Explain It To Me Like I'm Five
Equities and Crypto Pull Back
Explain It To Me Like I'm Five
Reducing complex topics to simple and easy to understand writing isn't easy; we have been trying to perfect it for a while now. Recently a reader challenged us to make our writing simpler. This weekend we thought we would attempt to reduce some of crypto's core concepts into simple explanations.
What is a Blockchain?
A blockchain is a ledger; a ledger is simply a tool people use to understand who owns what and how much of it they own. Ledgers also exist to record other things like events; examples are when I purchase a sweet at a store or when I bought a home. People rely on ledgers to tell them whether something is true or not.
The "blocks" of a blockchain are like pages of a book. Each page only has a certain number of lines and, therefore, a limit to how much can be written. Every time a page fills with writing or information, we need to start a new page.
The "chain" of a blockchain is like a reminder of what was written on the previous pages; this reminder is always written in the first line of the new page. This reminder links the current page to all the pages that came before it.
What is a Consensus Mechanism?
Consensus mechanisms are like rules to a game. You can play the game as long as you are willing to follow the rules. In this game, the points that you score only count if you follow the game's rules. If you decide not to follow the rules, the other players wouldn't want to play with you anymore, and you would need to find new players who are willing to play by your new rules.
What is a Miner or Validator?
Miners and validators are the players of the game. The game they are playing is adding new entries to the ledger, and to do so, they need to follow the rules of the game. When they manage to add new entries and follow the rules of the game, they are rewarded with points.
What is a Node of a Blockchain Network?
Nodes are like referees; they check the new entries to the ledger and decide whether players (miners or validators) followed the rules of the game. If they are happy that the rules have been followed, they add these new entries to the ledger (the blockchain) by filling in another page of their book. They then wait patiently to receive the next page worth of information.
What is Bitcoin?
Bitcoin is internet money. The bitcoin ledger (blockchain) records who owns bitcoin and how much bitcoin they own according to the rules of the game (consensus mechanism) that miners play and that nodes referee. People like bitcoin because the rules of the game are easy to understand and because bad people can't change the rules to win more points.
What is Ethereum?
Ethereum is like a vending machine for all the things you can do with your money. Think about when you use a vending machine, you click the product you want, the machine tells you the price, you put your money in, and then the machine gives you the product. Vending machines are useful because they don't need people to be at a store, and they only give products to customers if the customer pays the correct amount. The Ethereum vending machine is different because it only accepts Ether. The products of the Ethereum vending machine are all the things you can do with your money, such as spend, lend, borrow, save, invest and trade.
What is a Smart Contract?
A smart contract is like an agreement between you and a friend. Let's pretend you make an agreement with a friend that if it rains on Friday, you will pay them $100. In a typical agreement, if it were to rain on Friday, your friend would have to call you and ask for the $100, and you would either have to meet him with the cash or use your bank to pay him. However, a smart contract will remove the need to call your friend, meet with cash, or use your bank because it will make the payment for you.
What is a Token?
A token is something we can record on a ledger. Tokens can represent anything from money or a company to the pictures we share on Instagram. They rely on the ledger, rules of the game, players of the game and referees to keep track of what tokens are owned by who and how many of those tokens someone owns.
What is a Public Key?
A public key is basically an account number; it is the unique way people identify you on a blockchain. If you want to receive money from a friend, you will send them your public key so that they know where to send the money.
What is a Private Key?
A private key is like a bank PIN, signature, or fingerprint. Every time you want to send money or tokens on the blockchain, you must use your private key to prove that it is, in fact, you who is sending money or approving the transfer. Private keys are secret numbers that you shouldn't send or share with anyone.
What is an NFT?
An NFT is a token that is unique, just like you. These tokens often represent assets like art, property or music. They prove that you are the owner of these assets, and you have the exclusive right to make money from them, just how the Louvre Museum in Paris is the only place in the world that can make money from the original Mona Lisa.
What is an Oracle?
Blockchains are just ledgers that exist on the internet. Therefore, they have trouble accessing information from the outside world; this limits what is possible for them. A smart contract cannot tell if it has rained; it needs to rely on someone to tell it if it has or has not. Oracles are what we use to feed real-world information to blockchains and smart contracts.
What is the Metaverse?
A Metaverse is where technology and the real-world meet. We currently live in a basic form of the Metaverse; we use phones and applications like Facebook, Instagram and Twitter to interact with one another in a digital space. As technology advances, the gap between real and digital will become more blurred. We will start living our lives in an ever more digital world.
What is Web3?
Web3 can mean a lot of different things to a lot of different people. The Web3 we refer to is the next generation of the internet that runs on blockchains and is less reliant on companies like Google, Facebook and Amazon.
What is the Multichain?
The multichain is a collection of different ledgers that have different rules, players, referees, tokens and smart contracts. The multichain is important because not everyone wants to follow the same rules or even play the same game. The multichain allows you as a user to decide.
What is Interoperability?
Interoperability is the ability for blockchains that play by different rules to talk and cooperate with one another.
What is an Altcoin?
An altcoin is any crypto that isn't bitcoin.
What is a dApp?
A dApp is similar to the applications we use today on our phones or computers, such as Spotify, Instagram or Amazon. However, instead of running on these companies servers, they run on blockchains.
What is a Fork?
A fork happens when the users of a blockchain want to change its rules but can't agree. One set of users will choose one set of rules and the other another set of rules. The new blockchain with the least support will often have to change its name.
What is Gas?
Gas is the fee you pay to a blockchains miners or validators to add your transaction to the blockchain.
What is a Stablecoin?
A stablecoin is a token that most often represents government-issued money such as dollars, euros or pounds.
Notable Articles and News Stories This Week:
Fed Opens Debate on CBDC
The Federal Reserve avoided taking a side on a central bank digital currency in its highly anticipated white paper released Thursday.
In the 40-page report, the Fed outlines the advantages and disadvantages of creating and implementing a CBDC, but made no policy recommendations. The report comes as other nations move forward with their own CBDC plans.
China and Russia have both expressed interest in creating CBDCs. China has already launched wallets to test its eCNY, which it hopes to have up and running by the Winter Olympics this year. Russia revealed in December that it was moving toward developing a CBDC, partly in response to the threat of Russian banks being possibly disconnected from the global financial system.
Read more about the report here
Bank of Russia Wants a Bitcoin Ban. Here's How That's Gone in Other Countries
The Bank of Russia on Thursday issued a report calling for a total ban on cryptocurrencies.
While Russia banned cryptocurrency payments in 2020 and the central bank last month floated a ban on cryptocurrency investments within the country, today's proposal would go further.
Citing environmental concerns, it would immediately halt Bitcoin mining in the country, which provides over 10% of the computing power to the Bitcoin network. It would also prohibit financial institutions from handling any transfers of the digital assets. Not only would Russians not be able to buy goods and services in Bitcoin, they wouldn't be able to buy Bitcoin.
Read more about the announcement here
NYC Mayor Receives First Paycheck in Converted ETH, BTC
New York City Mayor Eric Adams made good on his promise to receive his first paychecks in cryptocurrency, the Office of the Mayor said Thursday.
Adams’ first paycheck, which arrives Friday, will be converted into bitcoin and ether through Coinbase before the funds are made available, according to the statement.
“New York is the center of the world, and we want it to be the center of cryptocurrency and other financial innovations,” Adams said in the statement.
“Being on the forefront of such innovation will help us create jobs, improve our economy, and continue to be a magnet for talent from all over the globe.”
Read more here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.