “Satoshi Nakamoto”, a Japanese man who doesn’t exist.3

Altcoins

“Altcoin” refers to any cryptocurrency which isn’t Bitcoin. This doesn’t make them less valuable; indeed, altcoins are where the magic really begins to happen with blockchains. We can think of Bitcoin as the proof-of-concept for the technology and it might always be the heavy hitter, value-wise, but altcoins are where developers began to take the technology and look for ways to use it. Make no mistake, we’re living in an exciting time for I.T.

NFTs

Like Bitcoin, you’ve probably at least heard someone talking about NFTs (non-fungible tokens) recently. Everybody from Facebook to the NBA is getting in on the NFT game (usually with embarrassing tone deaf attempts). Remember when we talked about fungibility all those paragraphs ago: there are millions of pieces of gold of various sizes in the world, but at any given moment a precise measurement of any of that gold is worth the same as any other of the same quantity.

Not so with NFTs. NFTs are usually demonstrated as digital art but they can be any asset which has a cryptographic code assigned to it ensuring that it is the only one of that item that can ever exist. Right now it’s being looked at for possibilities in computer gaming, virtual reality, and so on… but I can foresee a world in which tangible objects somehow have NFT hashes assigned to them. There’s no reason it’s not possible and it’s cheaper than hiring an art historian to examine your painting.

One neat thing about NFTs is that the original creator retains some ownership of it throughout its life, so as it is resold the creator receives royalties for their work. That truly puts ownership in the hands of the artist in a way that’s never been possible before. Long gone are the days where distribution companies screw over bright eyed 20 year old’s for billions of dollars. If the recording industry thought Napster and Spotify were bad for their bottom line, they ain’t seen nothing yet.

Conclusion

How did I do? Was this reasonably easy to understand? I tried to stay away from geektalk as much as possible but it’s never possible to stay completely clear of it. One shouldn’t, either. My goal isn’t to never use proper terminology but to slowly introduce it so my readers learn over time.

Any of these topics could be studied for weeks on their own so if you’re interested in one or more of the subjects here, I’ve included hyperlinks to the respective authorities for the major players. A word of warning, though, the authors of their documentation certainly do not speak in any human language I’m familiar with.

Linkdump

Bitcoin
Ethereum
Solana
Polkadot
Cosmos
Tether
Monero

Footnotes

1 This is a stupid and simplified view of money and anyone who uses this as part of any argument is definitely in their early twenties.

2 Open source refers to software for which the source code is publicly available. This is opposed to commercial software in which only the developers have access to the source code. Open source software is implicitly open for modification and expansion by third parties and is incredibly difficult or impossible to monetize. Linux is the best example of open source software: it’s a completely free operating system with more flavors than I can remember (this post is being written on the Kali distribution which is in turn based on the Debian distribution… phew maybe I’ll write an intro to Linux some day). A drawback to open source software is in the difficulty of monetizing it. Many developers rely on donations for their work and as such, updates can be slow or nonexistent when compared to commercial software developers. Despite the promises of the anarchists, nobody wants to work completely for free.

3 The name is certainly a pseudonym for one or more persons, and the claim of Japanese origin is also under scrutiny because the source code and its comments are all written in obviously native English. However, if the author truly is a lone genius (as he would have to be if not a team of skilled people), language may be one of his gifts. Even so, numerous “figures of speech” and remarks are made that someone who has never lived in a native English-speaking country would likely not know. Plus lots of nerds wish they were Japanese because Anime.

4 “But… but… but.. people steal real assets all the time!” Correct, simpleton, but it’s exponentially easier to rob someone who has given you their private key to their crypto-wallet and there is no way for anyone to ever get that money back… not even the police can help you. The wealthiest crypto holders are, humorously, all criminals.

7 comments

  1. Do you think the energy requirements for proof of work will at some point limit the mass adoption of cryptocurrencies?

    What I don’t understand about NFTs isn’t so much the idea of an NFT but why people are paying a shit-ton of money for some lame-ass bored ape jpeg. If an NFT is a digital representation of something that people perceive as having value, that makes sense to me. I guess my confusion is less that NFTs exist and more what people choose to see as having value, which I suppose is more along the lines of not understanding why people pay a shit-ton of money for a painting of two shades of blue.

    1. “Do you think the energy requirements for proof of work will at some point limit the mass adoption of cryptocurrencies?”

      Yes, that’s what’s behind the big push toward proof of stake and is why, for example. Ethereum is moving to a stake model with Ethereum 2. It has its downsides (such as being theoretically easier to attack) but as far as I can tell it’s a vast improvement over proof of work. I wanted to get more into the two models but I’ll save it for a more advanced post, lol.

      “I guess my confusion is less that NFTs exist and more what people choose to see as having value, which I suppose is more along the lines of not understanding why people pay a shit-ton of money for a painting of two shades of blue.”

      Right! I think there are a few things going on with that. One is just “clout”. People who already have a ton of cryptocurrency snatching them up at insane prices which makes other people envy them and drives the price up even more. A second component is tech infatuation. People want them because it’s the new thing and some blogs told them they should want them. Third, and I’ve talked about it a bit before, is money laundering. I can’t say for certain how much of the NFT market is based in money laundering, but it’s certainly there. Some of it isn’t even nefarious money laundering… it could be entrepreneurs in less-ethical countries who can’t do business in their native currency lest they be beheaded. Digital casinos (which are almost always scams) “coincidentally” trade in a lot of NFTs.

      As for the example you mentioned, the CryptoPunks collection… I think those are valuable just because they’re “first”. They’ll always be worth money because they were one of the first NFT collections. Nobody will be able to make that much money off of a shitty 8-bit jpeg again unless the artist is somehow worth the money beforehand.

      1. I’d never heard of proof of stake, but after taking a quick look at what Ethereum says about it, it certainly sounds more sustainable.

        I’m curious if/when big-time criminals will trust the anonymity of cryptocurrency enough that they stop dealing with boatloads of cash that they need to launder.

        1. We’ll have to see if it becomes more mainstream to trade NFTs because right now the process of creating and selling them is probably too complicated for “normal” criminals, lol. Maybe there will be a black market of dumber criminals paying smarter ones to set it up for them. XD

  2. I have to give you credit for both being knowledgeable about crypto but also having the view that crypto will never fully replace fiat currency. That’s a nice nuanced take that I didn’t know people even had. There seems to be two parties, one who thinks all crypto is a useless scam and another that thinks crypto is money of the future and there is no alternative.

    I was also wondering about the energy costs of crypto, nice to see the reply above!

    1. It’s painful to see so many people fall for the ridiculous notion that crypto is the future of money, but you don’t have to be smart to go crazy for Bitcoin I suppose. Lol.

      Yes, the energy cost of mining proof of work-style is insane. After Ashley’s comment I thought about how to explain it in a future post and it would be like having 1,000 coal power plants burning coal but 999 of them aren’t plugged in to anything.

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