If the words ‘blockchain’ ‘cryptocurrency’ and ‘NFT’ fill you with dread because you don’t fully understand them, you’re not alone. We’ve pulled together a simple guide to these enigmas to help cut through the jargon and relieve that ignorance anxiety at your next networking event.
Blockchain
This is the technology underpins digital currencies and NFTs. Here’s some quick facts to cover the basics: blockchain is a technology, not a unique place on the internet. It’s often referred to as a ‘digital ledger’ but you can also think of it as a database of transactions with no single location for the data. Instead, data is duplicated and distributed across a network of computer systems.
There are many uses for blockchain technology including sustainability and security, but you'll mostly hear about it in the context of cryptocurrencies and NFTs.
There are many uses for blockchain technology including sustainability and security, but you'll mostly hear about it in the context of cryptocurrencies and NFTs. The distribution of data, at least in theory, eliminates the need for transaction validation by a central party, like a bank, because that responsibility is shared by the network. The network’s incentive to validate transactions and expand the blockchain to facilitate more transactions is often receipt of some of that cryptocurrency, which goes some way to explain why it has become one of the most successful uses of blockchain technology.
You will also hear people refer to individual blockchains or ‘the blockchain’. Most of these will be cryptocurrency blockchains, like Bitcoin, Ethereum, Polygon or Flow, which are largely independent uses of blockchain technology.
Cryptocurrency
A cryptocurrency is a virtual or digital currency. It takes no physical form, unlike cash or gold. Without physical form, cryptocurrency exists as tokens on a blockchain.
As we’ve already mentioned a blockchain has no central location, instead being distributed across a network of ‘nodes’. Nodes are devices on the network that are tasked with validating transactions that use the cryptocurrency. With local currencies, banks communicate with each other to validate a transaction made between person A and person B, but with cryptocurrencies like Bitcoin, this validation is done by the nodes and is referred to as ‘mining’.
Mining refers to the process by which some of the top cryptocurrencies have their transactions validated. It’s also how new units of that currency are ‘minted’ and enter circulation on the blockchain. In the case of popular blockchains such as Ethereum this consensus mechanism referred to as ‘Proof of Work’, which involves finding the solution to a deliberately complex computational equation. That’s an enormous oversimplification of the system, but it’s enough to highlight the issue of crypto’s environmental impact, because complex computational maths requires complex computational work, which in turn consumes significant electrical energy. Miners are rewarded with some of the cryptocurrency for their efforts, but only if they’re the first to solve the problem. To increase your chances of being first, you want the best hardware – and lots of it!
Proof of Work’ is far from the only consensus mechanism for blockchain. ‘Proof of Stake’ has grown in popularity, partly due to its significantly decreased energy consumption
‘Proof of Work’ is far from the only consensus mechanism for blockchain. ‘Proof of Stake’ has grown in popularity, partly due to its significantly decreased energy consumption. Equations are less complex, and therefore quicker to solve, but in order to have the opportunity to solve them, you have to stake some of your own crypto coins against your validation efforts. If you try to dupe the system and you’re caught, you’ll lose face and finances. Miners are also selected via a lottery system, which means you can’t just mine whenever you want. These two factors mean fewer miners and speedier solutions, with transaction validations backed by a ‘put your money where your mine is’ protocol.
‘Proof of Stake’ comes with its own issues, however: the mechanism is criticised for encouraging hoarding of cryptocurrency, so there are alternatives to address both excess energy consumption and distribution. These include ‘Proof of Capacity’, which assigns mining activity to those mining devices with spare computational capacity, or ‘Proof of Elapsed Time’ which randomly assigns variable ‘sleep time’ to mining devices to give everyone an opportunity to mine. These alternatives are less popular than ‘Proof of Work’ and ‘Proof of Stake’ but are in use by cryptocurrencies like Signum or for non-cryptocurrency purposes including supply chain and logistics.
NFTs
The principle of an NFT is not in itself outrageous, but as you may have already seen, some of the latest use cases are pretty entertaining.
NFTs haven’t been buzzing around the zeitgeist for as long as blockchain and cryptocurrency, so let’s cover the basics: NFT stands for ‘non-fungible token’. ‘Non-fungible’ means something with unique qualities that cannot be replicated, replaced or reconstituted and so cannot be exchanged like for like with another item. The best non-crypto examples are things like natural diamonds or one-of-a-kind baseball cards. ‘Token’ refers to the unique identifier on the blockchain. Put them together and you have unique, irreplaceable and protectable rights to a digital asset.
Cryptocurrencies are tokens on a blockchain, but whereas cryptocurrencies are fungible (they are interchangeable for other cryptocurrencies and tradable for assets of an equal value) NFTs aren’t
NFTs, as the name suggests, are not media or assets themselves, just the blockchain token that represents them. Similarly, cryptocurrencies are tokens on a blockchain, but whereas cryptocurrencies are fungible (they are interchangeable for other cryptocurrencies and tradable for assets of an equal value) NFTs aren’t. Same technology, but different properties.
The majority of NFTs are created and purchased on the Ethereum blockchain, which means they’re implicated in the same mining processes that are used for cryptocurrencies when they’re created, sold and resold. This is why NFTs aren’t exempt from the crypto environmental impact debate.
What can I take away from this?
If you’re not already accepting Dogecoin for your online transactions or selling NFTs of the selfies you took every day for the last five years, don’t panic. Cryptocurrencies and NFTs are (relatively volatile) investments made by the few.
What is key to keep in mind is the growing interest in and behaviour surrounding these technologies and what that means for your business in the digital space.