A Beginner's Guide to Crypto
From core fundamentals to more specific topics, explained in a structured and simple way.
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When I created Crypto Explained, I did it with the intention of helping people understand the fundamentals of crypto space by explaining concepts in layman's terms.
With time, increasingly more people have mentioned that they don’t know where to start, so today I’m putting together a beginner’s guide that would highlight the key things you need to know about crypto, from core fundamentals to more specific topics.
I’ll follow the semantic tree model used by
Elon Musk
to learn new things. Essentially, he suggests viewing knowledge as a sort of tree - you should understand the fundamental principles (the trunks and big branches), before you get into the leaves (or details), or there is nothing for them to hang on.
I’m therefore dividing this article in these 4 sections, with suggested readings for those who’d like to deep dive further:
The root is the concept and philosophy on which crypto is built.
The trunk is the technology that enables it to do what it does.
The branches are the extensions of this combination of philosophy and technology that materialize in the shape of different blockchain platforms.
The leaves are the various applications and usecases enabled by these platforms.
Section 1 - The Root.
1. The first thing you need to understand is the concept of money
Money is a concept, it’s one of the most powerful creations of humanity. We have been assigning economical value to goods based on supply and demand for millenials now, from the barter system, all the way to the monetary system of dollar bills we know today.
The underlying concept of money or capital has not changed. What changed, is what we collectively believe and trust in to represent that value, as well as the financial institutions that we created to support and regulate this system.
We were born into the existing financial system, but we forget that it hasn’t always been like this, we forget it’s been adopted because it represented a better option than the previous system.
Therefore, the rise of cryptocurrencies, and their magnitude, is not simply speculation.
Of course, there is speculation, and it will always be there. But what we are witnessing though, is the evolution of money
,
enabled and empowered by technological advancement, transforming and disrupting an outdated and malfunctioning financial system that is struggling to keep up with our needs and behavioral changes.
Suggested read: Why I’m bullish on crypto
2. The second thing you need to think about is why things don’t work today.
The way things work today is what we call centralization,
this means certain institutions and corporations have control over our assets: federal governments hold the complete and absolute power to print money; banks can malfunction and seize or freeze your funds, just like how it happened in my home country Argentina during the events of “Corralito” and “Corralon”.
If you think these are extreme examples, then just consider how much time and moeny it cost to do an international bank transfer.
Long story short then, the existing financial system is, in many aspects, outdated and malfunctioning.
In this context, Bitcoin emerges.
3. The last thing is this section is to understand how it all started, which is with Bitcoin
Bitcoin is the king, the market mover, and the core of crypto world because of many things, but one of them is because it’s the origin story.
Bictoin was originally created in 2008 as a peer to peer electronic cash system, allowing the transfers to happen between people without any banks or other middlemen. In Yan Pritzker’s words, “Bitcoin offers an alternative to centrally controlled digital money with a system that gives us back the person to person nature of cash, but in a digital form”.
Over the years, the gold standard and subsequently the USD standard have been losing strength. The emergence of Bitcoin, combined with the lack of other alternatives, has made it become increasingly more relevant in the store of value space to hedge against the existing system.
Suggested Reads:
Bitcoin Explained for Beginners
Why is Bitcoin considered a Store of Value
Section 2 - The Trunk
1. The key here is what the technology can enable.
The trunk to this massive tree, is the technology behind it that enables the solutions by combining blockchain technology and cryptography, eliminating the need of intermediary or third party that we normally give so much power over our assets.
By doing so, crypto solves the root problem with conventional currency and financial system that is all the trust that's required to make it work.
2. The reason this is possible is because blockchain and cryptography enables certain specific and very key features.
Let’s take a look at these particular features that make it so powerful:
Immutability: this means data on the blockchain network cannot be corrupted, you can’t just go and change it.
Distributed: blockchain operates on a network of computers than can be distributed literally around the world. This allows for a series of other attributes named below.
Decentralization: this group of nodes (or computers) maintains the network, so there is no one central authority that can wake up one day and decide to do something against the interest of the users out of the blue.
Enhanced security: the fact that it’s a distributed network also means that there is more security because you cannot corrupt the network by attacking a single point.
Permissionless: everything is built in the codes, when certain requirements are met, a specific transaction will happen, there is no need for an intermediary to approve it.
Peer to peer: because everything is coded in the protocols, we don’t need to trust intermediary institutions or companies no more.
Faster and cheaper settlement: the whole network is also more efficient, we no longer need to wait for days and pay crazy commission for an international transfer to happen.
3. These distributed network of computers operate on the basis of very complex consensus mechanisms that act as check and balance system.
Without going into too much details, all transactions need to be validated, and those who are in charge of doing so are typically incentivezed to behave positively thanks to the reward systems in place, and/or the possibility of losing assets if he/she fails to do so.
Game theory does get very beautiful.
For those interested in how these mechanisms work in the most important blockchain projects in crypto, I’d recommend going through the articles shared below.
Suggested Reads:
What is Proof of Work & Mining
Proof of Stake explained
Staking 101: Everything you should know
Smart Contracts 101: the key to removing intermediaries.
Section 3 - The Branches
1. Just like a tree has many branches where leaves can grow, crypto also has many platforms where different usecases can flourish.
We are talking about the Smart Contract Platforms, that are blockchain networks that provide the infrastructure over which other projects can be built.
I like to use the analogy of office buildings: if these platforms are buildings, then all the applications created on these blockchains are companies that have their offices within that building.
2. How these platforms started - Ethereum
If the creation of Bitcoin marks the beginning of this crypto space, the creation of Ethereum made it possible to build different use cases and applications leveraging blockchain technology.
Ethereum was officially launched in 2015, and is the original and first smart contract platform. Its goal is to become the world’s programmable blockchain (or supercomputer), and it is definitely leading the disruption in the crypto space.
The most important types of projects you can build on Ethereum are:
Suggested Reads: Ethereum 101 - everything you should know
3. The Blockchain Trilemma and the emergence of competitors.
Building a blockchain platform is challenging, there is this famous trilemma: it is very hard to balance Scalability, Decentralization and Security, which are 3 key cornerstones of every blockchain network.
Because of this, there are trade-offs that will present itself in different situations for the user. For example, Ethereum is famous for focusing more on Decentralization and Security, sacrificing a bit the Scalability piece, which is why the network can get congested when there are too many transactions to be processed, and the transaction fees (known as gas fee) can get quite high as a consequence.
Competition has started to emerge strongly in the last couple of years, all with their own version of what’s the best way to tackle this trilemma. Some of the main players are:
4. It’s not all competitors, there are also other solutions
During the last 1 to 2 years, a lot of new blockchain platforms emerged, but they are slightly bit different from the ones mentioned above.
These are the so called Layer 2 blockchains, which are solutions designed to help scale applications by division of work: Layer 2 helps by processing more transactions, while main blockchain (Layer 1) focuses on the underlying network consensus and security.
It’s like opening up a tab at the bar: instead of settling your bills everytime you order a drink, you open a tab that keeps track of all your orders and spending (Layer 2), and then at the end of the night you pay the bill altogether (Layer 1) - this way, it’s faster, lesser work, and in many cases, cheaper.
Suggested Read: What is Layer 2 in crypto?
5. Difference between Coin and Token
Now that we spoke about blockchain companies, before moving on to the last section, we should touch base on the difference between coin and token.
In a nutshell, the key differentiating factor is where the project is built on, and whether it has its own blockchain.
A coin is built on and uses its own blockchain, whereas a token uses someone else’s blockchain as the backbone, without having to worry about developing its own infrastructure. Therefore, Ethereum’s cryptocurrency ETHER is a coin, whereas UNI (from Uniswap), which is built on Ethereum’s blockchain, is a token.
I like to highlight this difference because from an investment point of view, it’s quite a relevant distinction.
If we go back to the blockchain platforms being buildings, and the applications built are companies that are renting an office in it, then these companies can come and go, but as long as the building remains standing, that’s all that matters, right?
Suggested read: What’s the difference between Coin and Token?
Section 4 - The Leaves
1. The many types of crypto projects
Crypto has grown exponentially these last couple of years, and it’s no longer just a better money and store of value (Bictoin), or blockchain platforms (the likes of Ethereum).
Thanks to these pioneers, a lot of use cases have been enabled and continued to disrupt many spaces and industries.
For a comprehensive map of, I’d strongly suggest you reading Crypto Categories 101
Additionally, to deep dive into the specific types, here is more Suggested Reads:
2. Trending topics
With so much happening, there are few important concepts that are very trendy in this space right now, and you’d probably see a lot of content and conversations around it.
Here are a few, and their suggested reads:
Web3
Web 1.0, 2.0, and 3.0 mark different eras in the history of the Internet. This transition is normally marked by paradigm shifts introduced by a combination of changes and disruptions that mark a clear before and after.
We are currently in Web 2.0, transitioning to Web 3.0. which combines the decentralized, community-governed ethos of Web 1 with the advanced, modern functionality of Web 2, but with the possibility for users to have full ownership over their content, data, and assets.
Web 3 is the Internet powered by blockchain, which means that we can leverage on the new functionalities that blockchain technology enables together with cryptography, which empowers a different way of doing and building things.
Suggested Read: What is Web3, and why it matters
The Crypto Metaverse
In a nutshell, it’s the virtual world with more immersive experiences.
The uniqueness here is that, by utilizing blockchain as the underlying technology, the crypto metaverse enables crypto assets and tokens to be part of the economy. Therefore, the hype around this is that it is a complete new frontier and market that is “free” for grabs: an entire economy can exist within this digitilized world.
Suggested Read: What is the Crypto Metaverse?
Interoperability in Crypto
The current challenge in cyrpto is that all these different blockchains are acting as siloed bubbles, without speaking to each other.
To achieve interoperability, means making networks compatible with each other, so that information and assets can flow freely across different chains.
This is really key in terms of user experience as well as scalability of crypto overall.
Suggested Read: What is Interoperability in Crypto, and why it matters
Final Thoughts
1. Just because a company operates in the crypto world doesn’t mean it’s decentralized with all the above attributes.
I think it’s important to make this call out.
With the rise of cryptocurrencies, a lot of companies are seizing the opportunity. If you buy crypto in an exchange platform like Binance, Coinbase or crypto.com, these are simply normal fintech companies that provide the service of buying crypto assets, which means they still have control over your assets.
I’m not saying it’s inherently a bad thing. The point I’m trying to make is that you need to understand the difference here between centralized and decentralized, as well as custodial or not, and then make decisions according to what suits your needs best.
Suggest Read: Crypto Wallets 101
2. It’s all about the possibility of choosing.
Today, we have evolved into a point where the borders of what’s purely crypto is blurry, and this is a positive sign as for crypto to become more mainstream, institutional adoption, potential regulations and transitions are needed.
Additionally, I don’t think crypto is here to take over completely and that everything needs to be crypto. The beauty of it, is that it offers an alternative to the existing system.
It’s a matter of having a choice, which is a powerful thing.
3. “Decision making is a 2 step process: first learning, and then deciding. Learning must come before deciding”, Ray Dalio.
As usual, I’d like to close with highlighting that this is a nascent space, going through crazy growth, and with it, there is good, and there is also bad.
Understand the fundamentals, so when there is too much noise, you can zoom out. think of the bigger picture, and make informed and educated decisions, so that you can then yield results (or to close off with the semantic tree model, yield fruits).
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