I can’t help but laugh when I see those pictures of gold Bitcoins that the newspapers love. Forget you ever saw them. Cryptocurrency, or “crypto” for short, is not a physical thing. Want to know more? Keep reading.

How does crypto work?

You might have heard of something called the Blockchain. Imagine the blockchain as a list of transactions, a ledger of sorts. When John sends $5 to Sarah, it gets recorded on the blockchain.

Why is this so revolutionary?

Well, firstly, this transfer of cryptocurrency never went through a bank, or any other financial institution (or any trusted third party for that matter). This is what we call a “peer-to-peer” transaction. It’s the equivalent of John placing $5 into Sarah’s wallet, only now Sarah and John can be on opposite sides of the planet, and the transfer is near-instantaneous*.

Who “manages” this blockchain thing?

Every transfer between parties is reviewed by computers located all around the world. These computers are referred to as “miners”. A lot of people get confused by this name; think of a cryptocurrency “miner” as a bank teller (yes, I know, there’s no bank involved, just bare with me) who checks that John has enough money in his wallet to be able to send Sarah $5. If he doesn’t, then the transfer doesn’t get added to the blockchain (ledger).

If John does have enough money in his wallet, $5 gets sent to Sarah, and the miner who processed the transaction gets a small cut (think like $0.01). This is where things get interesting. Usually, we trust a bank or some other large organisation to keep a tab on how much money we have to spend. If you try to spend more than you own, the bank won’t process your transaction (and sometimes will even hit you with a dishonour fee). This is referred to as a “centralised” system, where one entity (the Banking system) centrally controls who can send what to whom.

Because any average Jane or Joe can “mine” cryptocurrency (don’t get excited, it’s a little more difficult to do these days), it is considered “decentralized”. This is possible because the ledger (i.e. the Blockchain) is completely public. Anyone can view any part of it.

Before a transaction can be added to the Blockchain, it needs to be verified multiple times by multiple miners. This gives us the added benefit of preventing a single dishonest person with bad intentions from manipulating the blockchain.

Here’s an example; John has a cryptocurrency mining computer (known as a “mining rig”), and has $10 in his cryptocurrency wallet. John tries to send $50 to Sarah’s wallet to pay her for some goods, and instructs his mining rig to verify the transaction (incorrectly). John’s fake transaction of $50 to Sarah is reviewed by 20 other miners across the globe, who all checked John’s wallet and saw that he only has $10 to spend, so John’s dodgy transaction is never added to the Blockchain. And Voila, we have an example of the sort of self-regulation built into this new wonderful technology.

Better still, there’s no need for John or Sarah to know or trust the miners across the globe. The decentralized system works because the “mining power” of the honest miners outweighs the mining power of any cooperating group of malicious miners. Essentially, unless someone bad controls over 50% of all miners all over the world, the system is secure, and that’s pretty damn unlikely.

So who can I call for a refund?

Hand-in-hand with this is the fact that cryptocurrency transactions are irreversible. Once you send cryptocurrency to another person, there is no way to reverse the transaction. It is recorded in the blockchain and nobody can remove it.

If you have any questions, please leave a comment below and I’ll try to include an answer in a later post. If you feel ready to give it a red-hot go, check out my next post on how to buy cryptocurrency.

If you know how this all works and would like me to continue trying to bring crypto to the masses, please consider donating either Bitcoin Cash (BCC/BCH) or Ethereum (ETH) to the following addresses:

BCC/BCH: 1Kwv2nJYXQytSs83Bm6gi7NtT9j1e8X2aJ
ETH: 0x5EE262f67D573000515643BB4D931b04c3867615

*I know, Bitcoin and the majority of other high market cap cryptos aren’t generally instantaneous, but for the sake of introducing these concepts, I’m describing it as it was at conception.

Originally published at dailyshill.io on January 21, 2018.