Here is an intro to cryptocurrency and blockchain – there will probably be a lot of new scary words, but we promise we’re going to break them down for you. If you’re new to crypto then welcome! We’d like to assure you that it is a lot less scary than some people make it sound, provided you know what you’re doing. 

A lot of the information in this article is unnecessary for the day to day usage of crypto currency. 

If you’re brand new, the most important section is Public and Private Keys, Wallet Addresses, and Seed Phrases

What is Cryptocurrency?

Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. The only requirement for something to officially be a “cryptocurrency” is that it uses cryptographic techniques to secure transactions. 

Today the term “cryptocurrency” typically refers to digital currencies that operate on decentralized systems called “blockchains”.

In this article (and across this site), when we say “crypto” or “cryptocurrency,” we are exclusively talking about blockchain-based cryptocurrencies, such as Bitcoin, Ethereum, Solana, and many others.

What is Cryptography?

Cryptography is the practice of securing information by converting it into a format that can only be read by someone who has the correct key to decrypt it. 

While cryptography is a deep and complex subject, here’s a brief overview of some of the key parts:

Asymmetric Encryption: 

Encryption is the process of converting plain text into a coded format, called “ciphertext.” Only someone with the correct key can decrypt this coded information and read the original message. 

Analogy: Think of traditional encryption as having a lock on an office building. Many people can both lock and unlock the door if they have the key.

Crypto uses “asymmetric” encryption. This is where there are two types of keys; a private and public one. Anyone can “lock” the information with a public key; but only the holder of the private key can “unlock” it. 

Most often in crypto this is the transfer of funds; anyone can send funds securely to your wallet, but only you can get them out. 

Analogy: Think of asymmetric encryption like a postbox. Anyone can add mail to it; but only the postman can get the mail out of it, as he has the only key. 

Digital Signatures:

Think of digital signatures as cryptographic “proofs” that a transaction has been authorized by the holder of a private key. When you send cryptocurrency, your private key generates a digital signature, which anyone can verify using your public key. This ensures that the transaction is authentic and hasn’t been tampered with.

It’s important to note that no one manually checks these signatures—blockchain nodes (computers on the network) automatically verify transactions using public keys. 

Hash functions

Hash functions are a fundamental part of how cryptocurrencies and blockchains work. A hash function takes any input (like a piece of text or a file) and converts it into a fixed-length string of characters, which appears random. 

Even a tiny change in the input will produce a completely different output. Additionally this process is one way; the same input will always create the same hash, but working out the input from the hash is impossible. 

Analogy: Think of a hash function like a blender. You put in ingredients (your input) and blend them to make a smoothie (the hash). If you change even one ingredient, like adding a banana instead of a strawberry, the smoothie will look and taste completely different. 

Whilst you can consistently get a smoothie from the same ingredients; reconstructing the smoothie into the original fruit is impossible. 

Public and Private Keys, Wallet Addresses, and Seed Phrases

Note: All of the mathematical processes mentioned below are carried out automatically, so don’t worry—you don’t need to be a mathematics expert to own cryptocurrency.

 

• • Private Key: Your private key is like a super-secure password that only you should know. It’s used to sign transactions and access your funds. Although the terms are sometimes used interchangeably, a “private key” is different from a “seed phrase.” The seed phrase is used to generate your private key.
    Tip: You’ll probably never need to know or use your actual private key directly, but understanding its importance is crucial.

 

• • Public Key: Your public key is derived from your private key and is used to verify that a transaction was signed by you. It’s a bit like an account number in a bank, but with extra security. While it’s technically possible to know your public key, in practice, you’ll rarely, if ever, need to.

 

• • Wallet Address: A wallet address is like a digital address where people can send cryptocurrency to you. It’s derived from your public key. You can safely share your wallet address with anyone, as it allows them to see your transaction history but not access your wallet.

Example: To show you what a wallet address looks like, here’s the VestaDAO wallet address:
0x5952e92cb272a181a91aE37Faa4F12cfbAD7c80e

 

• • Seed Phrases: When you create a crypto wallet, you’ll receive a “seed phrase,” a list of 12-24 random words. This phrase is used to generate your private key and can be used to recover your wallet if you ever lose access.
    Warning: Never share your seed phrase with anyone. If someone gets hold of your seed phrase, they can access your funds.

What is Blockchain?

Cryptocurrencies rely on a technology called blockchain, which is a “#distributed ledger#” that records all transactions across a network of computers. This is viewed as a positive as it means anyone (who knows how) can check the blockchain and make sure all transactions are above board. 

Each block in the blockchain contains a list of transactions, and when one block is completed, it links to the next block, forming a chain of these blocks – hence the name.

Here’s a simplified breakdown:

 

1. 1. Transaction Creation: A user initiates a transaction by sending cryptocurrency to another user.

1. 1. Transaction Validation: The transaction is broadcast to a network of computers (nodes) that validate the transaction.

1. 1. Block Creation: Validated transactions are grouped together in a block.

1. 1. Adding to Blockchain: The block is added to the blockchain, making the transaction permanent and observable by anyone. 

Key Types of Blockchains, Coins, and Tokens

There are several types of blockchains used in cryptocurrency networks, each with its own mechanism for validating transactions. The different types of Blockchain and how their #native coins# interact with them is a long topic.

In addition there are many non-native tokens that exist on the various blockchains. You can learn more about these topics using the links below:

Types Of Cryptocurrency: Coins and Blockchain

Types of Cryptocurrency: Tokens and Altcoins

Advantages and Disadvantages of Cryptocurrency

When it comes to advantages and disadvantages, cryptocurrency is most often compared to #fiat# (“normal money”). You can find more information on advantages, disadvantages, and the ways in which crypto is used using the link below:

Cryptocurrency: Advantages, disadvantages, and use-cases

Is Cryptocurrency Safe?

This is an incredibly complicated subject and the answer essentially boils down to “Yes, sometimes, but…”. We have compiled the following articles on this topic to dive in to this issue in a more robust way:

Cryptocurrency and Blockchain: Is is safe?

Crypto Scams: how to identify and avoid them

Crypto Security: How to keep your funds safe

A Brief History of Cryptocurrency

The concept of digital currency has been around for decades, but once again, we will focus on the more widely accepted understanding of “cryptocurrency”. Here is a brief timeline for reference:

1. The Birth of Bitcoin (2008-2010)

 

• • Satoshi Nakamoto: In 2008, an unknown person or group using the pseudonym Satoshi Nakamoto published a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This paper outlined the framework for Bitcoin, a decentralized digital currency that solved the double-spending problem using a technology called blockchain.

• • Genesis Block: On January 3, 2009, Nakamoto mined the first block of the Bitcoin network, known as the Genesis Block. This marked the creation of the first 50 bitcoins.

• • Bitcoin’s Early Days: Initially, Bitcoin had little to no monetary value. The first recorded purchase using Bitcoin was in May 2010, when a programmer named Laszlo Hanyecz paid 10,000 BTC for two pizzas, a transaction now valued at millions of dollars.

2. Expansion and Altcoins (2011-2013)

 

• • Early Adoption: Bitcoin slowly began gaining traction among tech enthusiasts and libertarians. By 2011, the price of one Bitcoin reached $1.

• • Altcoins: As Bitcoin grew, other cryptocurrencies, known as altcoins (alternative coins), emerged. Litecoin, created by Charlie Lee in 2011, was one of the first. It aimed to improve upon Bitcoin by offering faster transaction times and a different hashing algorithm. Litecoin is probably the best known early #fork# of Bitcoin. 

• • Silk Road: In 2011, the online marketplace Silk Road started using Bitcoin for transactions, primarily for illegal goods. This association with illicit activities gave Bitcoin notoriety and brought it to the attention of authorities.

3. Increased Adoption and Legal Scrutiny (2013-2017)

 

• • Mainstream Awareness: By 2013, Bitcoin reached $1000 for the first time. Media coverage and public interest surged, leading to increased adoption.

• • Regulation: Governments began scrutinizing Bitcoin and other cryptocurrencies. In 2013, the U.S. seized assets from Mt. Gox, the largest Bitcoin exchange at the time, due to regulatory concerns.

• • Ethereum: In 2015, Vitalik Buterin launched Ethereum, a decentralized platform that enabled the creation of smart contracts and decentralized applications (DApps). Ethereum’s introduction of smart contracts expanded the potential uses of blockchain technology beyond simple currency transactions.

4. The ICO Boom and Bust (2017-2018)

 

• • ICO Frenzy: Initial Coin Offerings (#ICOs#) became a popular way for new cryptocurrency projects to raise funds. In 2017, the ICO boom saw billions of dollars invested in new tokens. However, many projects were scams or failed to deliver on their promises.

• • Market Surge and Crash: Bitcoin and other cryptocurrencies experienced a massive price surge in late 2017, with Bitcoin reaching nearly $20,000. However, the market crashed in early 2018, losing significant value and highlighting the volatility of cryptocurrencies.

5. Maturation and Institutional Interest (2018-Present)

 

• • Regulatory Developments: As the market matured, regulators worldwide began creating frameworks for cryptocurrencies. Countries like Japan recognized Bitcoin as legal tender, while others imposed stricter regulations to prevent fraud and protect investors.

• • Institutional Investment: Major financial institutions and corporations started investing in cryptocurrencies and blockchain technology. Companies like Tesla, Square, and MicroStrategy made significant Bitcoin purchases, and major banks began exploring blockchain applications.

• • DeFi and NFTs: Decentralized Finance (#DeFi#) and Non-Fungible Tokens (#NFTs#) emerged as significant trends in the cryptocurrency space. 

• • Recent ETF News: In recent years, there has been significant progress towards the approval and launch of cryptocurrency exchange-traded funds (#ETFs#). These ETFs allow investors to gain exposure to cryptocurrencies (so far Bitcoin and Ethereum) through traditional stock markets without directly owning the digital assets.