Money Rehab with Nicole Lapin - Bitcoin Thieves Part 2: Understanding The Network

Episode Date: February 22, 2022

Yesterday Nicole unpacked the major complaints with the current currency system that made some people feel like we need a complete overhaul. Today, she explains how crypto founders sought to address those problems with cryptocurrency. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Yesterday, I left off by telling you that three things,

government's management of monetary policy, increased security threats, and distrust of big banks led people to wonder if it was possible to create a new financial system, one free of all the issues facing our current monetary system. For some, the answer was yes, cryptocurrency could be the financial system we've been waiting for. Bitcoin, after all, came into the fold in 2008 in the wake of the subprime mortgage crisis. Coincidence? I don't think so. To decode some finance jargon, the U.S. currency system is referred to as centralized in that the U.S. currency is controlled by a central force, the government. But as I mentioned yesterday, not everyone agrees with the way the system is set up.

It's like this. You know when you're watching an action movie and there's some really important, life-changing technology like a mind-reading device, and then some old, wise character says it would be catastrophic if that technology were to fall into the wrong hands. When you're watching these movies, do you ever think to yourself, WTF? It's that easy? A tool that could help or hurt people could actually fall into the wrong hands? There's gotta be a better way to lock that shit up. The cryptocurrency founders apparently have seen that movie and thought the very same thing. And they think that a centralized currency is ripe for falling

into the wrong hands. Not to mention that those people who are still reeling from the 2008 crisis thought that the monetary system had already fallen into the wrong hands. Cryptocurrency founders tasked themselves with creating a financial system that is independent from government and big banks and more secure. They started by addressing their belief that when it came to our financial transactions, there were too many cooks in the kitchen. For example, if you're going to make a big purchase, like buying a car, you're probably not going to show up to the dealership with one of those burlap sacks with big dollar signs on the side. No, you're going to swipe your card, which is basically telling your bank how to proceed with the money that is in your bank account.

Your transactions are not simple point A to point B dealings between you, the buyer, and the seller. Nope, you're basically at a threesome with your bank. But according to cryptocurrency founders, three is a crowd. Call them old-fashioned. But cryptocurrency fans think that transactions should happen just between two people, the buyer and the seller. With cryptocurrency, there is no bank overseeing your hard-earned money, and no government-regulated mint affecting the amount of money in supply. At a top level, all cryptocurrencies are decentralized, meaning they are not controlled by one person or one institution, but rather a network of people tasked with monitoring the usage of the currency to make sure no funny

business is going down. We'll get to who's a part of that network tomorrow, but for now, I want to focus on demystifying how the network works. The network system cuts out both of the middlemen we deal with in the dollar system. Again, those middlemen are, first, the government, which controls your finances at the macro level by affecting the value of the dollar system. Again, those middlemen are first the government, which controls your finances at the macro level by affecting the value of the dollar through monetary policy. And second, big banks, which control your finances on a day-to-day level by affecting the interest rates in your savings accounts, the APR on your credit cards, and so on. So let's unpack how it works in the cryptocurrency network. Cryptocurrency buffs would hate that I'm saying this, but the work that the cryptocurrency network

does is pretty comparable to what the banks do. The network verifies that people spending the cryptocurrency actually have the coin to spend. And the network keeps track of these transactions and adds them to a big old record known as the ledger. I'll pause here to say, if you just heaved a big sigh, I totally get it. When new terminology gets introduced, new concepts seem more daunting. But remember, the ledger is basically a term for a list of transactions. It's not too dissimilar from your bank statements. Except instead of a record of only your transactions, a cryptocurrency ledger keeps track of every transaction ever made in the history of cryptocurrency. I think it's easier to

conceptualize the purpose of the cryptocurrency network if we leave the finance world and venture into an example that's a little bit more concrete. So let's take a field trip to a car dealership. Say the year is 2010 and Volvo is putting out a new line of cars. Manufacturers take each car and mint them, paint them, do whatever they do to create that delicious new car smell, and then ship the cars to the dealerships. A salesman at a dealership, let's call him Carl, hustles on the lot and sells one of these new Volvos right away to a young guy named Phil. Carl has to keep a record of this sale, so he prints out the transaction between him and the buyer and keeps it in a manila folder, which he then shoves deep into a filing cabinet. Every time he sells one of these Volvos, he adds the records of the transaction to the Manila folder. These records make up Carl's ledger. It's a list describing all of Carl's transactions. A few

years later, Phil comes back to the dealership to trade in his Volvo for the newest model. When Phil rolls back onto the lot, his car has some water damage and smells like smoke. A serious combo, but okay. Carl takes out his trusty manila folder and notes the damage and the 50,000 miles that Phil put on the car. Now, let's fast forward. Say you are going into that very same dealership and come in looking for a 2022 Volvo. If Carl is secretly a conniving car salesman, think the dad in the movie Matilda with the drill and the mileage meter, if you know, you know, then Carl may try to sell you the 2010 Volvo previously owned by Phil and tell you it's the 2022 model. If you ask for the records on the car,

which you always should, Carl may scurry back to his desk, whip out the manila folder, take some whiteout, and erase the 50,000 miles and present you with a very different car history. But Carl doesn't stop there. A new character, let's call her Mary,

is doing some car shopping online the very next day and sees the exact same Volvo that you bought only yesterday. Mary then calls Carl and asks if the car is still available. Carl lies and says, you're just in luck. That's up for grabs. Great choice. Mary asks to see the records for the car, another very good money rehabber. And Carl shows her the exact same ledger he showed you, white out and all, without any record of you purchasing the car yesterday. Mary says everything looks great and sends a down payment for the car. Then when she goes to the dealership the very next day to scoop up that car,

Carl has picked up and left out. It's not an impossible scenario. As a car salesman at the dealership, Carl maintains this history of the car, so he has the power to decide how much information to share with potential buyers. Hopefully, he will be honest, but that's for him to decide. And it's up to us to decide whether we can trust Carl and his ledger. The decentralized cryptocurrency system places more checks and balances on the ledger upkeep. So instead of one person or entity taking responsibility for all record keeping, a whole network of people is tasked with maintaining, updating, and verifying the ledger. Because so many people are verifying the ledger, it becomes nearly impossible for one person to fabricate a false history. So if that same car

dealership was set up in the same way as a crypto network, Carl would not be the sole person responsible for keeping the ledger. To round out this metaphor, once the car was sold for the very first time to Phil in a crypto-like network system, information on Phil's sale would be sent to members of the local community. Importantly, not colleagues, just of the car salesmen. Then members of the community would add a record of Phil's transactions to their own personal copies of the car dealership's ledger. Community members update their personal copies of the ledger each time there's a new transaction associated with the car. So then when you go to buy what you think is a 2022 Volvo, damn it, you can go to the community members and check their personal

ledgers and see that the car that Carl is trying to sell you is not actually the car you wanted at all. You'd, of course, blow Carl off, but thank the members of the community who just saved you from getting scammed. Mary would then be protected by the very same process. If Mary went to the community and asked to check their ledger, they would be able to tell her if the car was actually available or if Carl was up to no good and had already sold the car to another potential buyer. Foiled again, Carl. Foiled again. For today's tip, you can take straight to the bank. If you're still a little fuzzy on the cryptocurrency network, don't you worry. In tomorrow's episode, we'll be talking about who actually belongs to this network

and we'll move away from the metaphors, pinky swear, and into more real life examples. Yep, we're going from the car dealership into the blockchain. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team,

Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.