It helped me to start from the problem it tries to solve.
Fundamentally, we've been making digital versions of everything. We have digital phone calls, television, bookkeeping, document writing, drawing, etc.
One thing we didn't have digitally was a currency.
Why would we want a digital currency? For similar reasons to all the other stuff above. It's more convenient. When you "transfer money" from your bank account to another, your bank has to physically move the associated cash from it's vault to the other banks vault, by hiring secure trucks, people, and so on. If the money has to cross a border, that's even more of a hassle, now you have to physically cross a border with a truck full of cash. When a bank "holds onto your money", they need a big vault full of cash, they have to count it, account for every dollar, physically safeguard it, etc.
This is a huge cost, inefficiency, and a big challenge of banking, and it's one reason transaction fees and banking fees are so high.
Now we have an idea of why we might want to make a digital currency. The biggest issue with making one is how do you solve the "double spend problem". That is, if I have 1 unit of a currency and I give it to you, how do we guarantee I no longer have that unit after it was given to you? In a physical world, I'm giving you the actual unit of currency, but in the digital world I'm giving you a copy of it, it would be easy for me to keep my copy as well and have an infinite money glitch.
The solution to that is simple, you have a source of truth that processes the transaction. That source of truth records that I had 10$ and you had 10$, I gave you 1$, and now I have 9$ and you have 11$.
That's easy enough. Here comes the second problem, who would trust owning that source of truth? Would you trust me keeping the official source of truth log of how much money everyone has? I could easily add myself a few 0s to my account, or remove some from yours.
Would you trust the government of your country? Of another country? A big corporation? A US charity?
This is where crypto comes in. Crypto says, nobody would ever trust a single entity, but what if everyone could join a network of nodes that together form the source of truth? Not owned by any single person, but the union of everyone who wants to join the network, and you could join the network, I could join it, anyone is free to join it, and we can all validate and check each other's work to make sure no one else on the network is fudging the numbers.
And now a lot of complex cryptographic math comes in to from this network.
> When you "transfer money" from your bank account to another, your bank has to physically move the associated cash from it's vault to the other banks vault, by hiring secure trucks, people, and so on
That's several centuries out of date, I'm afraid. Even before computers banks didn't actually do that, but now they certainly never do that. They just change records in their books - it has been paper books once, now it's just database files. I mean, banks do move cash (still do) but not when you transfer money from account to account, it has nothing to do with that, unless when you're running a massive cash-based business (which most banks hate btw, for many reasons).
> Why would we want a digital currency? For similar reasons to all the other stuff above. It's more convenient. When you "transfer money" from your bank account to another, your bank has to physically move the associated cash from it's vault to the other banks vault, by hiring secure trucks, people, and so on. If the money has to cross a border, that's even more of a hassle, now you have to physically cross a border with a truck full of cash. When a bank "holds onto your money", they need a big vault full of cash, they have to count it, account for every dollar, physically safeguard it, etc.
>
> This is a huge cost, inefficiency, and a big challenge of banking, and it's one reason transaction fees and banking fees are so high.
That's absolutely not how this works though. Banks perform electronic transfers and most of the money is accounted for in databases. The problems are slow, antiquated, technology, which is made worse by the amount of regulation surrounding it that makes it hard for new contenders to enter and drive down prices via competition.
Cryptocurrency is trustless, but there is an interesting tangent about if you _do not_ want a government to control monetary policy.
GP: this describes the whole crypto world so well I can almost taste it.
Someone completely misunderstands how the real world works, misrepresents that even more when trying to articulate, uses convoluted wording to hide their total lack of understanding of the real world. Then create a "solution" for the problems that do not exist in the real world in the first place, in the process reinventing problems that are solved for centuries already or running head first into ideas that have been proven multiple times in history to just not work.
This whole machinery is then used by criminals to launder money, scammers to scam people out of money and speculants hoping to get rich quick, providing real money liquidity for the previous two.
"When you "transfer money" from your bank account to another, your bank has to physically move the associated cash from it's vault to the other banks vault, by hiring secure trucks, people, and so on."
Payment settlement is a solved problem and very rarely involves physical cash transfer. Most of this is just numbers moved between accounts which commercial banks have with a central bank.
> When you "transfer money" from your bank account to another, your bank has to physically move the associated cash from it's vault to the other banks vault, by hiring secure trucks, people, and so on.
That hasn't been true for, uh, centuries. It's like literally the entire point of banking, to allow financial transactions to take place without having to physically haul around collateral anywhere.
(And if you want a digital version of what banks actually do, it's called SWIFT, and has been around since checks Wikipedia 1973).
Yes and for people who think “centuries” is an exaggeration, the knights templar gained their power and wealth in the middle ages specifically because people could use their promissory notes to exchange for cash so that they didn’t have to physically transport valuables around between Europe and the middle East during the time of the crusades. They allowed people to deposit cash at temple church in London and withdraw it in Jerusalem.
It’s really telling how poor the knowledge of financial history and the existing state of the art in traditional financial tech there is among people in the crypto-boosting space. Many of the “innovations” they claim have been around in traditional finance for hundreds of years.
Hawala is the same principle and existed pretty much since the same times, maybe earlier (nobody really knows when it started). Still exists and causes major headaches to people like FATF.
> When you "transfer money" from your bank account to another, your bank has to physically move the associated cash from it's vault to the other banks vault, by hiring secure trucks, people, and so on. If the money has to cross a border, that's even more of a hassle, now you have to physically cross a border with a truck full of cash. When a bank "holds onto your money", they need a big vault full of cash, they have to count it, account for every dollar, physically safeguard it, etc.
While I'm sure some of this is true for some banks at some point in history, this is the kind of understanding of a given industry that results in TechBros reinventing buses or juicing machines.
> This is a huge cost, inefficiency, and a big challenge of banking, and it's one reason transaction fees and banking fees are so high.
The reason banking fees are so high is because they charge what the market will bear, and most of the banks customers are a captive audience. It doesn't cost $2 to perform a transaction at an ATM; it costs pennies, if that. Banks should be paying you for holding, and putting to use, your money.
> When you "transfer money" from your bank account to another, your bank has to physically move the associated cash from it's vault to the other banks vault, by hiring secure trucks, people, and so on.
That’s not at all what happens!
Transfers are done digitally, physical cash does not move between vaults or bank branches.
I remember being shocked at some point that my deposits at a bank would actually be a liability on their books not an asset. When you think about it as passing around debt, it makes a bit more sense.
The easier explanation is that your deposits are yours, not the bank’s. In terms of debt, they owe you. They make money by borrowing from you and lending long term debt to get more yield than they pay you on your cash (you may hear this called “borrow short to lend long”).
Since the invention of the computer, sure, but before that, yes they did at some point reconcile. Even today, cash still physically moves from the mint to banks to consumers.
Fundamentally, we've been making digital versions of everything. We have digital phone calls, television, bookkeeping, document writing, drawing, etc.
One thing we didn't have digitally was a currency.
Why would we want a digital currency? For similar reasons to all the other stuff above. It's more convenient. When you "transfer money" from your bank account to another, your bank has to physically move the associated cash from it's vault to the other banks vault, by hiring secure trucks, people, and so on. If the money has to cross a border, that's even more of a hassle, now you have to physically cross a border with a truck full of cash. When a bank "holds onto your money", they need a big vault full of cash, they have to count it, account for every dollar, physically safeguard it, etc.
This is a huge cost, inefficiency, and a big challenge of banking, and it's one reason transaction fees and banking fees are so high.
Now we have an idea of why we might want to make a digital currency. The biggest issue with making one is how do you solve the "double spend problem". That is, if I have 1 unit of a currency and I give it to you, how do we guarantee I no longer have that unit after it was given to you? In a physical world, I'm giving you the actual unit of currency, but in the digital world I'm giving you a copy of it, it would be easy for me to keep my copy as well and have an infinite money glitch.
The solution to that is simple, you have a source of truth that processes the transaction. That source of truth records that I had 10$ and you had 10$, I gave you 1$, and now I have 9$ and you have 11$.
That's easy enough. Here comes the second problem, who would trust owning that source of truth? Would you trust me keeping the official source of truth log of how much money everyone has? I could easily add myself a few 0s to my account, or remove some from yours.
Would you trust the government of your country? Of another country? A big corporation? A US charity?
This is where crypto comes in. Crypto says, nobody would ever trust a single entity, but what if everyone could join a network of nodes that together form the source of truth? Not owned by any single person, but the union of everyone who wants to join the network, and you could join the network, I could join it, anyone is free to join it, and we can all validate and check each other's work to make sure no one else on the network is fudging the numbers.
And now a lot of complex cryptographic math comes in to from this network.