The entire blockchain technology and cryptocurrency concept may sound confusing even to tech-savvy people. There’s too much noise around the purpose and the long-term vision of the underlying idea. In reality, things are not complicated at all. Here’s cryptocurrency explained in a simple way.
Cryptocurrency explained with a simple card game
Imagine that you are playing a poker game with a couple of your friends but you don’t have the chips.
In that scenario, you would most likely pick one player to run the records for each individual player. Maybe you would call that guy the house, the bank, the public notary or the bookkeeper. Either way, he would be the central regulatory entity, responsible for keeping the game clean and setting the records straight at the end of the game.
That’s how things work right now in our monetary-market system. There has to be someone confirming the transactions and/or contracts and preventing double-spending while keeping the records clean. And that someone, be it a bank, a central bank, a lawyer or a public notary takes a generous fee for the provided service.
Furthermore, we are all required to have faith in that single, central service even though it can take up to the month for the contract to be confirmed. Or, what’s even more ridiculous, it takes 3-5 working days for the money to change hands, even though the entire process operates on a superfast communication network in a digital sphere.
So, it takes time and money to complete a transaction or to seal the deal. And let’s not forget that we cannot rule out a foul game or someone manipulating the numbers.
But what if every player at the table is running the records?
In addition, what if you are constantly crosschecking each individual record for consistency? And what if the house is not taking 10%, 5%, 2%, 1% or even 0.001% fee for the provided service? Finally, what if the house is not taking 3-5 working days to complete the transactions but everything occurs instantaneously, right at the table, after each round?
All of that is now made possible by blockchain technology and subsequent cryptocurrency initially used as an incentive to reward the network of peers who are controlling the system and confirming transactions in a matter of minutes.
A single software managed to speed up the process, seriously cut the costs and successfully eliminate any need for the “middleman” such as the banks, lawyers, and public notary offices.
Cryptocurrency explained for what it truly is
In October 2009, the unknown entity under the alias Satoshi Nakamoto, released a white paper publicly announcing the groundbreaking technology called blockchain and corresponding cryptocurrency, Bitcoin. If you want to learn more about cryptocurrency, check out Cryptocurrency Institute.
Why blockchain?
Let’s get back to our poker table.
Say you lost the hand to the guy next to you. All the money you put in that round goes to him. In the next step, you issue a request to transfer X amount of money from your wallet to his.
The network of peers (everyday people like you and me plugged into the network) receives your request and starts working on a mathematical problem unique to your transaction.
Whoever solves the problem first, confirms the transaction by creating a new block that is then added to the chain. Thus, the blockchain.
That block contains your private and public identity keys, the exact time of the transaction, the amount of money you are sending to the person, the address of that person’s digital wallet, and a few additional important records.
On average, it takes 10 minutes or less for the network to confirm your transaction and for the receiver to see the money on his account (wallet address).
Where is the cryptocurrency in that entire process?
First, the people who are keeping the blockchain ledger (the chronological record of all the blocks in the chain starting from the Genesis Block) are doing that because they are expecting an extremely small compensation for their time and computing power that comes in a form of a cryptocurrency. It can be Bitcoin, Ethereum, Litecoin or any of over the thousand existing these days.
Second, in case you didn’t realize, you weren’t playing your poker game using conventional fiat money like dollars or euros but rather using a cryptocurrency, say, Bitcoin.
So basically, after you lost your 5 BTC bet, you transferred that number of Bitcoins to the guy who won the hand. In a process, an extremely small number of Bitcoins went to the person on the network who solved the mathematical problem and successfully confirmed your transaction by adding a new block to the chain.
And it’s that mathematical problem along with the identification keys that ensures two important things:
- Nobody can impersonate you unless he or she has the access to your private key
- Nobody can reverse-engineer the equation in such a short time thus, it’s hack-proof
Finally, there is no need for the bank or any other central intermediary body to freeze your money for a period of 3-5 days and deduct a rather large fee. It’s just you and the guy to whom you are sending those 5 Bitcoins. Those 5 Bitcoins will land in that guy’s crypto wallet in 10 minutes or less.
No more banks. No more manipulation of the inflation and currency value. No more expensive lawyers. No more juicy fees you must pay every time you want to pay for something. No more waiting. All made possible with the blockchain technology and cryptocurrencies.
Conclusion
That’s cryptocurrency explained in the simplest way possible. However, if you do have additional questions, just drop a comment and we will get back to you.