Topic 1

A Crypto Story

Introduction

Sometimes, the best way to understand a complex topic like crypto is to explore it through the lens of an everyday situation.

 

In this first topic, we’ll look at an interaction between ‘Sarah’ and her ‘Bestie’, specifically looking at a transaction between the two friends, and what is actually happening with respect to the exchange of value.

 

Diving deeper, we’ll explore how traditional systems use ‘Middlemen’ to facilitate transactions and why this isn’t always the best idea.

 

We’ll finish off with a mini introduction of Blockchain and touch on some of the industries it’s impacting.

 

Allocate time to this first module, especially if you’re new to the space, as it’s important to get a strong understanding of the fundamentals.

 

And if you don’t get it the first time, fear not, for this is commonplace among many others who are also learning about the future of finance. You might need to re-read it a few times for things to sink in, and that’s okay.

Part 1 - Sarah is low on money

Sarah is your bestie. 

 

She’s planning a summer weekend away with her boyfriend but has spent all of her money on new swimsuits.

 

So, she calls you: 

 

“Bestie, I spent my last $300 on a new set of bathers and now I can’t afford to do anything with Jake when we go away this weekend. Can you please transfer me some money and I’ll pay you back when I get paid on Monday?”

 

You reply: 

 

“OFC bestie, sending the money now” 

Transfer Complete

Part 2 - The transaction

On Friday morning, you call your bank account manager and ask her to transfer $1000 from your account to Sarah’s account.

 

Your account manager replies, “Yes, madam.” and proceeds to look up your accounts and check you have enough money to transfer the $1000 to Sarah. 

 

Because you save your money as your grandma told you, you have plenty; thus, she makes an entry in the computer.

Once the information has been input, the transfer is completed.

 

FYI: we are pretending there is a bank teller doing this to keep it simple when really, it is a computer system owned by the bank which conducts this transfer.

Part 3 - The end

You call bestie and tell her, “I’ve transferred the money. Have fun this weekend!”

What happened in the above example?

You and your Bestie, Sarah both trusted the bank to manage your money.

 

There was no real movement of physical bills to transfer the money. All that was needed was an entry in the register, or more precisely, an entry in the register that neither you nor Sarah controls or owns.

 

And that is the problem with the current system.

 

To establish trust between ourselves, we depend on third parties.

The Problem

Middlemen

For years, we’ve depended on these middlemen to trust each other, and you might be asking yourself, “what is the problem with depending on them?”

 

It’s a worthy question, particularly when they provide an adequate service. Everyone deserves to get paid for a service, right? Of course, however, when technology can step in to replace this ‘middleman’ role, and do it more effectively, with no bias, then it shouldn’t be ignored.

 

Middlemen represent a single point of failure in the system, and when we consider this in the context of value exchange (people transferring money between each other), a very real risk arises. 

 

To prove this point, we’ve highlighted three examples of ‘trusted organizations’ that became corrupted, and where significant money was lost.

Corrupted Groups

Filing for bankruptcy in 2008, the Lehman brothers was the fourth-largest investment bank in the U.S. Thought to be a well-trusted organization, the company actually had an overly aggressive trading strategy and was dealing in complicated financial products which eventually led to their downfall.

The collapse of this energy giant marked one of the biggest bankruptcy filings in the history of the United States. The main cause of their downfall...Accounting fraud.

Between 1870 and 1911, Standard Oil was the world's most dominant oil company, but this came to an end when the Supreme Court found that they were guilty of violating the Anti-Trust Act (passed in 1980) by using low prices to eliminate its competitors.

The Opportunity

For many years, we have relied on these middlemen/institutions to manage and influence our money.

 

You might not be aware of this but every time you transfer money, your bank checks your account to make sure you can make a payment/transfer. They then need to notify the bank of the recipient of that money that the payment is coming in.

 

Is there a way to transfer money to someone without a bank? 

 

Think about it for a second…what does transferring money mean? It’s just an entry in the register. With this in mind, the better question would then be —

 

Is there a way to maintain the register among ourselves instead of someone else doing it for us?

 

‘Blockchain’ is the answer to that question.

Blockchain

Blockchain is a technology that facilitates faster, and more secure transfers between two people…with no middleman. 

 

It is a method to maintain a register among ourselves instead of depending on someone else (The bank) to do it for us.

Summary

The crypto industry is large and complex and unlike other industries, it impacts nearly every facet of business. Below are some of the major topics you’ll often hear associated with blockchain. 

Given the potential impact of blockchain technology, and how many different topics you can dive into, we urge you to take your time.

 

It should also be noted that you absolutely DO NOT need a comprehensive understanding of how blockchain may disrupt these industries before you invest your money. Cryptocurrencies and blockchain are two separate things…but let’s not get ahead of ourselves; this is something will unpack in future modules.

Key Terms

Blockchain

“Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.”

 

– IBM