What Is Crypto? A Beginner’s Guide to Digital Currencies and Blockchain

Not so long ago, sending a message across the globe – or even between cities – could take days, weeks, and even months to complete. These days, thanks to the Worldwide Web, we can exchange messages and files across the entire globe in seconds without thinking much of it.

The same applies to keeping and sending money. We’re used to our funds being issued and controlled by an authority – be it central banks, governments, or both. Up until recently, we had to deal with fees, delays, and an overall lack of agency over our monetary holdings. But if you think about it, money is data. Why shouldn’t we be able to freely keep it and exchange it without gatekeeping and oversight?

Wouldn’t it open up immense perspectives for how people trade, run businesses, and just communicate on a day-to-day basis? The answer is – yes, it would… and it actually already has. Cryptocurrencies entered the stage back in 2009 and made all of that come true.

In this guide, we’ll walk through each piece of this puzzle to help you understand the forces reshaping the internet and finance as we know it.

What Is Crypto? The Great Paradigm Shift

We’re used to keeping cash in a bank that oversees every transaction. But what if you could hold digital assets directly and send them anywhere in the world without reporting to anyone? Well, that’s perfectly possible now, thanks to crypto. The ultimate goal is simple: to let anyone store and transfer value digitally without relying on any central authority like a bank or government. No IDs, no passport checks – just complete freedom and anonymity to keep and transfer assets in a way you see fit.

This kind of digital freedom is enabled by blockchain tech. A blockchain network is basically a record-keeping tool. It’s often referred to as a “distributed ledger,” which is true enough. The blockchain stores all operations – movements assets – as a continuous chain of interconnected blocks of data. Hence the name, block-chain.

Blocks are interconnected with a unique hash. Each new block contains within it the hash of the previous one, which makes the records seamless and unalterable. Thus, blockchain’s main function is to keep track of every transaction ever made within the network – much like your bank or broker’s accountant. The twist is in how the network approaches adding and verifying entries.

We know that traditional banks and governments are the sole record keepers for their respective currencies. As a user, you have no say in how the records are created and changed – you can only accept whatever terms and rules are imposed on you ‘from above’.

Blockchain is a whole different beast. It’s powered by a distributed network of independent validators – “nodes” – that collectively verify and store each transaction, with no central entity calling the shots. For any new entry to be approved, there needs to be a collective agreement – aka network consensus – that the record is indeed valid. Once an entry is added, it cannot be deleted or changed – in other words, it’s immutable.

Thus, all historical transactions on a blockchain are unalterable, stored permanently, and 100% transparent. You can load up a blockchain tracker and browse through all transactions ever made within the network. You’ll see the wallet addresses, assets and their amounts. But you’ll never know the persons behind the operations, as blockchain is anonymous.

In the end, the fact that you can rely on blockchain for trustless, autonomous record-keeping is the foundation of the value of any cryptocurrency.

How Bitcoin Works: The Foundation of Digital Currency

Wherever there’s talk of cryptocurrency, there’s talk of Bitcoin, and let’s fill you in on that first. Bitcoin (BTC) is the originator of all things crypto. It is the first cryptocurrency ever launched, along with its self-titled blockchain network. The original Bitcoin Whitepaper was published in 2009 by an anonymous figure known only as Satoshi Nakamoto. To this day, no one knows for sure who Satoshi was (or were).

The Bitcoin Whitepaper proposed a game-changing vision of digital money you can exchange directly with anyone, anytime, without a bank or government getting in the way. It was Bitcoin that laid down the source code for the first-ever fully operable model of a blockchain network. Soon after publishing, the network was developed and launched by a group of enthusiast developers, and that’s where things got rolling.

The Bitcoin blockchain runs on a Proof-of-Work (PoW) consensus mechanism, wherein “miners” (active network participants) use their hardware’s computing powers to solve complex mathematical puzzles. The network sends out a sort of ‘riddle’ or task – to figure out the unique hash of the next to-be-approved transaction block. The node that figures out the requested hash gets to approve the transactions and add the block to the records. As a thank-you, the node is rewarded the transaction fees paid within the block. The process runs continuously, as these blocks are linked together in an endless chain.

As you may have guessed, running a PoW network is basically a rat race of computing powers, and it doesn’t exactly put the environment first. So, it’s a real smoker when it comes to energy consumption – probably its biggest downside.

When you own Bitcoin, you store it in a cryptocurrency wallet – a tool that holds two keys: your public key (your wallet’s address) and your private key (your digital password). The public key allows you to receive Bitcoin to your address, while the private key lets you send bitcoins from it.

The trick is that the blockchain doesn’t ‘know’ you – it only listens to the private key, which can technically be held by anyone. So, if you lose your private key, then anyone who gets it next will have full access to, and control over, your wallet. There’s no support line in blockchain, so it is your responsibility, in any weather, to keep your private keys away from the prying eyes.

Ethereum, Smart Contracts, and the Evolution from PoW to PoS

The second most impactful name in crypto after Bitcoin is, of course, Ethereum, which was founded by Vitalik Buterin and launched in 2015. Ethereum built upon the same groundwork as Bitcoin but introduced a world-changing innovation: smart contracts.

Buterin wondered: can we have a blockchain ecosystem that would not revolve around a single asset and would allow users to develop and create their own tokens and applications? Ethereum – and, specifically, smart contracts – came as a definitive “yes” to these questions.

Picture a vending machine – you put in money, make a choice, and get your snack automatically. That’s smart contracts in a nutshell: “if-then” agreements coded right into the blockchain, running completely without a middleman. So, in a lending smart contract, for instance, you could automatically receive cryptocurrency if you provide enough collateral – no bank approval needed.

Proof-of-Stake (PoS) Consensus

For a long time since its inception, Ethereum used to run on Proof-of-Work (PoW) consensus – just like Bitcoin. However, dApps and smart contracts demanded efficiency, which called for a whole new approach to transaction processing. That’s when Proof-of-Stake (PoS) entered the stage.

In PoS networks, validators “stake” their crypto as collateral to verify transactions. No more flexing computational muscle to solve math problems, no more smoking the atmosphere. Validators are now selected based on how much crypto they have staked. This makes PoS allegedly 95% more environmentally friendly than PoW. There are lottery-like mechanisms in place to prevent monopolizing decision-making. Ethereum began its transition to PoS in late 2020, saying bye-bye to ETH mining.

DeFi and dApps: A New Internet Powered by Blockchain

Along with other smart contract networks, Ethereum spawned a whole new world of decentralized applications (dApps). DApps function just like your normal apps but with a twist. Instead of centralized servers, they run directly on blockchain.

The totality of all DApps makes up what’s called DeFi – short for Decentralized Finance. It’s an ever-growing sector of financial services powered entirely by cryptocurrencies & blockchain. Through DApps, DeFi markets let people borrow, lend, and trade assets directly with each other, using blockchain as the basis for their interactions. Imagine earning interest or securing a loan without ever stepping foot in a bank – that’s what DeFi fintech is all about.

But dApps aren’t limited to just finance. You can have a DApp of virtually any kind – a social network, an entertainment platform, a creative service, or even a video game. The twist is – you guessed it – dApps run entirely on blockchain. But how do they differ from traditional apps, you may woner? Let’s go through a few examples.

Blockchain-driven social networks and metaverses give users control over their own data – a welcome break from centralized companies that profit from personal information. In blockchain gaming, players can trade in-game items and earn digital currency through gameplay, with ownership that lives on the blockchain. Artists can sell digital collectibles (NFTs) or earn royalties automatically, cutting out traditional middlemen. The list goes on. You can have virtually any kind of application, with the twist being full control over your assets.

To sum it, the idea of the DeFi market is to decentralize control and put users at the center of the process. As we speak, dApps are shaping an internet that’s more open, user-driven, and censorship-resistant than what we’re used to. The end-game of DeFi applications is to bring about Web3 – a digital ecosystem where you – the user – have true control over your online footprint, your money, and your experience.

CeFi vs. DeFi: Centralized and Decentralized Finance Explained

At this point, you may be wondering about how to buy and sell crypto. As far as financial services (brokers, exchanges etc.) there are two main ways to interact with crypto: Centralized Finance (CeFi) and Decentralized Finance (DeFi).

CeFi platforms, also known as Centralized Exchanges(CEX), include many names you’ve likely already heard: Coinbase, Binance, ByBit, Kraken, Gemini, Crypto.com, Gate.io, and so on. These platforms work a lot like traditional banks. They give investors and traders access to crypto liquidity but are also regulated and centralized.

With centralized exchanges, they’re the ones technically holding onto your crypto. You’ll need to verify your ID, and basically hire a middleman to manage your assets. For investors and traders, they make onboarding and UX simple. The tradeoff is that when using a centralized crypto exchange, you have to disclose your data (KYC). Plus, you are relying on a central authority, which may be prone to policy changes. If the location you’re registered in happens to be sanctioned or banned from worldwide markets – your CEX account might be in trouble.

By contrast, DeFi crypto exchanges offer all the same opportunities – investing and trading on exchanges, lending, borrowing assets, etc. – but with no middleman involved. Instead of relying on a third party, you interact directly with smart contracts on the blockchain using your blockchain wallet. Thus, instead of relying on a broker, you are kind of your own broker. You have full custody of your assets and complete control over your financial activities with no one to dictate what you should do and how.

The main caveat with DeFi is the amount of responsibility control you assume. All of the benefits are 100% on you, but so are your potential losses. Lose your keys or mess up a transaction, and those funds are gone for good. So, building a safety net is entirely on your shoulders, and yours alone. In Decentralized Finance, there’s no support line to recover your funds. So, to navigate DeFi, you need to know the ropes of blockchain or, better, be versed in it. But once you’ve got the hang of it, the level of control you get is pretty amazing, and for many, it’s a point of no return.

So, if you’re new to crypto and want a simpler start, centralized exchanges may offer an easier way in. DeFi, on the other hand, offers infinitely more flexibility and puts you in full control; but does require a bit of learning to navigate.

So, which field – CeFi and DeFi – do you think you vibe with? The answer boils down to how much control, custody, and trust you’re willing to have – or trade for convenience. Centralized exchanges make things simple – they handle the tricky tech stuff for the user. But with that convenience comes trust: they platform is in charge of your assets, not you. DeFi, on the other hand, offers transparency and self-sovereignty and requires a bit more tech-savvy and a willingness to handle things on your own.

Summing It All Up: A Brave New World of Finance and Technology

Crypto flips the script on how we interact with money. It’s not just another payment method or investment vehicle; it’s a revolutionary tech that gives full ownership of your assets without relying on a bank – or any middleman, for that matter. "Your keys, your coins" is the motto of the whole system – a system where you’re the one in charge. No third parties, no gatekeepers, just you and your wallet, and an endless sea of financial opportunities.

For those who value that level of control and are ready to dive in, crypto opens the door to a financial system that’s entirely on your terms. It’s not about replacing banks for everyone, but about having an alternative that prioritizes transparency, security, and independence. Whether or not you embrace it comes down to this: how much do you want to rely on others versus taking the reins yourself? With crypto, the choice is finally yours.