What Is Crypto?

What is crypto

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

July 28, 2021

What is crypto? You’ve probably heard the terms crypto, cryptocurrency, and Bitcoin and wondered what they are all about. For most people, these words are new and evoke a variety of thoughts and feelings, but mostly confusion. We have been getting a lot of questions from clients about these words. That tells us there are probably a lot more people out there with the same questions.

Explaining crypto will take more than 1,500 words. To make the complex simple, I plan to break the topic up into byte-sized posts (pun intended). This first article will provide a foundational jumping off point by reflecting on where crypto came from. In subsequent articles I will focus on the technologies supporting crypto, the products, services and applications that make up the digital economy, and how companies plan to make money. By the way, this entire ecosystem is referred to as “crypto”. I find the topic fascinating and I think you will too. Especially if you are a fan of technological innovation.

When clients ask us about crypto, what they’re really asking is whether they should hold digital currencies in their portfolio. I am not going to answer that question in this article. In my experience, 9½ out of 10 people have little to no understanding of cryptocurrencies. Making investing decision without knowledge is a recipe for disaster, so let’s focus on building our understanding.

I need you to do something for me. Close your eyes and set aside any notions you have about the term crypto. Set aside any opinions you might have formed before coming to this article. I need you to imagine a clean sheet of paper from which to start because, frankly, crypto is just scratching the surface of the technical innovation that lies ahead.

The Evolution of the Internet

Our journey toward understanding crypto begins with a look back at the Internet. Most people take the Internet for granted. We go through our day getting our news and entertainment by looking at our phones. The tv we watch is mostly Netflix or some other video streaming service. We communicate with one another using email, text messages or Messaging apps. The youngest among us have a telephone but don’t use it to make phone calls. Forty percent of our purchases are made online. Amazon is literally on everyone’s doorstep. These services would not be possible without the Internet.

If you’re older than 30 then you know it hasn’t always been like this.

Internet 0.0

The Internet is actually in its third phase of evolution. The first phase started in the late 1960s with the development of the first inter-connected computer network called ARPANET. We’ll call this the pre-Internet or Internet 0.0. The network was primarily used by government for military communications. Having many nodes of connection within the computer network alleviates the risk of a single node taking down the entire communication system.

Internet 1.0

By 1990, Internet 1.0 emerged with the development of the World Wide Web. The web linked the system together in a way that facilitated near-instant communications via emails, video chats, message boards, and online shopping. You might remember Netscape, the company that created the first mainstream web browser. Netscape was co-founded by Marc Andreessen who later went on the create the premiere venture capital firm in Silicon Valley known as Andreessen-Horowitz. I mention this because AH is funding much of the development within crypto.

Internet 2.0

In the mid-2000s, the introduction of the IPhone, kicked Internet 2.0 into gear. The advent of mobile access greatly accelerated the productive and commercial uses of the Internet. The world’s four largest companies – Apple, Microsoft, Amazon, and Facebook owe their existence to the Internet. 

The evolution of the Internet has had profound impacts on our global society. Per capita wealth has increased.  Productivity has increased. Access to capital and information has increased. And friction within the economy has decreased. All of this has lifted more people out of poverty at a faster rate than at any time in human history.

Economic and Social Frictions Persist

But friction in the economic system still persists. For example, access to capital for everyone still remains challenged, and cost to access that capital remain high. The advances in productivity have been great, but we’ve also seen more centralized control over our culture. Think about the influence social media companies have on the content we consume, or our ability to express ourselves. These are just a couple examples of the friction that persist.

Society is made up of a number of systems. Organizations – led by humans – make decisions about the rules running these systems. And these rules are subject to change based on the whims of the people running them. For the most part, society is pretty centralized around a relatively few number of systems. I’m not saying this from a governmental perspective, but rather from a perspective of the systems that we encounter in our daily lives. The financial system. The communication system. Online platforms. These systems are controlled by a few number of organizations that set the rules for participation. Meet their requirements and follow their rules, then you can participate. If not, oh well. 

The rules change often. They can change to advantage some and disadvantage others. All at the whim of the organization controlling the system. Here are a few anecdotes of what I mean:

The Financial System

  • Determines who is banked and unbanked
  • Determines who has access to capital and who does not
  • Sets monetary policies subject to political aims

The Communication System

  • Determines who can participate and what can be communicated
  • Controls the flow of information within the system
  • Amplifies some content and suppresses other content

There is a common element that cuts across these systems. That element is the general lack of trust held by many of the participants. What if the system had immutable rules that govern decision making, and they weren’t subject to the whims of these organizations? Would that create more trust or less? Would that facilitate more access for more people?

Decentralizing Power Structures

Internet 3.0 is the next evolution and it’s focused on decentralizing the power structures that govern these digital systems. It uses cryptography and consensus to authenticate decision making. Effectively, the system – through thousands (or millions) of connected participants – becomes a computer that can make commitments. A commitment to follow a predefined rule without being subject to manipulation. A commitment is a promise to honor a rule. And since it is a computer making the commitment, it can only follow the program that was written. It will not interject human interference once the program has been written. I’ll get into this concept more in the next article.

Turns out it is pretty hard to create a decentralized system compared to a centralized one. Some of the challenges faced by a decentralized system are ensuring all the participants see the same information and excluding bad actors. All of the participants that make up a decentralized system must see the same information so they can form a consensus around what is true and what is false. And the system must have a way to exclude bad actors, or participants that are trying to pass a false for a truth. Fortunately, in 2008 a novel invention was created to solve these challenges. That technology is called Blockchain and it underpins all of the developments underway to fulfill the aims of Internet 3.0.

My next article on this topic will dive into how Blockchain technology facilitates decentralized decision making, and how that has the potential to fundamentally disrupt existing systems. Much like how the IPhone disrupted society when it was released. For now, I need you to understand that crypto is not just digital currency. It is much more profound than that.

Disclosure: The topics discussed in this article are for general financial education and are not intended to provide specific investment advice or recommendations. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. The information has been obtained from sources considered reliable but is not guaranteed. Sources include: Andreessen Horowitz, Wikipedia: History of the Internet, Coinbase, and TechCrunch.