I have been told by a friend that cryptocurrencies like bitcoin and ethereum are going to be the way we use money in the future.
This is a big claim, backed up by bitcoins massive success as of late.
So I thought it is worth investigating.
As I began probing this world I realised I am a total fresh face, with no notion of what any of the complex tech and investing jargon meant.
In challenge I see opportunity.
I’ve decided to demonstrate the Feynman technique in action to unlock the dense jargon of the crypto world.
What Is The Feynman Technique?
The Feynman Technique (a Learning tool used by Physicist Richard Feynman) follows the idea that: if you can’t explain something to yourself like you were a child, you don’t really understand it.
His main deal was about getting really clear on what each and every word or idea meant.
So this is how I will tackle the cryptocurrency world.
Let’s get rolling…
What Is This Word/Phrase Cryptocurrency?
Well we know the word currency. Euro, dollar, Yen, are all currency’s.
Ah! Says the Feynman mind! But what does currency really mean?
“Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.”
The important idea to clear up here is medium of exchange.
Imagine you were a farmer who grew potatoes, and I was a farmer who owned cows.
Now say you wanted a cow for milk and I wanted potatoes for my dinner. We could agree to trade.
Only it wouldn’t be a straight up trade. I wouldn’t give you one cow for one potato.
Cows are more valuable than potatoes. I’d trade you one cow for 1000 potatoes.
Now say you buy a cow from me. You don’t need another one. You got all the milk you want.
But I am a fat bastard. I’ve eaten all my potatoes. I want more.
How are we going to trade? You don’t want what I’m selling.
So to make trading easier, humans invent money, which is valuable itself.
Our society could assign a healthy cow with the value of 1000 gold coins.
Where as a single potato might only be assigned 1 gold coin in value.
So if I have 250 gold coins, I can offer you that for 250 potatoes, even though you don’t want cows.
These gold coins are a medium for exchange, they give us a way to measure value.
The currency (think of the word current, or if a rivers flowing current) is simply the specific thing we use as this medium for exchange.
In this case everyone has agreed to use gold coins. In Europe everyone agrees to use Euros. In America, dollars.
So after all that rambling (get the fundamentals clear calls the Feynman mind) we add another price to the puzzle: what is a Cryptocurrency?
“A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature.”
Ok – but what is cryptography? I’ll let Khan academy cover this:
It is a technique for communication where you “scramble” up letters to stop bad guys from figuring out the message.
In cryptocurrency (crypto meaning secret in Greek) they use computer codes to send messages. And they use really hard maths problems to “scramble” these messages so bad guys can’t figure them out.
Why is this important for a currency? Well this is dense, but I’ll let this video give you an idea:
The Feynman mind says that important jargon idea here is the “public ledger”.
A public ledger is like a giant book that records who owns what.
- Mick has 50 gold coins
- John has 9 gold coins
- Beth has 300 gold coins
When Beth pays John for johns potatoes (people love potatoes in my world) this exchange is written onto the ledger.
- Beth sends John 25 gold coins
- John now has 34 coins
- Beth now has 275 coins
Of course bad guy greg might write something untrue on this ledger.
- John Beth and mick send all there money to Greg.
A bank is usually the authority that watches for this stuff.
We all trust banks to take care of the public ledger. Bankers and their computers keep the ledger in order.
A cryptocurrency instead uses cryptography.
The puzzles (encryptions) they use to guard the ledger are so hard to solve that it takes a computer to figure them out. Human brains are just too slow.
They are so hard that it takes a computer a long time to solve it. So if Greg wanted to write this dodgey transaction it would cost lots of electricity.
And even if he did there’s another barrier!
All over the world there are guys who have linked their computers to the public ledger, and they are all racing to figure out the puzzle first.
So in order for a bunch of new transactions to be written on the ledger they are first sent to all the computers hooked up to the cryptocurrencies system with a puzzle, and in order to validate them (that is – confirm they are true) all these computers race to figure out the puzzle.
This whole process is called mining.
The winning computer is then given some money, the transactions are written onto the ledger, and a new bunch of transactions are sent out to the computers with a new puzzle.
Each bunch of transactions and the time it takes to confirm them is called a block (block of time) and this is where we get the name of this technique that makes crypto currency possible: blockchain.
The public ledger is a big chain of these blocks, and it’s really hard for Greg to get his meddling fingers onto the ledger because he has to compete for each block against thousands of computers over the world.
And even if he did win! The other computers could check the block of transactions he tried to write and compare them to the ones the were sent.
If they see something weird they can just choose to ignore him!
This makes cryptocurrencies very fair and hard to corrupt, and this means it’s easy to trust – in the same way we trust banks to take care of our transactions – we can trust this blockchain system to tell the truth.
This is the reason why people find blockchain so interesting. It means you can send someone money without having to use a bank.
This becomes especially interesting because banks charge fees for recording a transaction. These fees are even higher when you send money to other countries!
Blockchain seems to dramatically reduce these fees, and if your bank goes into crisis (like what’s happening in Venezuela) you can send your money quickly to a cryptocurrency where they can’t mess with it.
In many ways internet based cryptocurrencies may be the currencies we recognise as the medium for exchange all over the world in the future.
Imagine you walk down to your local shop, pay for food with a cryptocurrency app on your iPhone, climb aboard a plane, buy an album with the same currency, get off in a different country and be able to buy food again with the same currency!
Still keeping up? Let’s look at the chief cryptocurrency right now.
Big Bad Bitcoin
The first cryptocurrency to really work was bitcoin. This has been around since 2009.
Since then it has ballooned and bust in terms of value, but recently steadily started to grow.
Bitcoin is the pioneer of the cryptocurrency technology and its uses are all related to the above fundamentals:
- Send money across borders and long distance for tiny fees. Many entrepreneurs in third world countries are doing this to avoid crooked governments.
- Store wealth online to avoid unreliable “local” currencies. Like Venezuela.
This makes bitcoin look like an anti government weapon, but Japan just recently made bitcoin a legal payment method.
More and more I am seeing people offer bitcoin as a payment method.
A problem bitcoin may have is when the mainstream start to use it and the number of transactions is so large that it begins to slow down.
Another cryptocurrency called Litecoin is slipping in with an updated software to fix that problem and getting a lot of attention.
There are many other cryptocurrencies that are doing well, some to explore are: Ripple, Dash, Ethereum, and Monero.
Other applications for blockchain technology
Since the advent of bitcoin people have figured out that there are more possible uses for blockchains, beyond money.
One project known as Ethereum is an example.
Ethereum uses the blockchain to create a sort of Internet server.
Feynman mind returns: what is an internet server?
A server is usually a big powerful computer that stores loads of data.
Facebook, and everything on it is stored on massive computers.
When you type your friends profile in Facebook search you are actually asking their big server machine to send you the info.
Ethereum uses blockchain technology to replace these servers.
Instead of the people supporting a cryptocurrency by checking transactions, they support it by sending it some computer power.
When you have thousands of people doing this all over the world at once you have a super server! Or as the ethereum guys like to say: the world computer.
Ethereum is like a special space where you can build a website on a world server instead of having to buy a server yourself or rent space off a hosting site (hosting sites are like landlords who rent out server space).
This is especially good because the collective power of all these computers will be WAY bigger than any one server, allowing you to build far crazier websites and applications!
Think of it this way: consider how much more sense it makes to simply pay 10 euro to visit Lego land and use its massive store of lego than to spend 50 euro each time you want a new batch of Lego at home.
To some up the arc of Feynman thinking we ask questions that can further our journey into the topic.
Do these technologies have a useage? If so which are the real deal and which are fluff?
Will they be used by the mainstream or just corporations?
What’s the best way to get involved? Investing? Or adding these payment methods to your business?