How does Crypto Currency work?

By December 17, 2017Tutorials

Disclaimer, there are tons of videos online to give you a technical explanation for how crypto currency works. This section is focused on giving one simple analogy to get your feet wet.

Currently, when you want to send money to your uncle in North Dakota (does anyone really live in North Dakota?), you are probably going to use a third party to accomplish the task. One way you could do this is by transferring some money on paypal. If you are lucky enough to have the same bank, you might wire him the money. If you are feeling super paranoid, you could even attach some cash to a carrier pigeon and hope he makes it there in time for winter. In all these examples, whether you use Paypal, Chase Bank, or a carrier pigeon, you are putting your trust in another person/entity to successfully transfer your money. This, is what crypto currency changes. There is no middle man, and this is why it became so popular. Initially at least.

Analogy

So how is this possible? Again, there are many more resources if you truly want to understand how this is technically possible. For now, we will use a simple classroom analogy to explain.

Imagine a room of 10 people; all with an imaginary $10. Everyone knows the rules of this room and how much money everyone else has. When Person A wants to send their imaginary money to Person B, they simply say it out loud. “I, Person A, am sending $5 to Person B”. The entire room hears what just happened and writes it down. When Person C wants to send money to Person D, they follow this same process. Announce their transaction, and everyone writes it down. At any time, we can ask the room how much money Person X has, and the room, as a whole should be able to tell you the correct amount. There is no teacher in the middle. There is no principle in the lobby. Everyone has an equal voice and relies on the trust of the group to come to a consensus of what is right.

But what if one the kids decides to be Mr. Krabs and gets greedy. He flubs his numbers on purpose to put a few extra dollars in his pocket. While he claims to have $13, the room can easily see this is incorrect, and throws out his response.

But, what if Mr. Krabs gets a few of his friends to gang up and corrupt the group? The most powerful thing about crypto is the network affect. While it may have been possible for Mr. Krabs to corrupt the group in the early stages, the classroom has now grown to over 100,000 people. For Mr. Krabs to truly make a difference, he would need to convince 50,001 people to corrupt the group. Not an easy task. The larger the class grows, the harder it is to corrupt.

Conclusion

This is a simple, yet effective analogy of how crypto currency works. While it’s a cool concept, in the next section we will jump into why crypto is becoming so popular.