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Crypto basics

It’s not too late

I’ve recently started getting interested in cryptocurrencies, decentralized finance and blockchain technology, so I’ll write down some of my notes on the things I’m learning here.

Impression 1: It’s not too late.

Almost every podcast, conversation, and commentary I’ve seen has marveled at the growth the crypto / DeFi / blockchain world has seen recently. But every single time, without fail, they all talk about how it’s still just so early.

It’s still early innings. It’s not too late to get involved. In fact, there’s a huge need for entrepreneurs in the space. Or so I’ve heard from folks like Chris Dixon, the Bankless podcast, and others.

That was encouraging.

Now I’m trying to understand what’s actually happening and what hasn’t been done yet.

Reading the white papers

I’m not sure why but I’ve heard a few times that if you want to learn about crypto, DeFi and blockchain, you should start with the seminal papers:

I’m also looking at more recent white papers for projects that have taken off:

Who knows, maybe I’ll write one of my own!

Okay, let’s start from the top.

Bitcoin white paper notes

First impression, I’m surprised at how non-technical this starts. Pretty accessible.

A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a financial institution.

source

Think I’m starting to get it. The goal was to get rid of banks, and this was a credible attempt at solving some of the real problems involved in getting rid of banks. Why? Namely:

  • Banks can’t avoid mediating disputes because transactions aren’t completely foolproof.
  • The cost of mediating disputes drives up the transaction cost in the whole network.
  • If I serve you a pizza and you eat it, I can’t get the pizza back. But I know you could get your money back by complaining to the bank. So now I’m forced to be wary of you.
  • With bitcoin, there’s no way to get your money back. (Except if there’s a “routine escrow mechanism” in place to protect buyers.)

Layers of money

Just read through Nick Szabo’s excellent post on the history of money, where he breaks historical money systems down into two layers:

  1. The “layer 1” protocol, or “bullion” – which is the gold the coin is made of or backed by
  2. The “layer 2” protocol, which is the dollar bill or banknote that represents the value.

When monetary systems and mediums of exchange are broken down in terms of their features, benefits and drawbacks, it becomes very clear that internet money can be built in specific ways to serve specific purposes.

For instance, Bitcoin is the digital gold because it has high transaction costs but ultra-high security. It’s like a Swiss bank.

Ethereum, on the other hand, has lower transaction costs (and getting lower), which means lower (but probably good enough) security combined with greater usefulness for a wider variety of applications. People are calling it the “world computer,” and that’s a good description. It’s an app store on which anyone can build apps, but its code runs in pieces on computers around the world. Pretty cool.

By Christian Petroske