What is Crypto?

“Crypto” is a catch-all term for digital currencies and other assets based on cryptographic technologies. 

There are different types of cryptos, and for this introduction, we’ll consider two types of cryptos: 1. cryptocurrencies and, 2. crypto tokens. 

Cryptocurrencies

Bitcoin, the granddaddy of all cryptocurrencies, is simply a digital currency that uses cryptography for security and anonymity.  It is used as a store of value and as a medium of exchange, independent of traditional government-issued and controlled currencies.

Governments or central banks are not the primary issuers of cryptocurrencies, unlike fiat currencies such as the U.S. Dollar and the Euro. [Note – the tremendous popularity and growing use of cryptocurrencies is spurring governments to issue their own digital version of their national fiat currencies.] Non-national cryptocurrencies are digital mediums of exchange that can’t be controlled by politicians.  A government might outlaw the use of cryptos by its citizens, but it can’t affect the value of cryptos in the same way that it can print more fiat currency (serving its interests at its citizens’ expense). Bitcoin was designed as a vehicle to transfer value securely outside of the control of central banks. and as an alternative, digital storage medium.

Crypto Tokens

Two examples of systems that involve crypto tokens are Etherium and EOS.  They are “blockchain” systems based on the use of tokens.  The systems are blockchain protocols – think of them as the computer operating systems of crypto assets – which support the creation and operation of “smart contracts.”  They enable app developers to build and deploy their blockchain-based operations easily without creating a new blockchain system from scratch.

The preceding three sentences introduced some key terms which we’ll define now.

Blockchain is the technology used by Bitcoin and other crypto assets to process and keep track of secure, public and anonymous transactions.

A blockchain is a database like a secure online digital ledger that is transparent (openly observed) to all market participants.  The database is shared among a distributed network of computers that independently process the transactions for a fee typically paid in the crypto asset being processed. 

The computers that process transactions on the blockchain are intentionally not under a central control source or an authority that has to be trusted. 

This is the opposite of today’s financial transactions that are processed based on trust, such as deals facilitated by third-party middlemen like banks and brokerage. Blockchain eliminates the middleman and central control; thus, trust is no longer an issue, making transactions cheaper and more secure.

Cryptography is the blockchain’s basis of security, thus the moniker of “crypto” for digital assets based on blockchain technology. 

Smart Contracts are digital contracts that enable, verify, or enforce the provisions of a contract.  The transactions are transparently executed and recorded in a blockchain.  Importantly, they do not rely on third parties or intermediaries like a bank or a brokerage firm. Smart contracts aim to increase contractual security (fewer lawsuits needed to enforce contracts) and decrease transaction costs (bank, brokerage, and legal fees, for example). 

App developers release tokens on an operating system like EOS.  They offer value through access to some kind of resource associated with the app.  It might be storage space, bandwidth or processing power, just to name a few examples.  If the marketplace perceives that those resources have value, the token will be in demand and will have a market value.

Tokens can also be sold in an initial coin offering (ICO), which is similar to a public offering of stock. The proceeds of the ICO are used to build the underlying system for the token.

Let’s wrap up this discussion by returning to cryptocurrencies and looking at the benefits of Bitcoin—the world’s first digital, decentralized cryptocurrency.  

• Bitcoin knows no borders. Bitcoin can easily be sent around the world, 24 hours per day, without requiring an intermediary like a bank.

• Bitcoin is open and secure. Every transaction is recorded in the decentralized Bitcoin blockchain.  The software is free and open-source, and the blockchain digital ledger is transparent and anonymous. A malicious party cannot manipulate transactions. Bitcoin can be stolen, but only through insecure storage (See User Guide: Storing Your Cryptos). The blockchain itself is secure and based on cryptography. The anonymous and decentralized nature of the Bitcoin blockchain means that you don’t have to share sensitive financial information with other parties.

• Bitcoin is independent. Bitcoin’s value is determined purely in the open market; central banks cannot manipulate it.

• Bitcoin is finite. The underlying software for Bitcoin has a limit on the number of Bitcoins that can be digitally mined (created), which is 21 million. A central authority can never dilute the Bitcoin supply after the established limit is reached.