When trying to explain crypto a few years ago John Oliver famously quipped.. “Everything you don’t understand about money combined with everything you don’t understand about computers”.
This is our attempt to help you understand better in non-technical terms, what exactly does one mean when one talks about cryptocurrencies and things like Bitcoin and Ethereum and Dogecoin and how do cryptocurrencies compare to real money/currencies like the US Dollar ($) or the Euro (€) or the Chinese Yuan (元)
Think of crypto in terms of arcade tokens or tickets. When you walk into..
- A video or game arcade or
- Chuck E. Cheese (though they stopped using tokens back in 2016) or
- A place like Dave & Busters or
- Any Casino
you go up to their ‘Exchange Counter‘ and you give them ‘real money‘ (real currency) and you buy say $100 worth of tokens or tickets. Now you can use those tokens inside of the establishment to play games, buy food and drinks etc. How many tokens does it take to play a specific game or buy a slice of pizza for example, is determined by the owner of the establishment and is based on customer demand and supply economics. While you are in that establishment those tokens are effectively the cryptocurrency of that establishment. When you leave that location you can either
- Cash out your unused tokens i.e. exchange them back at the counter for USD($)
- Put them in your wallet, take them home and use them when you come back to that location again
- If it’s an establishment with many locations, you could use those wallet tokens at other locations
However what if that company had locations around the country and wanted their customers to be able to use tokens from one location in another location and wanted to allow customers to be able to exchange tokens online for services in different locations. Those physical token coins/tickets would not be suitable in that case so the company typically will provide their customers with a ‘digital card’ that can be loaded with real money at any of the locations or online through a website of phone app. Customers would then use that ‘digital currency‘ (instead of the physical tokens/tickets) that is loaded on their card to use for services/goods at different locations.
Now what if instead of using that ‘digital card and currency‘ only at that company’s locations or online at the company’s website, the company wanted to allow their customers to be able to use that card at other companies they’ve partnered with. In order to do that they would reach an agreement with their partner companies and create an ‘internal network’ with those companies and exchange data about the customers and data about the digital cards of the customers and updated card balances, as customers used those digital cards at the different companies and different locations.
That in essence is what a cryptocurrency is and how it’s useful. In terms of the above use case..
- A cryptocurrency is the tokens you purchase with real money and put on a card that you get when you walk into an arcade/casino/game/entertainment establishment
- A digital wallet is the card the company provides you which holds your token balance
- A crypto exchange or bank is the exchange counter at a company location that allows you to buy/sell/exchange your real money for a token or ticket or put real money on your digital card
- A cryptocurrency network is the group of partner companies that have agreed to allow you to use your tokens at all their establishment and which share your data and account balances among all networked companies
- Unlike the arcade or casino company which creates/produces the game tokens and unlike the federal bank of a country which mints real currency, no single entity produces/mints a cryptocurrency. Any computer connected to the Blockchain can create/mint/mine a cryptocurrency as explained below
Just like 20 years ago any company or network of companies could print/produce their tokens/coins/tickets and share use of those tokens physically or through their digital cards today…
- Any digitally connected/internet company or a group of people with a rack of computers or an individual with a single powerful computer or a few computers, can run software to create or mine a digital token or cryptocurrency and that process is referred to as crypto mining
- All those computers are connected through an internet network and run a common program(s) to share information about use of that cryptocurrency and that connected system is what’s called a Blockchain
- Since no one company owns the cryptocurrency or owns the Blockchain (it’s decentralized finance hence the term DeFi), the account balances of the users (digital wallets) of that cryptocurrency and the validities of the cryptocurrency transactions (buying/selling) taking place at any given time have to be shared/acted upon by all computer systems that are connected in that Blockchain. The well defined rules, processes and data systems involved in that Blockchain is called a Distributed Ledger
- The price of a particular cryptocurrency is based on the exchange rate of the cryptocurrency with real currencies like US Dollars, Euros, Yuans etc
- The value of a particular cryptocurrency is determined by the supply/demand economics of the participants (companies, groups, individuals) in that particular Blockchain and the popularity of that crypto
- There are over 4000 cryptocurrencies in use around the world with the most popular being Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Litecoin (LTC), Dogecoin (Doge), Cardano (ADA), USD Coin (USDC), Monero (XMR), Chainlink (Link) Bitcoin Cash (BCH)