If you have heard all these terms that have to do with new currencies, cryptocurrencies, digital money of any sort, well, it’s the wave of the future. For many of us, we have no idea what the basic terms of this new world of money are all about. Don’t feel bad if it’s been a challenge for you, because for me, I feel like there’s so many terms having to do with all this stuff I just didn’t understand at all. So this is going to be a really deep dive into all these things we see going on out there right now in the digital currency market. But we’re going to define those terms and we’re going to show you how they work and how they link together and how this whole thing as a concept works.
I got to sit down with blockchain expert and co-founder of TenX, Dr. Julian Hosp, and today we’re going to make it super easy for you guys to understand. Transcript below.
I was listening to Tim Ferriss‘ interview recently where he was comparing blockchain to a fly in amber and the way that works. Let’s start at the basic level and just explain what a blockchain is.
Dr. Julian Hosp:
Imagine this money is not physical. Imagine this money’s totally virtual. The problem is since it’s virtual, everyone can just copy that money or anyone can delete it. It’s pretty much—you can do whatever you want. So it’s really, really difficult to keep track of the money since you would have to trust that no one else is cheating because if I have no chance in looking into your account, you could just manipulate your account. And if you send me money, I don’t know if you just created that money. It’s pretty difficult.
In the real world, how do we solve this? You have a so called centralized institution, a bank. That bank sits there and is in charge of everyone’s account. So you have a bank, Bank of America, or whatever you have—chase or whatever. You have your account there. And so they have to trust from the central authorities to be sure that you can’t cheat and they don’t cheat. Let’s hope they don’t. So you have to trust them.
The thing is this, imagine we take a different approach. Imagine all of us sit there and we have let’s say a piece of paper in front of us and we tell each other, all we’re going to do is we’re going to look for 10 minutes and I’m just kind of picking random numbers right now but these numbers are quite applicable actually. So we sit there and for 10 minutes, all we do is we look at each other and we check if any of us is spending money or is receiving money. And if any one of us does that we pick a random anonymous number. So every one of us doesn’t use their real name, we all use a pseudonym, we use a number. So for example, you, Jeremy get the number nine, I get the number 13—it doesn’t matter. So we all pick certain anonymous numbers. And as soon as one person sends money to the other person he has to tell that to everyone else on the table.
So when I send you money, it’s not me having to talk to a central bank, it’s me telling everyone else and saying, “Hey listen, I’m number 13 and number 13 just sent $5 to number nine.” No one knows who number nine is, you’re the only one who knows, okay I’m number nine. So that’s what you know.
Then we do this for 10 minutes. And after these 10 minutes we compare our notes and we are sure that something called consensus is reached. And consensus means that at least 51% of us agree on who sent money to whom and who received money from whom. So do this for 10 minutes and afterwards we check—we compare our notes and then we say, okay, is this what we agree on? As long as 51% agree on it, we all sign and we flip the page over and we put it onto our left side. And we just have a page there now. And this is what’s called a block.
This is a block of paper, a piece of paper and we flip this over. Now we all start the next block. So what happens is, if you make a transaction, you cannot be sure that your transaction actually was made until that block was flipped over. Why? Because in between, there’s still an agreement—a consensus that it’s a little bit of a discussion. Did that transaction actually occur or not? Now the next 10 minutes start. Now we do the same thing again. We do the exact same thing and we all look at each other and we’re making sure who’s spending money or who’s transacting with whom, who’s sending money from where to where. And after these 10 minutes, we reach a consensus and we flip the page over and we put it on top of the other page.
Now here’s the trick.
Whenever we put one page on top of the other, we chain them together. Chaining them together, we use a lot glue. If we were to take the paper off again, we would start ripping the entire paper, and this would destroy the entire blockchain because these blocks are chained together. So what happens is, the more of these papers we put on top of each other—meaning the more time passes and the more often we agree—we reach consensus on who transacted what to whom—the more secure your transaction becomes—we call this the more confirmation. So the older this gets, the further down in the blockchain this thing is, the more indestructible your transaction is and the more guaranteed it is that you actually received money or that you sent money.
In Bitcoin, for example, when a transaction has three to four confirmations—so 30 to 40 minutes have passed. So three to four of these blocks got chained together. It’s pretty much guaranteed that that money is yours forever because the work of actually having to unglue all this and taking the glue off and being sure that the paper goes off really, really nicely and doesn’t rip and doesn’t break—that work is so expensive and is so difficult and is so hard to do that it is actually more expensive than the economical gains that you’re getting if you manage to get these pieces of papers apart. And that’s pretty much how the blockchain works.
Now obviously in the world of computers, it’s not humans sitting there and having to take notes. It’s computers—it’s so called miners, and all they do is they sit there, they watch the network and pick up these transactions and then there’s these so called nodes and these nodes broadcast transactions to each other. So what happens in the real blockchain in the Internet is if one of us makes a transaction, it gets broadcast to 20 other nodes and these 20 other nodes broadcast it each 20 nodes and it goes on like this. So it spreads over the entire world within seconds. And so that’s how this blockchain is super stable and super secure.
In terms of the different types of currencies, I understand there’s probably a lot more to it, but just in basics, we have Ethereum, we have Dash, we have Bitcoin—which are the well known ones. I know there’s other ones out there. But what are the difference between these different currencies? Is Ethereum better than Bitcoin? I’ve seen all these different things. So what’s the difference between these currencies?
Dr. Julian Hosp:
I know that people love to compare Bitcoin and Ethereum, but by definition these things are totally two different things. Bitcoin per se is a pure currency. It’s not a very anonymous currency. Many people believe it’s very anonymous, but it’s actually not very anonymous and there’s a lot of examples where people got caught committing crimes because they thought Bitcoin was anonymous and then the police caught them quite fast ’cause it’s not really anonymous. So Bitcoin’s a pure currency. A currency—these five definitions really, really important to understand that.
Ethereum, on the other hand, is more of an asset. Meaning it’s something that can be used. Bitcoin cannot be really used. Bitcoin is a currency that’s used for spending and paying and transferring. But Ethereum is actually a decentralized computer. So what I mean by this is this: think about these pages that you flip over and all you do for 10 minutes—you monitor how much people are spending and receiving. You could do the exact same thing if you monitor servers and you monitor the zeroes and ones that get updated on these servers. Instead of updating transactions, you’d update states of what computer programs are in. And what this would allow you to do is you would have a computer that is completely decentralized all over the world that’s literally impossible to stop. If you want this computer to stop, you would have to shut down every single server. Because every server has a copy of another server, of another server, of another server. And that’s what Ethereum basically is.
And in Ethereum it’s—you have the so-called ether. But ether—yes it can be used as a currency—but the actual use of ether is actually to pay that computer and that’s called gas just like when you want to drive your car. So it’s gas. And so you need to pay gas in order to use that computer. And if you want to run a computer program on top of Ethereum you need to pay gas. So it’s a totally different system. There’s a lot of other things where Ethereum’s very similar to, there’s also other currencies and you mentioned Dash, for example but also Monroe or C-Cash.
These currencies are very, very anonymous. So they have a special type of cryptography in them that allows them to be really, really, really anonymous, so it’s really, really hard actually to even know who sent money to whom. So it’s an extra layer. You have newer protocols. There’s something called IOTA, and IOTA doesn’t even have a blockchain anymore . It has a so called tangle. A lot of people call Bitcoin the first generation of block chain, then they called Ethereum a second generation and now they’re calling IOTA this third generation of, not really blockchain but distributed ledger technologies. ‘Cause it’s distributed. You would have at the moment, you would have I would say, four or five different groups, currencies, very anonymous currencies, some assets, the IOTA kind of things.
You have a lot of these cases where you have these so called ERC20 tokens. These are tokens where companies use certain tokens to run on top of Ethereum as a computer program. This is basically what you could spread it over. It’s not that one is better than the other, it’s just a different use case. And if people ask me: Do I think in the future that Ethereum is going to be more important than Bitcoin? Who knows? I don’t know. I think Ethereum has a great use case and I think Bitcoin has a great use case.
Now, I’m not offering investment advice, but change, especially in the financial space, is a lot easier to understand if you grasp the terms being used. I hope you know have a greater understanding of this new monetary system. This is a selection of a full interview that I did with Dr. Hosp here. Opinions expressed here by Contributors are their own.