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Cryptocurrencies 101: A Crash Course On Tokens And Blockchains
By the end of this email, you'll understand how to think about the crypto market.
Blockchain is a breakthrough in computer science and has the potential to disrupt more than just the financial industry. Grasping these ideas today will give anyone an edge 10 years from now.
Blockchain: A Database On Steroids
Imagine you're a famous YouTuber creating cute cooking videos. You trust Google enough to exchange your information for a YouTube channel. That data safely gets collected into their database. For Google's eyes only.
Current cloud architectures are like this. It relies on a single business providing the service. On the other end, you've got users paying for that service. Few questions come to mind:
- Can the two entities equally use the same services?
- Can users pull their data out and bring it to other applications?
- Can users confidently trust the company to not modify their data?
The answer to these questions is no.
- YouTube does not share its algorithm with its creators. Only YouTube's developers are privy to that information
- YouTubers cannot transfer subscribers into Twitter followers. Google wouldn't want their customers moving to their competitors
- If there's a policy violation, YouTube can intervene by kicking creators off their platform
As you can see, many problems come with current networks. These are problems that blockchain solves. Comparing blockchains to the internet is a helpful way to think about it:
Internet Vs. Blockchain
Protocols are rules for a system. The Internet is a combination of open protocols with specific actions like TCP/IP (data transfer), HTTP (client-server communication), and SMTP (sending emails).
These open protocols allow people to make money on TikTok and OnlyFans. They're incredibly useful. Otherwise, I wouldn't be able to send this email (SMTP), you wouldn't get it (TCP/IP), and we'd be using the radio for entertainment (HTTP).
A side-effect of such protocols is that they're too complicated to use. To simplify it for people like you and me, the protocols get processed over application layers (like Netflix, Twitter, Google, or Facebook).
Applications build an easy user interface for people, but they also capture important user data in the process. Aggregators like Google compile this data to understand their users better. The results are then exploited through targeted advertisements from sponsors. "If it's free, then you're the product". This is true for other applications like Twitter, Facebook, or TikTok.
From the app user's point of view, current cloud systems are based on fully trusting company administrators. They control everything that happens on their servers from reading, altering, deleting, or blocking any user data at will. To make things worse, a hack in a system can expose a user's banking information, home address, or identity.
The world of blockchain has changed this:
 
Ok. I'll bite, what's a blockchain? As the name suggests, it's a public database (chain) made up of a sequence of transactions (blocks).
- Blocks = valid transactions
- Chains = reference of previous blocks
The Bitcoin blockchain:
Unlike Google, Facebook, or Twitter there's no central server to a blockchain. The data is scattered across multiple computers creating the network instead.
Crypto pioneer Nick Szabo describes blockchains as a computer in the cloud, shared across many traditional computers and protected by cryptography and consensus technology:
"A block-chain computer, in sharp contrast to a web server, is shared across many such traditional computers controlled by dozens to thousands of people. By its very design each computer checks each other's work, and thus a block chain computer reliably and securely executes our instructions up to the security limits of block chain technology, which is known formally as anonymous and probabilistic"
Blockchains are just like Monopoly. Imagine playing a game with your pals and landing on Community Chest. The words on the card say that "you inherit $100".
Rather than believe you, other players would read the card for themselves before handing over the cash.
Blockchain protocols work just like this. Every event is monitored through proof-of-work and proof-of-stake protocols––creating an unchangeable ledger. It's a new form of authenticating information and committing to it.
The internet is open-source, but application databases are kept closed to the public. Blockchains are the next step after open-source because they provide open data as well.
We now have a reliable way to share information, all while allowing millions of people to access, read, and write from the same data source at any given time. It can't be hacked since there's no central server to access. The data is shared across multiple computers (decentralized).
Best of all, blockchain users are pseudonymous, require no personal data, and don't need third parties. It's a fundamental promise blockchains make. In other words, it's a database on steroids.
Talkin' About Tokens
Ok, so we know what blockchains are. What are cryptocurrencies? "Cryptocurrencies", "crypto protocols", and "smart contracts" will be called "tokens" to avoid confusion.
A protocol is a fancy word for a standard language, which allows people to work on specific problems.
Tokens are software protocols (smart contracts) that enforce rules on a decentralized network (blockchain). Tokens are to internet applications what blockchains are to web servers.
First of all, there are thousands of tokens deployed on multiple blockchains. Uniswap, Dogecoin, MakerDAO, Zcash, Compound, Chainlink, and 1Inch to name a few. These are crypto applications that solve specific problems.
Crypto protocols can provide value in two ways. First as a service like any other company or application:
Uniswap for example is a crypto exchange (like Coinbase or Binance), but will never IPO because it's not a company. Uniswap's operations are not managed by an institution or employees. It's just a smart contract on the Ethereum network––initially starting with less than 300 lines of code.
Second-way crypto provides value is from the token each protocol is part of (the so-called "cryptocurrencies").
At the time of writing, Uniswap has a market cap of $12 billion. To put that into perspective, one line of Uniswap's source code is worth ~$17,500. Uniswap's token price:
All tokens have a current combined market cap of $1.5 trillion. Some are priceless, others are worthless, while the rest are scams.
What do you get when you buy a token? You get a fun afternoon at Chuck E. Cheese!
Just kidding. When you buy a token, you're buying a private key. The element of a token is the cryptography behind it (crypto-currencies).
Cryptography101
Cryptography is used to validate the integrity of a message. Private keys unlock the complex algorithms often used to encrypt information.
Of course, there's more to private keys than just decrypting algorithms. In the cryptoworld, private keys are like a virtual fingerprint that is unique to the person who owns it. This is known as a digital signature.
Here's the crash-course on cryptography relating to tokens. Things will be under-simplified––so be aware that it's over-complicated:
Cryptography boils down to public and private keys––used to encrypt and decrypt data.
A private key is similar to a password. It gives access to your tokens on the blockchain. They also act as an API key to provide the services tokens promise.
You also get public keys paired with your private keys. These act as your pseudonymous identifier. Rather than share personal data, you'd control what to share through your public key.
If someone has your public key, they can send you coins. If someone has your private key, they own your coins. Selling your tokens does not mean you're giving away your public and private keys. You're merely transferring coins from your key to the receiver's key.
Examples of public and private keys:
My public key is rushil.eth (Ethereum Name Server). You can type this into any crypto exchange and send money directly to my crypto wallet. I encourage you to do so :)
The private key to my Bitcoin wallet is:
5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF
Just kidding. If that really was my key, I wouldn't be able to reset it. Anyone who loses their private key, loses their coins.
Cryptography keys give access to use token protocols on a blockchain network. Just like passwords giving access to internet applications on a web server. Rather than providing your data to use a service, you can now control what you share through public and private keys.
That's a fundamental guarantee that crypto makes: decentralized applications that give users control of their data.
Incentives...Incentives...Incentives
Ok. So far we've summed up the importance of blockchains, what tokens are, and how it relates to current networks. Here's how to predict the future: study the incentives.
The investor, Charlie Munger once said:
“I think I've been in the top 5 percent of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it.”
“Show me the incentive and I will show you the outcome.”
Let's see what the outcome for crypto could be:
Continue reading by clicking here.
consider sharing to whoever else is curious about crypto,
-Rushil
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