Cryto is a second-generation Internet phenomenon. The first wave was the 1980s, when some people discovered that it was possible to send messages from one computer to another without the computer in question knowing what you were saying—just as long as you used a very secure method for getting messages to the other computer in the first place.
The first wave peaked in the mid-1990s, with a few hundred thousand users. As always happens with second-wave technologies, most of them were trying to do business with each other anonymously. You could buy or sell things on the Internet without giving your name or address or phone number, and then use checks or money orders to pay if you had any trouble.
But there was a problem. The very virtue of this technology—that it let people transact without leaving a trail—made it easy to violate laws against buying and selling drugs on the Internet, even though that’s not what most of them intended. So by 2000 encryption had started to become an important part of everyday life on the Internet—a kind of abstraction of money laundering protection that wasn’t actually about money laundering at all.
Crypto is a word that seems to mean “hidden,” but it’s actually about publicness. What cryptos do is make information visible: if you have a crypto, no one else can take your money without your permission. In this sense, there’s nothing hidden about cryptocurrencies at all.
Is that really a new idea? What’s new is the technology for making it work — for generating a cryptographically secure digital signature, which does not depend on trusting anyone else.
This means cryptos are resistant to what computer scientists call “brute force” attacks. A brute-force attack is where an attacker tries every possible key until she finds one that works. With crypto, when you’re trying to extract someone’s secret key (the key needed to open a lock), the attacker has to try all keys until she finds one that opens the lock. The more keys there are, the harder it is to find a valid one.
Cryptocurrencies are digital currencies that use cryptography for security and for recordkeeping. Cryptography is the study of techniques for secure communication.
When you send someone money, there’s a copy of it on both your computers. The money has to move between your two systems, and if it isn’t encrypted, anyone who can see the unencrypted copy of that money can spend it on something else. If you want to send me money, how can I be sure I’ll get it?
Cryptography is the science of keeping secrets. One way to keep a secret is to use a code so that no one can read the secret without knowing some special information. For example, if you are trying to hide that “I am going camping with my family” email from your boss, encrypt it with a code made up of random letters and numbers, so that even if someone knew what the original message said they wouldn’t be able to crack it. When you send me the encrypted message “It’s time for our camping trip,” the only person who can read it is my friend Bob who knows where to look in the list of possible messages and knows my secret code.
Currency is a medium of exchange. It is a very useful thing, and it has been around for a long time. But it is not the only kind of money. There are several others.
The first currency was gold and silver. Those were the currencies of barter societies, where you had to take what someone else had in trade for your own stuff. A currency is a unit that represents money, and that gets used as the standard of measurement. Gold and silver are units because they are scarce: you have to work hard to get enough gold or silver to make up a hoard worth exchanging against other things.
A second kind of money evolved as an alternative to gold and silver: paper money, backed by nothing except the promise of payment from government authorities, which could also go bankrupt at any moment.
At some point, people decided that being able to trust paper money was too much of a good thing, so they started putting their faith in something else: numbers on a computer tape or bits of information stored in the cloud. That’s where Bitcoin comes in.
Cryptocurrencies are digital money, usually stored on computer hard drives. They are not controlled by a central bank, and they have no physical form. They are meant to operate like cash, but they don’t work like cash; they’re very different.
To understand how they work, you need to understand code and cryptography. These are areas of mathematics and computer science. People who study them tend to be highly technical and sometimes geeky; they think of themselves as being at the cutting edge of technology and often don’t realize that other people view cryptology as a boring relic of the past.
Cryptography is the science of hiding messages in such a way that only the right people can read them and can only do so with keys that only the right people know. It’s about protecting secrets from snoopers. But cryptography is also about spreading them around: if you want your message to be seen by everyone, it helps to make it publicly available, so that anyone can read it without having to ask or pay for it.
To take our first example: Bitcoin uses cryptography to make all the transactions in Bitcoin transparent – meaning any person who wants to see your balance can see how much Bitcoin you have in total and how much you’ve spent or received. This makes
Cryptocurrencies—-virtual currencies based on mathematical formulas, not government—are the latest efforts to transform money. The first attempt was Bitcoin, which came out in 2009.
Bitcoin is a currency that isn’t controlled by a central authority (like a nation’s central bank) and isn’t managed for you by a trusted third party (like your bank). Bitcoin transactions are made directly between individuals, through a process called “mining,” rather than through a clearinghouse like the Federal Reserve or credit card companies. Since Bitcoin isn’t managed by an institution, it is impossible for any one person to control how much it is worth. This may be why it has become so popular with libertarians who want to make their own financial decisions.
But Bitcoin has had some problems. It can be difficult to buy or sell because there is no central place where you can do that easily. And there have been rumors of theft and fraud—a mysterious group of people called “Satoshi Nakamoto” created Bitcoin, then disappeared.
Enter Ethereum: Ethereum is a cryptocurrency different from Bitcoin in many ways. It started in 2014 as an effort to build a more flexible virtual currency that could be used to buy things in the real world rather than just traded like digital gold. So it is more like the
Some of us were hoping that Bitcoin could be the internet’s money. But it isn’t. Bitcoin is a scramble of keys, like email addresses or credit card numbers. If someone gets hold of your private key, then you are screwed. And the Bitcoin system’s design is so opaque that no one can even tell whether your private key is holding a single Bitcoin or a hundred million Bitcoins or twenty-five trillion Bitcoins. Some people have made fortunes by buying Bitcoins for a dollar and selling them for $1,000 each a few weeks later. That’s not because they know anything about cryptography; it’s just luck.
Let’s say you’re an engineer and you hear about this new thing, which is a digital currency but which nobody in their right mind would ever use for currency transactions, because it’s so insecure. You probably work at Google or Microsoft and you want to make some side money while the big boys are still making money off of your company’s name. But how? Well, you could mine Bitcoins with your laptop, but there are hundreds of millions of them out there already, each of which might take decades to find by chance. So the obvious thing would be to buy some Bitcoins and sell them on the way down for a profit. But what if there