Hey, so what is this?

My family and friends often ask “Can you explain crypto to me?” and, after some failed attempts and some successful ones, I realized that the concepts are really, really difficult to explain.

I wrote these posts partly to help explain the concepts to myself. I used examples that I could understand and, well, doodles.

But I hope that this will help others like you, my reader bhai, who have the same “what is…?” crypto questions.

You called me bhai. And you call yourself crypto-bhai. What is a bhai?

Bhai, in the Urdu language, means brother, or bro. But it is more than a “bro”. It is the cashier at the coffee shop you say good morning to everyday, it is your classmate, it is your favorite cousin, it is your teammate, it is your life long friend.

With a bhai, you can sit down on a patio overlooking a grassy terrain, and over a leisurely afternoon and a warm cup of chai, ask all of your crypto questions without feeling the specter of judgment peering over you.

Thanks, cryptobhai! So, if I read this, I’ll be a crypto expert, right?

No.

This is a gross oversimplification of many really complicated concepts.

It intentionally misses many nuances and detours that will likely require thousands of hours to explain.

But it should make you a bit more connected with a technology that may shape our society for decades to come just like the internet did.

Cool. So like reading Cliff’s Notes. Where should I start?

We recommend starting with this intro as a foundational concept. You can then veer into different topics. We’ll try to post a new one once a week.

For each post, you can also go to the bottom - the TL;FA (“too long, fell asleep”) section to read the main bullets.

Got it. So, what is all this bitcoin and blockchain and crypto stuff?

First, let’s say it all together:

Blockchains are not just Bitcoin and Bitcoin is not all of cryptocurrencies and cryptocurrencies can be more than blockchains.

Well, sort of.

The point is these are all different concepts but people use them interchangeably (but wrongly so).

If someone says to you: “Hey bhai, are you into crypto?”

You respond: “It depends. Do you mean bitcoin, or blockchains as a technology? If blockchains, what part of it? As a record of transactions or a governance mechanism? Or do you mean cryptocurrencies as a way to transfer value to others pseudo anonymously? Or do you mean digital assets as an alternative to fiat? Or are you talking about the decentralization of the ownership of property? Or all of the above?”

Understood. It’s all a jumble of stuff. So let’s start with: What is a blockchain?

A blockchain is just a set of data recording events.

Imagine a notebook recording your events of the day.

“Crypto bhai woke up at 7:03am. Crypto bhai had an empanada at 12:03pm. Crypto bhai had a empanada induced nap at 12:17pm.”

But instead of one notebook, you have thousands of people sitting in a large auditorium each with their own notebook, recording these events, and agreeing to them. That means there are thousands of identical notebooks recording your day.

Sounds creepy. Who are these people and why do they care about recording these events.

These people are computers, or “nodes.” And they are (1) screened to make sure they are serious about doing the work and (2) given a reward for doing the work.

Imagine that the thousands of people with notebooks in the auditorium are first asked to do twenty minutes of jumping jacks before they can enter into the auditorium. The random passerby is probably not do all that work just for the fun of it. This weeds out the frivolous. Only the serious and well intentioned get to enter the auditorium.

Next, once inside the auditorium, each time an event is recorded, a lottery system gives one random person in the room a handsome reward.

So what really happens?

These nodes, or computers, perform random computational work to spend resources (electricity = money) to ensure they are serious about being a part of the event recording and will do a good job. This process is known as “proof of work.”

And then they are all entered into this lottery and rewarded with a currency native to the blockchain. That currency is often referred to as a “token”.

So these nodes can be the record of any sort of events?

Yes. The cool thing about blockchains is that because you have thousands of people recording the same event, the chances of forgery, corruption, or an event being changed later on is close to zero.

What sort of events can blockchains record?

If you can get to the conclusion that blockchains can become the ultimate source of truth for any set of data, then you begin to imagine all of the different use cases where this becomes important.

Think of all the use cases where two or more strangers need to come together, agree to something, and that something needs to be recorded without risk of it being altered, or forged, later.

Think: Contracts. Sending Money. Exchanging something of value. Giving someone a loan. Buying a house.

But these are all things we know how to do today.

Correct.

But blockchains just change how we approach these areas. With blockchains, you just need software code, not intermediaries, to run the transaction.

Contracts? You agree to sell your house. Thousands of people record this contract using software code. You don’t need a lawyer and judge to enforce the agreement.

Money transfers? You need to send money to a complete stranger. Thousands of people record this transfer using software code. You don’t need the banking system to record the transfer.

Art work? You create art work and want it to be authenticated as yours. Thousands of people record that this art work is yours using software code. You don’t need appraisers and experts to verify its authenticity.

You no longer need the intermediaries.

Here’s a doodle of how blockchains replace the banking system as the intermediary to send payments:

Why do we hate intermediaries?

We don’t. But intermediaries have one flaw. They are centralized, meaning it’s usually one person or system.

The more central the power, the higher the probability of corruption.

As an example, Bitcoin came about as a response to the 2007 financial crisis when people realized that the financial system (a centralized intermediary) was also susceptible to greed, corruption, and frankly, idiocy.

Blockchain decentralizes the power (i.e., it spreads it over a lot of people) so the chances of mutability and corruption goes down significantly.

So Bitcoin is the blockchain?

Bitcoin is a new type of money built on blockchain technology.

But, and this is very important, even though Bitcoin is all you hear about on the news (Bitcoin! Bitcoin!), Bitcoin is just one use case of blockchain technology.

Everyone talks about bitcoin but forgets that the underlying technology is really what’s exciting.

As an analogy, think of blockchain as the internet and Bitcoin as one of the use cases of the internet, like a popular website.

Just talking only about Bitcoin is like saying, back in 1990 when the internet first became mainstream, AOL was the entire Internet (for those of you are snickering at the aged reference, AOL was once *the* way to chat with your friends (AIM and those away messages!), check the news and stock market, receive email, and meet strangers and fall in love).

That said, Bitcoin did create the concept of blockchain technology through this white paper so it’s more like AOL created the internet and then the internet then became much larger than AOL.

Now there are hundreds of different use cases of blockchain technology besides Bitcoin.

Got it. So then what is Bitcoin?

Initially, bitcoin was just a peer to peer payment system using blockchains without needing intermediaries like the financial system.

That means that someone could send a thing of value to another person without needing the banking system or any payment processor (more on this later but when you send money via Venmo, there is a vast system behind the app that gets your money to your friend. Bitcoin skips all of that).

With a peer to peer system, all you needed was an internet connection, and the blockchain solved a lot of the problems you would have when you get rid of an intermediary like the banking system (fraud, double spend, someone owning a ledger of who owns what).

But this thing of value that was sent was just software code. People decided to call this thing Bitcoin.

So it was like you were just part of a small club where people sent software code to each other on their computers and smart-phones and said “hey, I sent you something of value. I call it Bitcoin!” and the person receiving it said “I received this made up thing of value, I’ll call it Bitcoin too, and it only took minutes to get it and neither of us paid bank fees, thank you!”. None of it, though, really mattered outside the small club.

But, eventually the club got bigger and bigger until one day someone dared venturing outside the club and used this made up thing of value (again, just software code) to buy some pizza.

And voila! Bitcoin was on its way to becoming money.

Money has many properties (durability, divisibility, store of value) but, in general, money is money when it can be used to buy things and pay for services.

So can anything be money?

In theory, yes. Avocados can become money but they would be a poor form of money because they are not a good store of value (they go bad very quickly).

So, Bitcoin is just new, made-up money that just needs computers, and not a government, to issue it.

You can read a more detailed explanation here in “What is Bitcoin?”

So then what is a cryptocurrency, token, or coin?

At a very high level, they all refer to the same thing.

Recall that Bitcoin is just one use case of blockchain technology? Cool, just making sure.

Once the blockchain technology was discovered, people started using blockchains to create new ways of doing things that have already been done.

Just like the internet, for example, created not just email but a new way for people to transfer information and knowledge to each other by uploading videos, posting in social media forums, and directly chatting with someone on the other side of the planet.

Similarly, blockchains are creating new ways for people to enter into contracts, borrow money like you would from a bank, and trade assets. Before blockchains, people needed to go to a bank to borrow money, hire a lawyer to write a contract, pay a fee to a broker to exchange assets.

Now, software code can execute some of these transactions.

Each of these new use cases of things already done but using blockchain technology is like a separate project. Each project has typically what is called a token, or commonly referred to as a coin, and it is sort of like the currency for just that project.

Owning the token allows you to take part in, and actually be a part of, that specific blockchain project. So you can, for example, vote on how the blockchain is run and use the blockchain for what it was intended. It is like a little community where you are both an owner and the user of the product.

So is a token, or coin, like those gold coins from Super Mario brothers?

Not really, it is just more software code (I know, boring!). You can’t really touch it or hold on to it.

But, think of that software code like an admission ticket at an amusement park (not so boring!) where you get to use the ticket to use the rides but also decide which rides and games the amusement park should have!

Hmm, go on….

Imagine each amusement park has its own, separate admissions ticket. Each amusement park also offers a different set of rides, games, attractions. These amusement parts are all lined up side by side together.

Now, you can use your ticket to go inside the amusement park and ride the rides. Or you can wait outside to see if the amusement park is getting popular. If the lines outside the park get very long, you might even be able to sell your admissions ticket for a much higher price (e.g., supply/demand).

Or you can trade your ticket to an admissions ticket to a different amusement park down the street.

Most people you hear about who are buying these coins are hoping to make money, or use the ticket for the second purpose (wait outside until the amusement park gets popular and then sell their ticket).

But what is really cool is what is happening inside the amusement park, which is where the blockchain is being run.

Can you give real life examples of some of these tokens and blockchain projects?

Yes, for example, the Ether token is a ticket to the Ethereum project.

The Ethereum project allows people to enter into contracts with each other (already been done) but now using blockchain technology (new!). The blockchain technology allows you to create a smart contract. You need Ether to enter into these smart contracts.

What are some use cases of these smart contracts? Creating and buying NFTs! (More later on “What is an NFT?”).

But it is also much more than that - Ethereum is like a super blockchain that allows other people to build blockchain projects on top of that super blockchain (i.e., it is like the Apple operating system where anyone can build apps on top of it).

But more on Ethereum in, yes, you guessed it, “What is Ethereum?”

The Aave coin is a ticket to the Aave project.

The Aave project allows people to earn interest on deposits and borrow assets (already been done) but now using blockchain technology (new!) which avoids having to go through an exchange or a broker, like Charles Schwab or a bank.

The Polkadot project allows people to link one blockchain to another. That is sort of like a bridge connecting all the amusement parks together so you can travel easily among the parks (so mostly all new!).

But why do we call them crypto-currencies? Isn't currency money too, and so how are these other cryptocurrencies different from Bitcoin?

People are often confused as to how we could live in a world where there are thousands of different (crypto) currencies. The answer is that, practically speaking, none of these currencies are (at least in the short term) going to be used to buy a cup of coffee, just like you couldn’t use your airline miles or credit card points to buy a cup of coffee.

These currencies work for that specific project, and you can even trade the currency for real money. But you can’t walk down the street to the coffee shop and give them Ether.

They are no different than airline miles. They serve a particular purpose in a particular ecosystem.

Could one of these other tokens become popular enough to become money too, like Bitcoin?

In theory, yes, but unlikely.

That is because Bitcoin was specifically designed to be a payment system (sending payments to one another).

Most of these other projects, like Ethereum, are not designed to be just payment systems.

So it’s like Bitcoin already has the picks and shovels to be a bank and so got really good at being a bank but the other projects have the expertise to serve other functions (like a court system or a stock exchange).

So, in summary, what makes Bitcoin so special that it can be used outside the system in which it was created?

A few things:

(1) It was designed on a payment system blockchain. So, from the very beginning, it had all the tools to be its own sort of bank and allow people to send the Bitcoin to each other;

(2) It was the first use of blockchains, and therefore

(3) It had what is called “network effects”, meaning enough people owned and used it that it became popular enough to be more than just an internal loop currency, it became money.

So much information to digest, cryptobhai! Please give me the TL;FA (too long, fell asleep) bullets.

Here’s the key points to understand so far:

• Blockchains are a new type of technology that allow strangers to transact without an intermediary (a bank, a judge, a stock exchange, a company)

• Bitcoin is a new type of payment system that is built on this blockchain technology.

• Bitcoin became popular enough to become money

• Blockchains are being used to do many different things that previously required an intermediary

• Token or coins are your access to these blockchains.

You might have other questions, such as:

What is web3? What is DeFi? What is layer 1 versus layer 2? What does inflation have to do with crypto? Why is crypto bad for the environment?

AND WHAT IS DOGECOIN?

We’ll get to those.

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