May 23, 2022
Explaining Cryptocurrency to a New User — Part 1
# Intro #
I started writing this article late 2021 and with the help of many peers have added more to it over time. I figured it was time to share this out there and get some wider thoughts and opinions going! A big kudos to all my peers at Amazon who helped me dig into this topic with their questions and challenges to my story. So wonderful to walk and write amongst giants!
So with that, here’s part 1 of 6 or so, maybe more parts! Enjoy and share your feedback!
How do you explain Cryptocurrency to someone that’s coming in new to this space. The first thing is to figure out why is it that they’re interested and coming into this. If it’s purely from an investment side, do they care to learn about the tech or not?
Besides investing, one of the most empowering aspects of this space is becoming your own bank. Once you take ownership of your financial assets, you are now free to do what you wish with them and how. You’re also free to interact w/ whomever you want across the globe. There are no more borders to finance. Age and wealth also becoming irrelevant as there are no intermediaries to determine who’s eligible and who’s not.
As the space matures, more lego options become available with a higher degree of obfuscation.
So back to where we started, where do you start teaching someone, and how do you help them avoid pitfalls others have gone through without scaring them off. So let’s get back to being your own bank. If they do want to be your own bank then understanding how wallets work is the first thing. The fact that we call them wallets is entirely wrong to begin with since the wallet term implies you’re holding something locally. In the digital asset world, you don’t own any actual assets, you own the keys allowing you to interact with those assets. So if we think of those assets like locks, then we hold the keys to those locks and the term Keychain makes more sense than wallet.
Now we have a keychain with different keys that can open different locks. Well, some keys are like super keys that can open multiple locks and their doors. For the sake of argument, let’s think of these doors as the entrance to a traditional bank. Those keys allow us to do something at that bank; deposit assets, take a loan, send money to other account holders at that bank, or do whatever idea some teller may think of in the future (We’ll come back to that teller in a moment). If we continue with the Bank analogy, let’s establish that the “Bank” term here in the crypto world is a Layer 1 chain. You’d expect your bank to be able to conduct a certain amount of transactions per day, guarantee the security of transactions on their network, and provide a platform for new financial instruments. That latter is where the teller comes in.
Since the Layer 1, aka Bank, provides a layer of infrastructure where new financial instruments can be created, the teller and their peers can develop anything new they think about that may create value for the layer 1 or for their customers. Each teller is then free to operate their app how they want and integrate with whomever they want. These are the smart contracts or chain code on the network, and we refer to these as dApps or Decentralized Applications. The bank might even run hack-a-thons and create funding incentives for their tellers to create new dApps. This model happens regularly on many Layer 1s.
Ok, now we understand that we have a keychain, that keychain opens the door to the layer 1, aka bank. Once we’re in that bank, we can use those keys to interact with various tellers apps in a trust-less way. I don’t need to know the teller and the teller and their app don’t need to know who I am. Because assets are stored on chain and not in a wallet, anyone can verify that transaction. Then why do we need Layer 2s and what are they?
Well, let’s say that layer 1 or “bank” is full to capacity and can’t hire more tellers or expand their infrastructure fast enough. Well, they likely have high fees too. this creates opportunities not just for completing layer 1s/banks to come in and try to steal some of the thunder, but also for others to build on top of the existing layer 1, offloading some of the load from that core bank. This layer 2, just like a competing layer 1, may have the same dApps as the original bank, or have their own. Think about that for a moment. A teller at a bank can choose to work with other banks or other tellers to grow their financial instrument. This is just like a dApp today can support various layer 1s and layer 2s. The key difference with the layer 2 is that they still have to adhere to some of the requirements of the underlying chain. There’s a deeper topic of layer 2s vs side chains we won’t get into here, so let’s leave this analogy where it is.
How do you move assets between these layer 1s and 2s? The analogy we can use here, as painful as it is, is a wire. When you wire someone money in the traditional banking world, it’s a black box. You send the funds and cross your fingers the bank on the other side gets the money. If it doesn’t go through, you’re in a world of pain trying to unstuck the wire. In the crypto world, this isn’t the case. Remember, transactions are trustless and publicly verifiable on the chain, so we don’t need middlemen, just code that can move assets around. How these assets are moved is a deeper topic than this article will cover. But if we think of the wire analogy, in the cryptosphere we have bridges. It’s these bridges that help us move assets between the various Blockchain networks, aka chains, which is how I’ll be referring to it moving forward.
Let’s for a moment go back and say the new user doesn’t want to be their own bank and they just want to trade digital assets. Well, then we can skip most of the above right? Not so fast, this is a new world. You can’t just throw your hands in the there and say I trust someone else with all my assets. If we do that, then what are we really changing? We’re just muting and deconstructing the new to look like the old world. That’s not progress, it’s baggage. But it’s also understandable that not everyone’s ready to be their own bank. So then what. Well, they don’t need to understand all the nuances of the above. They need to understand what a hardware or cold wallet is and the responsibilities that come with it. They should then understand that whomever they’re trusting, owns those keys just like they would; so how is that entity protecting those keys? Then these users can start trading and using exchanges and eventually move into the world of decentralized finance and tools.
Trading use case aside and covered above, now we have a good foundation, we understand the keychain through the dApp, so what do we need to learn next as a new user. The next big hurdle is moving assets from centralized exchanges into DeFi. There are options out there allowing users to move Fiat directly into the world of DeFi, but this is often met with fees from many sides and can result in so much funds lost to fees the users are turned off. As an example, using a service to move $500 into the Ethereum network can cost ~$50–100 in fees. Then you want to transact on the Ethereum network and buy a digital asset, that could set you back anohter $50-$100 in network fees. So your $500 results in possibly sub $300 of buying power. But what about when you want to sell that asset, well, fee again. So new users need to step back and understand the various ways to get Fiat into the system.
That’s it for part 1. Stay tuned for part two on “Exchanges and Onboarding into Crypto”
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