Transcription
Confused by crypto, bamboozled by the blockchain, nonplussed by non-fungible tokens? You're not alone. The economists, finance experts Matu Fava and Alice Fullwood, talk to executive editor Helen Joyce about the fundamentals of cryptocurrencies and the technologies that make them possible. Depending on who you listen to, it can be described as a haven for scammers, the future of finance, a slow-motion ecological disaster, or all three at once.
Perhaps we could start by defining some of our terms. Well, "crypto" originally, as, as you said, refers to cryptography, which is the study of secure communications. And that's the set of technologies allowing for sending a message that only the sender and the recipients can read. And in the case of cryptocurrencies, that, that's money. But "crypto" today is also, uh, used to describe the entire universe of crypto assets. And these are assets, as we will discuss later, we'll explain how they work, that do not rely on third parties, like central banks or banks, to authenticate their value or authenticate, uh, their movements.
Brilliant. I think that you've got very hard one now. And Alice, every time someone's tried to explain the blockchain to me, I understand it while they're speaking, and then I forget it all as soon as they've stopped.
Sure. So a blockchain is just a database, uh, but it's a special kind of database. So rather than being stored on, sort of, a single computer by a single institution, like a bank, say, it is a database that is distributed across lots of computers, uh, called nodes. And they each have a copy of this database, and they update it, uh, in blocks. So a new block of transactions is added to the chain that is stored. That's where the blockchain comes from. And as Matu was talking about, the blockchain is sort of a key part of crypto. It was invented with the invention of Bitcoin, and it helps, uh, add new transactions without appealing to a single centralized entity. Everyone in the, uh, computer network has to agree for a new block to be added.
All right. I understood that much. Um, mining, Matu, this is you.
So mining is a, is another tricky one, uh, which is related to what Alice just explained. So to add new blocks to, to the chain, uh, you, you need to validate a certain number of transactions. And this is done by a, a number of users on the network. And what they do is they pick a number of transactions that happen in, in real time, and they, they decide which one they want to, to validate. They validate them, they verify, you know, who's sending the money, is it going to the right person, is, is our enough funds available at the sender's account, uh, or things like that. Um, and once they've done that, because they all do it at the same time, only one person can actually add a block. They need to compete in a pretty complex mathematical problem, whose winner will decide who has the right to add a block to the blockchain. And they, they don't do this for free, even though presumably it's, it's fun to do. Um, they do it because in exchange, if they win the right to add this block, then they receive some, uh, some Bitcoin, if they're mining Bitcoin, or some other currencies, if it's another one.
And speaking of currencies, what about you, Alice? Bitcoin?
Yes. So Bitcoin is the first, uh, cryptocurrency or crypto asset that was invented. Uh, it was first issued in January of 2009, and its creator, Satoshi Nakamoto, um, he came up with this sort of idea of a blockchain. And the first blockchain was designed to record transactions in Bitcoin. So it is the token that the miners receive for adding blocks to the blockchain, and it is the sort of native asset of that chain. And, you know, it was initially worth very little, basically zero. Um, and today is by far the biggest, uh, cryptocurrency by market cap, and is sort of the most famous of all of them.
And Ethereum, we're hearing a lot more about, Matu.
So Ethereum is, uh, is the new kid on the block. I mean, it's not so new anymore, but it definitely was when it came out. It's, uh, it's younger than Bitcoin. Uh, it's in many ways nimbler than it, because it uses, or it is, it's, it's, yes, it's created, uh, transactions, um, that are done in Ethereum are recorded on a different type of blockchain, which bear the same name, um, and which is just more nimble, more modern, uh, allows users of that currency to do many more things, many more complex, uh, financial transactions, which we'll discuss when we speak about DeFi. So it's, it's, um, it's the, the challenger, but it's a big challenger.
Okay. And NFT, you said, Alice? What's an NFT?
Yes. Uh, NFT stands for non-fungible token. Um, and the non-fungible, sort of, part of that term is supposed to distinguish these kinds of tokens from the likes of Bitcoin and Ethereum. So they are fungible, as is the US dollar. If you swap one Bitcoin for another, or one Ethereum for another, or a dollar for another, you have the same value. Non-fungible tokens are instead attached to unique assets. So that's either a piece of media, like a picture or a video, uh, or a piece of music, even. And it's essentially a cryptocurrency token that is issued with reference to that media. And it means that you own some, uh, some, I guess, almost the idea of that media. So if someone who owns an artwork issues, uh, an NFT in it, and they sell that to you, you, you might not own the artwork, but you own the NFT that represents it.
So maybe I could ask you both to tell me, um, when you're writing about cryptocurrencies, how do you keep your, your head straight? It's so confusing. Is there a trick for thinking about it?
It's a challenge to write about crypto because there's also a lot of, uh, of jargon that's being used to describe things that you could probably describe in, in a slightly simpler way. You know, in, for example, people who were hold on to their crypto are called the "hodlers." And that dates back to a time when a pretty frustrated investor in crypto would sold it to creep too quickly and vented his hangar on, on Twitter after plus drinking a bit too much wine. And he misspelled. He said, "Oh, you guys are the ho, the hodlers," you know, saying basically, "I should have done like you did." And he created a concept that's extremely popular these days. So I guess one, one, one way to, to keep track is to, uh, get, uh, you know, behind the dragon, to try and understand exactly what people mean. But also to have fun with these new concepts, which, you know, are quite colorful.
Anything you'd like to add to that, uh, Alice?
So you'll pick up a crypto story, you know, once, um, once every sort of few months, maybe a bit, a big one. And I find that if I haven't been, been reading about it that much, um, I get very frustrated immediately with all of the sort of nonsense and terms and everything that everyone is talking about. And I'm just like, "Oh God, this is all rubbish. Like, why are we even bother bothering?" And then once I sort of read more and more and more, and I do all of my reporting, I'm like, I become sort of more on the evangelical side, where I'm like, "No, no, this is it. This is everything. It is this sort of beautiful dream." Um, and I just, I guess I don't know how realistic it is, but, um, it, it can, it can draw you in if you, if you read about it enough.
I'm Sasha Niata, executive editor at The Economist. This was part of a digital event produced exclusively for subscribers to The Economist. If you'd like to watch the full recording of this or any of our other events, please click the link. You'll have to register first, or you can subscribe to The Economist and enjoy all of our journalism. Thanks for watching.