Cryptocurrency Basics

The basics of cryptocurrency are built around three ideas. Let’s break them down and look at how they impact cryptos.

The Pillars

These ‘pillars’ make up the cryptocurrency basics. There are three pillars of cryptos that you need to understand:

Decentralization – What is the structure? Who owns crypto?

Security – How are these currencies protected? How are YOU protected?

Transparency – How are these currencies any different from what we have now? What makes these currencies viable on the internet?

Each pillar will help you understand the definition of cryptos. These bite-size chunks will be an easier road to take than most!

Decentralization

Let us first consider how money works in the existing banking system.

Imagine for a moment that you are a hard-working worker bee.

Daily, you collect a load of honey. The helpful Queen Bee allows you to keep that honey in her Beehive.


This works great, until you realise that the Queen Bee has complete control over YOUR honey.

She knows the amount of honey you bring in everyday.

As well as the amount you use everyday.

Oh, she also knows what you keep stored.

She even uses some of your honey for her own personal gain!

The Queen has an incredible amount of control over your honey.

This is all in one location, a vulnerable spot. One point of attack that impacts an entire system. The entire hive would collapse and you would lose all your honey.

This is, in essence, the weakness of our centralized banking system.

First and foremost, cryptocurrencies are a digital form of currency. They do not operate as a Queen Bee (bank or government) would.

Instead of the traditional (centralized) network, cryptos run on a decentralized network. This removes the need for a central authority.

These networks are just two different methods of approach.

Take a look at the structures – both provide access for all points in the network. But the difference in structure changes the method of operation.

Centralised Network
Centralised Network
Decentralised Network
Decentralised Network

Decentralization distributes control, whereas the traditional network centers it.

A crypto is nothing without a strong community behind it. All of these people (worker bees) help create and build upon cryptos. We don’t need a Queen Bee to look after our honey because of this distribution.

This difference in structure has multiple benefits.

Firstly, it is MUCH harder for an attack to impact the entire system. There is simply no single point to target. It also prevents entities from having too much control over your finances. This is more effective in theory than in practice. Some creators can still influence and change their currency’s parameters.

Take Away: Cryptos remove the need for a bank to take care of your money. Decentralization distributes control to the entire network.

Security

Cryptos exist solely online – there is no physical currency. This brings questions of safety, security, and creation into focus.

The clue is in the name: Cryptocurrency.

Cryptography is the conversion of information into a new format. This format is unreadable unless you have the corresponding “key” to unlock it.

This is how information remains secure in the digital world.

You will have heard of this in the news, though may not know it. Intelligence groups (FBI, CIA etc) face difficulties accessing messaging apps on phones or computers. This is because they are encrypted (Cryptography!). Obtaining the correct key to unlock the information is very hard.

Without the corresponding key, you cannot read the information.

This is the backbone of cryptos. It protects every single transaction in existence!

On top of Cryptography, anonymity provides further security.

You don’t need to provide your name or address like you would with a bank.

You have a public and private key. No one will know the public key is yours unless you provide that information.

Your private key, however, needs to remain a secret to yourself. You can find it in your “digital wallet”.


This wallet stores, sends, and receives your cryptos, acting as a personal log of all your transactions.

For someone to find your full identity from your public key is difficult. Protecting your data and information is incredibly important in today’s world. With data’s value increasing, protective laws will need to be more robust.

Thankfully, the sending and receiving of cryptos is both private and transparent. This is a core value of cryptos.

Take Away: Cryptography protects you and your cryptos. It does this via complexity and the removal of a third-party (banks). Anonymity and independence achieved!

Transparency

It can be strongly argued that cryptos are some of the safest and most transparent currencies in the world.

Customer facing websites are the weak link of the crypto landscape. These are the focus for most criminals and/or hackers – exchanges in particular.

Achieving safety and transparency creates value for cryptos. Let’s take a look at how they manage this today.

Cryptos exist on a digital system called Blockchain.
Blockchain is the true beating heart of cryptocurrencies. It provides the platform for the basics of cryptocurrency.

Early pioneers believed in the need for more secure online transactions. After all, our credit card details, home addresses, and phone numbers had little protection.

This led to the development of the blockchain technology. This enabled the creation of virtual currencies and thus Bitcoin was born.

So what exactly is blockchain in simple terms?

It is a system that records and validates every transaction that happens for a cryptocurrency.

So it grows with every transaction that occurs.

Each time a new transaction occurs, a new block in a chain of blocks is created – hence the name blockchain. The chain of blocks are chronological.


Blockchain operates as a public accounting log book for a currency. It is how cryptos achieve their safety and transparency.

But your identity stays private because you provide no personal information. Your public key is the only thing visible which is like an account number.

So through blockchain, every single person can see and confirm every transaction. All whilst preserving every single users’ anonymity.

Don’t worry if some of this goes over your head – it’s complicated. In the next section we will break all of this down.

Take Away: Blockchain enables user privacy and currency transparency. By recording all transactions, you can see the entire history of a crypto.