CRYPTO CURRENCY

There are a lot of buzzwords thrown around in the world of cryptocurrency, but there's one thing they all have in common: they're all pretty confusing and hard to grasp.

'Decentralised control', however, might be the hardest of the buzzwords to wrap your head around, despite being key to how cryptocurrency actually works.

In essence, it's the moving of control from a centralised being or body to multiple beings or bodies. Example: If you had a bunch of chocolate eggs and someone offered to hold them for you in their basket, congratulations, you've just entered a centralised system. If later, you decide you don't want to keep all those eggs in your new friend's basket so you take most of them out and distribute them across other baskets, you've just decentralised your egg collection.

To understand that, we have to first understand how our current centralised systems operate.

Centralised systems, as the name suggests, operate under a central system. It's something many of us are used to due to most of the companies and organisations we interact with functioning under this model. Take banks, for instance. You deposit your savings into one company that promises to take care of your money and help you grow it. All transaction data is monitored by the bank and stored in their system under a digital (and sometimes physical) lock and key.

During turbulent times (like, say, the Global Financial Crisis), these centralised systems are at risk of failing the millions of people around the world who've entrusted them with all their money. It's for this reason some have argued that decentralisation is the obvious antidote.

Let's bring back that chocolate egg analogy for a second.

In a decentralised system, instead of you depositing all your chocolate into one basket (AKA bank account) for safekeeping, the risk and spread would be diversified (multiple baskets holding smaller amounts of your chocolate).

With cryptocurrencies, transactions are stored across multiple networks around the globe. They use distributed ledger technology (DLT) to record information (like transactions), which is time-stamped and synchronised within the whole network of users, making it unfeasible to edit. In fact, you would need to simultaneously login to every network (provided their online) to hack the system, which, aside from being laborious, energy-draining and time-consuming, is also basically impossible.

But this is where the concept starts to get a bit fuzzy for most. While the idea of cryptocurrency is built on decentralisation, many of the exchanges that people use to trade and hold their coins are not.

Traditional exchanges are organised markets, like stock markets, where people can trade their share of a company or foreign currencies for another. Most cryptocurrency exchanges are centralised and work in much of the same way. This means there is a central organisation helping crypto owners to trade their coins (or shares of coins), withdraw national—AKA fiat—currencies ($, £, ¥ etc.) and just generally manage their digital crypto wallets. It also means that if you lose your cryptowallet, you won't lose allyour cryptocurrencies, as some poor souls have.

We asked Daniel Garnsey from National Currency Exchange (NCX) why it can be beneficial to use a central exchange.

Okay, what makes an exchange decentralised?

Essentially, there are no third-parties in charge of decentralised exchanges (DEX). Someone will create the platform so that exchanges can be made, but unlike at a centralised exchange, traders are on their own.

They will need to find sellers or buyers, negotiate prices and execute the sale. DEX primarily work on a cryptocurrency to cryptocurrency basis with users utilising smart contracts (computer protocols, the most common is called 'atomic swap') to trade. For smart contracts to self-execute and trades to be made, both the seller and the buyer must commit to sending their payments. If only one honours the smart contract, the trade doesn't occur and they are automatically refunded.