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What’s Crypto & How’s it Work? Start Protecting Your Money Now

All cryptos are cryptographic assets used with crypto wallets on distributed networks. Six different roles use three core technologies to make crypto work. This article teaches you what cryptos are...

G. Saldana
Updated on December 12, 2023 12 Mins Read
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In 2009, Satoshi Nakamoto mined the bitcoin genesis block on the Bitcoin Network1. The bitcoin genesis block contained ‘satoshis’, a crypto. Since then, most people don’t recognize the name “satoshis”, nor their unique capabilities. If you don’t, you should. 

Let’s better understand crypto, including satoshis, so we can use them the right way.

Why? 

Because we can fall behind, if not.

Today, hundreds of cryptos saturate the internet. Many of them can boost our finances with never-before-seen capabilities. They can help us better manage our finances. Unfortunately, some can be catastrophes. But those who understand how to tell the difference can use them the right way. While those who don’t, may find themselves behind the curve. 

So, how can you tell if a crypto is an opportunity to diversify and hedge risk, better than before? Or, if the crypto is a risky investment, at best? 

Well, we start by answering: what’s crypto & how’s it work?

What's Crypto?

This article will teach you, in a simple way, what cryptos are and how they work. Then, you’ll gain the knowledge and confidence to act if (or when) you feel the time is right. 

To learn what cryptos are we’ll first look at what makes them special. Then, we’ll see how people make them work. It’s important for cryptos to address real-world problems, too, so we’ll review why. Last, we’ll learn about the core technologies which drive any crypto’s capabilities. Then, you can use your newfound knowledge to start thinking about why cryptos matter. 

Now, let’s begin thinking smarter about money by discovering the world’s newest assets: cryptographic assets.

Cryptos are cryptographic assets

The word ‘crypto’ refers to cryptographic assets. We transact cryptographic assets on crypto networks2. Like bitcoin on the Bitcoin Network. 

But crypto assets are not typical assets. They have special traits and  unique properties. When you understand these properties you can understand how to use them.  

After all, thinking smarter money means using cryptos’ good, for good.

But, good or bad, all crypto are distinct digital assets used on crypto networks. In this regard, crypto assets enable competitive gains for those of us who use them to full effect.

Like bitcoin, for example. It wasn’t the first crypto to exist, but it is the longest lasting. Some consider it the most successful crypto3.

Why? Because the network performs as expected. 

Satoshi Nakamoto enabled the prototypical decentralized p2p cash for ecommerce4. A novel capability with a clear use-case. Today, bitcoin remains a viable hedge to centralized money.

Bitcoin’s the world’s first censorship-resistant, decentralized, cryptocurrency. Successful because people understand how to use it. You can gain better clarity about what any crypto is when you learn how it’s used.

We use crypto w/wallets connected to networks

We use cryptos on crypto networks via crypto wallets5. Shocking, huh? Think of these wallets as locations to keep (aka: “hodl”) cryptos to gain value (eg. buy low, sell high) or provide utility (like, making fee payments). 

Here’s how cryptos, networks, and wallets interact, in a basic way: 

  1. Get a wallet – You learn of a crypto and download it’s wallet to your device of choice.
  2. Create ID & connect – You create your user ID and connect the wallet to the network.
  3. Fund & receive – You or others send funds to your new wallet.  
  4. Save or send – Later, you can send or trade your crypto when you decide the time is right.

Pretty simple, huh? 

In short, we buy and receive cryptos via wallets connected to crypto networks. Then, you can perform transactions from within the wallet software. Buy digital art, trade for other crypto, or self-custody for the long-term. 

With thousands of wallets to choose from, it’s up to you to explore the cryptoverse.

People are key to crypto performance

Users are not the only active parties on a crypto network. In fact, six groups perform critical crypto-related activities. We can refer to these groups as key crypto roles.

We learn how people engage with crypto through the key crypto roles6. Different roles provide different network-critical activities, like processing transactions. Furthermore, roles help or hinder use-case goal attainment. So, any active crypto platform has six roles, not only users.  

Six key roles drive crypto activity

So, while crypto-users drive activity, the following roles are key to successful performance:

  1. Users
  2. Gateways
  3. Participants
  4. Developers
  5. Administrators
  6. Issuers

Each of the six roles acts upon the network in a unique way. They perform critical activities to ensure the sustainability of the network. These activities drive network capabilities. 

Roles are interactive. They each rely on one another to contribute to the platform’s capabilities. In turn, capabilities drive value which we can assess. The roles represent active community members.

Here’s a simple way to visualize how key roles interact:

1. Issuers issue new crypto on the network. Crypto issuance includes redemption. 2. End-users transact crypto through gateways to gain utility benefits. 3. Gateways provide GUIs needed to interact with any crypto. Different gateway types exist. 4. Participants are incentivized process transactions within consensus. 5. Developers write code impacting all layers of the network. 6. Administrators control rules and access to the core protocol.
People and crypto interact through six key roles.

When role interactivity aligns w/goal attainment, the platform may grow. Interactivity occurs via inputs within core technology layers. Role diversity and core technologies form the foundation of any crypto platform.

Key role interactions help outline crypto viability

Key roles interact with core tech, which drives performance and properties. We gain trust through consistent performance and robust role interactivity.

In this regard, we can better learn what any crypto by assessing its roles. Look at the people behind the platform and the tech they use as they interact. Ask yourself these questions: 

  • Which ways do administrators incentivize participation? This will help uncover the source of trustworthiness.  
  • Where’s developer talent? Find out and gain a sense of long-term viability. 
  • Is the community united toward working to solve a real problem? Answer this and help determine the potential value.

Review key roles to better determine real-world opportunities.

Cryptos can help us solve real-world problems, the challenge is discovering how.
Learn how to put crypto on the books.

Cryptos (should) address a real-world problem

Let’s face it: any crypto needs to serve a useful purpose. The problem is it’s not always so easy to know what the purpose is. To find out, we’ll take a look at the problem the crypto’s development team seeks to solve. Then, we’ll gain a clearer picture of the platform’s utility and why we would use it.

Let’s illustrate how crypto can address a problem, using the Bitcoin Network as an example. 

Years ago, a group called the Cypherpunks formed around a manifesto. They figured it was important to protect internet transaction privacy. 

Seems logical, right?

Well, some believe the Cypherpunks inspired none other than bitcoin-creator Satoshi Nakamoto. Does the Bitcoin Network perform as an effective hedge against central banks? Only time will tell. 

Regardless, bitcoin’s capabilities enabled the world’s first decentralized currency. A real-world use-case for anyone to self-bank. For the first time in history. Inspiring stuff. 

Cryptos’ special traits serve purposes

Satoshi Nakamoto’s inspiration behind bitcoin is debatable. But the success of the Bitcoin Network is not. Anyone, anywhere in the world, who understands what it is and how to use it, can do so. Hence the importance behind understanding why a crypto should serve a purpose.

Cryptos are digital assets with special properties and traits. Like a decentralized cryptocurrency such as bitcoin. People design crypto to operate on crypto networks. Roles interact to address real-world problems, using crypto to bolster utility. 

Recall how roles use core technologies to perform activities on the network. Robust activities through crypto apps can help transform marketplaces and disrupt industries. Let’s better understand how they can do so and dive into how cryptos work.

How's Crypto Work?

We know cryptos are assets w/capabilities (hopefully) used to your advantage. Use them via a wallet connected to a crypto network. Easy.  

But what’s going on under the hood? How does crypto actually work?

To find out, we’ll look to bitcoin-creator Satoshi Nakamoto. Their approach: to enable user trust in the network by combining technologies.  

Administrators use three core technologies to establish how any crypto works.

Crypto works using 3 core technologies

Any crypto (and platform) works using three core technologies7:

These core technologies drive important traits which we can use to our advantage.

1. Distributed ledger technology (DLT) 2. Consensus Technology 3. Encryption Technology
Any crypto works using three core technologies.

DLT keeps record

Distributed ledger technology (DLT) systems provide record-keeping for the network8. Recall how users send and receive cryptos within transactions. Participants record those transactions on the ledger11. Transactions cannot be unwound. Users can better trust a network which is immutable in this way. Once a transaction occurs, it cannot change.

Here are some key DLT properties to keep in mind:

    • A DLT system is a general term. It refers to any group of participants (aka: nodes) who interact on a common ledger. 

    • Developers build DLTs to operate in an ‘adversarial’ environment. This means we determine vulnerability to malicious participants.

    • A shared ledger is available to all. This enables the transparency property.

    • Many DLT types exist.

    • ‘Blockchain’ is a general structure of a DLT system and has been around since the early ‘90s.

    • The Bitcoin Network uses a blockchain structured DLT system. An ‘unspent transaction output’ (UTXO) ledger type.

You’ll later learn how some DLT systems innovate upon the general guidelines above. Distributed ledgers with shared-records operated by nodes. 

So, how do participants (“the nodes”) share records? All while assuming any other participant is malicious. 

By using what’s called the consensus protocol. It’s the second core crypto technology. And it gives further insight about how any crypto works.

Consensus technology builds trustworthiness

To understand how consensus works, we’ll begin by discussing the ‘present state’ concept. It’s a time-based concept which we’ll illustrate with a simple example:

Think of imaginary crypto ‘y’. Let’s say the crypto ’y’ network has only five participants. Recall how a distributed ledger is not stored in a central place. Rather, the participants update their own version of the shared ledger. The “present state” of the ledger is the complete transaction record up to the present time9. All five agree on completeness.

So, how do participants know if others have the same set of transactions? The consensus protocol. It fosters trust via algorithms.

The consensus protocol is a layer of mathematical mechanisms participants must follow. Participants cannot perform their activities without using the proofing mechanism. So, if they don’t follow the consensus rules, they cannot participate.

Let’s sum it up.

A distributed ledger stores a crypto’s transaction history. Participants can only add new transactions to the ledger if they form consensus. Consensus implements governance and fosters cooperation, even in an adversarial environment.

All-in-all, the distributed ledger records crypto transactions between users. Consensus allows participants to agree which transactions are true and when. Lastly, encryption secures the crypto.

Encryption secures transactions

Encryption is a cornerstone tech for DLT systems. Crypto transaction data is encrypted using a cryptographic hash. This hash is our cipher. It’s an algorithm. The hash and a key encrypt the “plaintext” transaction data10.

This creates ciphertext. Ciphertext is safe to send. Receivers must decrypt the message to access it.  

This is public key encryption. Also known as, asymmetric encryption. Public key encryption uses your public key to encrypt your data. Your public key is like your home address, free for people to view. Public key encryption uses a private key to enable distributed consensus.

A private key decrypts the data. These public and private keys are pairs. So when the sender encrypts the data with your public key, only you can decrypt it with your private key. A new wallet creates a unique key pair.

Visualize encryption with colors

Let’s make sense of encryption by visualizing a cryptographic hash as a color. We know the hash is an algorithm made with a public key pair. Let’s look at how mathematics allow a private key to decrypt a message w/a visual of the concept:

  1. Alex creates a hash w/her public key pair and transaction data. She’ll have to include Barb’s public key info to send her a message. We visual the public key pair as two distinct colors, combined. This represents a unique and very long number.
  2. Alex shares the hash with Barb. We visual Barb’s receipt of the hash w/the light blue color. Barb then combines the hash with her private key to decrypt the message. This is shown as the red, white, and blue message and is possible because the mathematical commutative property.
  3. A malicious actor observes the hash Alex provided to send the crypto to Barb, and notes the light blue hash color. Note how Alex’s true private key is dark blue and is now hidden within the hash.
  4. Once the hacker observes Barb’s hash (the pink color) they’ll combine it with the Alex’s light blue hash. Fortunately, they have the wrong color, and cannot decrypt the message.

Crypto does as crypto is built

Cryptos change the way we can do business, starting in 2009 when satoshis came to be. But not all investors and finance pros understand why they are so important. Cryptos, like satoshis on the Bitcoin Network, are scarce, digital resources we can use on crypto networks. Key crypto roles apply tech and cryptos’ properties to gain an edge or hedge risk. The success of any crypto resides in the community and how they apply the crypto platform tech.

All-in-all, encryption, DLT, and consensus protocols form the foundation for any crypto. Crypto platforms enable users to transact crypto assets via shared-ledgers using consensus rules and encryption tech. People who leverage crypto capabilities form the crypto’s community. 

Now you can start thinking smarter money by learning to take advantage of cryptos’ capabilities, too.

Sources

  1. Popper, Nathaniel. “Decoding the enigma of Satoshi Nakamoto and the birth of Bitcoin.” New York Times 15 (2015).
  2. Ankenbrand, Thomas, Denis Bieri, Roland Cortivo, Johannes Hoehener, and Thomas Hardjono. “Proposal for a comprehensive (crypto) asset taxonomy.” In 2020 Crypto Valley Conference on Blockchain Technology (CVCBT), pp. 16-26. IEEE, 2020.
  3. Ballandies, Mark C., Marcus M. Dapp, and Evangelos Pournaras. “Decrypting distributed ledger design—taxonomy, classification and blockchain community evaluation.” Cluster computing 25, no. 3 (2022): 1817-1838.
  4. Nakamoto, Satoshi. “Bitcoin whitepaper.” URL: https://bitcoin. org/bitcoin. pdf-(: 17.07. 2019) (2008).
  5. Jørgensen, Kim Peiter, and Roman Beck. “Universal wallets.” Business & Information Systems Engineering (2022): 1-11.
  6. Reijers, Wessel, Iris Wuisman, Morshed Mannan, Primavera De Filippi, Christopher Wray, Vienna Rae-Looi, Angela Cubillos Vélez, and Liav Orgad. “Now the code runs itself: On-chain and off-chain governance of blockchain technologies.” Topoi 40 (2021): 821-831.
  7. Tasca, Paolo, and Claudio J. Tessone. “Taxonomy of blockchain technologies. Principles of identification and classification.” arXiv preprint arXiv:1708.04872 (2017).
  8. Kannengießer, Niclas, Sebastian Lins, Tobias Dehling, and Ali Sunyaev. “Mind the gap: Trade-offs between distributed ledger technology characteristics.” arXiv preprint arXiv:1906.00861 (2019).
  9. Ferdous, Md Sadek, Mohammad Jabed Morshed Chowdhury, Mohammad A. Hoque, and Alan Colman. “Blockchain consensus algorithms: A survey.” arXiv preprint arXiv:2001.07091 (2020).
  10. Maetouq, Ali, Salwani Mohd Daud, Noor Azurati Ahmad, Nurazean Maarop, Nilam Nur Amir Sjarif, and Hafiza Abas. “Comparison of hash function algorithms against attacks: A review.” International Journal of Advanced Computer Science and Applications 9, no. 8 (2018).
  11. Rauchs, Michel, Andrew Glidden, Brian Gordon, Gina C. Pieters, Martino Recanatini, François Rostand, Kathryn Vagneur, and Bryan Zheng Zhang. “Distributed ledger technology systems: A conceptual framework.” Available at SSRN 3230013 (2018).

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