Nina Kazmierczak- Partner and Principal Adviser
Sovereign Wealth Partners
One of the hardest concepts for many regarding cryptocurrency is grasping what crypto actually is.
Over lunch on Sunday the discussion veered too just that. Here is how the conversation panned out- One of the guests described the state of their crypto account, having found a new token, wrapped, sitting in their wallet, which they did not buy blah blah blah. I’m sure by this point many around the table saw a clapping monkey as I noticed some very blank faces. For those who understood crypto, they began to analyse where it came from and how to convert it; the other side of the table drew blank faces and resounding comments such as “so it’s all abracadabra money?”… “I don’t understand how its not real” “if it’s not real, what have you bought?”.
They wouldn’t be the only people asking these basic questions. And to be honest, with YouTube crypto instructions such as “in metamask….you can then choose to wrap your MEMO to WMEMO via abracadabra…” one can’t be blamed for thinking it’s all one big hocus pocus.
What is crypto?
Cryptocurrency is a type of currency that exists entirely online. It does not have an actual physical form but exists in a blockchain. This blockchain is kept on a server, which stores data regarding transactions in blocks without any personal identifying factors.
So, in a way, yes it’s not real in the way we understand investing within traditional investment markets.
Because the value of cryptocurrencies isn’t backed by anything, investments can be highly unpredictable. That’s one of the reasons why these currencies cannot take the place of a local bank. While they provide an investment opportunity, they can’t offer stability either, which is what one may need when it comes to your cash and cashflow needs. Furthermore, this currency can’t secure mortgages, loans, or other services you’ll need throughout life…yet.
Attempting to understand crypto feels like the opening of pandora’s box. Tokens, fiat, NFT, DAOS, mining, web3 utility, nodes… the list is endless. The new vocabulary, foreign; one I hope I can help explain.
From the definition alone, naturally the next question tends to be, “block what?”
A block chain stores information electronically in digital format. Blockchains are used to maintain a secure and decentralized record of transactions. The innovation with a blockchain is that it allows digital information to be recorded and distributed, but not edited. In this way, a blockchain is the foundation for immutable ledgers, or records of transactions that cannot be altered, deleted, or destroyed (Investopedia). All the transactions are encoded using a technique called cryptography and it all takes place on nodes somewhere in the wide inter web world (nodes will be explained later).
Have I lost you yet? ‘Decentralized’ ‘immutable ledgers’.. the above explanation, in itself, doesn’t mean much to many.
Ari Zoldan, CEO, Quantum Media Group helps to break it down further with a little abracadabra hocus pocus in his explanation – The Magical Village.
Once upon a time, there was a tiny, magical village filled with tiny, magical people. In this village lived a young boy named B.C., and today was his birthday. His parents had bought him a wooden, toy sword, which he was now swinging about in his front yard.
The thing about this sword, and most everything else in the magical village, is that it hadn’t always been a sword, nor had it always been in B.C.’s possession. Luckily, in this magical village, there was a way to find out where that toy sword started, and each step it had taken on its way to B.C.’s front yard as his birthday present.
The villagers maintained a magical record at the center of town, which showed all the items that were traded among the villagers, as well as all of the items that were brought in from other villages and sent out to other villages. Everyone could access this record and update it whenever they were involved in an exchange of their own.
So when B.C.’s parents traded for the sword at the local marketplace–for the sum of a bushel of potatoes–both they and the market vendor updated the record to include that exchange. But the record went back much further than this.
You see, before the wooden sword was a sword, it was a wooden board. And before the board was a board, it was rough, unstructured lumber stock. And before that lumber stock lay in a yard waiting to be transformed, it was part of a tall and proud tree in the forest to the south of the village.
Any villager, B.C. included, could discover this information by looking at the magical record. Indeed, it traced B.C.’s toy sword from its days as a tree along each stop on its way to becoming the toy sword B.C. now swung about in his front yard. The same was true for each and every product moving in and out of B.C.’s village.
And what a useful tool this was! It meant that nobody except for all of the villagers together had to keep track of these things. There were no middlemen, as there used to be in the days before the magical record, who charged the villagers to keep track of the comings and goings of their goods.
The community used the record to keep itself informed of the operations of the entire local economy, as did the other surrounding villages. Then, together, they merged these records into one larger record, establishing a start-to-finish list of all of the products exchanged within the kingdom.
And that’s blockchain in its simplest form explained.
Remember, blockchain is not only about Bitcoin. Because it is all over the news and is the predominant cryptocurrency, people think blockchain means bitcoin. Bitcoin is simply one digital currency which is built using blockchain technology. Blockchain is simply a means by which to record and store information.
The world of crypto is a very foreign concept to many, hard to grasp because it can’t be seen. In a series of bit sized article pieces, I hope to explain the basics of cryptocurrency.