28: Behind Every Transaction: How Crypto Really Works

Welcome to Crypto Explained, brought to you by the National Cryptocurrency Association. I'm Allie, your crypto confidence coach, here to make sense of the world of crypto without any of the hype or jargon. Because crypto isn't just for tech bros or Wall Street, it's for you. So whether you're crypto curious, crypto confused, or somewhere in between, this is your space to see how crypto can actually fit into your everyday life. Each week, we'll break it down, keep it simple, and help you become crypto-confident. Welcome back to another episode of Crypto Explained. So you've probably been in this situation before. Someone mentions crypto and suddenly the conversation is full of gas fees, layer twos, block explorers, and you're just nodding along like you know what any of that means. You're not alone. These terms get thrown around constantly and almost nobody ever takes the time to actually explain what they mean. So today we're going to do just that. We're going to be talking about four different buzzwords that people use to talk about how crypto actually moves. Once you understand how crypto moves, a lot of the mystery disappears. You just need the right vocabulary to understand it all. So the four terms we're going to cover in this episode are gas fees, on-chain versus off-chain, layer two, and block explorer. All four are connected. And by the end, you're going to have a clearer picture of what actually happens when crypto goes from one person to another. Let's get into it. First up is gas fees. So if you've been listening to the show for a while, you know we covered this back in episode eight, but we can't really talk about how crypto moves without mentioning them again. So here's a quick refresher. Gas fees tend to trip people up because the name sounds strange. Gas fees? What does gas have to do with digital money? So think of it like this. When you send crypto, you're asking a network of computers, thousands of them, all around the world to process and verify your transaction. That takes real work. And that comes with a small cost often called a gas fee Think of the blockchain like a highway You want to get from point A to point B Gas fees are like the toll The more congested the highway meaning the more people trying to transact at the same time, the higher the toll. One practical thing to keep in mind is that these gas fees aren't fixed. They can become more expensive during times of high traffic and cheaper when the network is less busy. On a network like Ethereum, for example, they can sometimes be significant. But on other blockchains, like the XRP ledger, for example, they can be less than a fraction of a penny. It's also worth noting, and to get a little bit more confusing, not every blockchain actually uses the term gas fees. On Bitcoin, for example, users pay what's called transaction fees, and then the miners are rewarded for confirming those transactions. But the idea is pretty similar. You're paying for the network to process your transaction. And one last thing, these fees go to the people helping run the network, not to a company or middleman. The fees exist to keep the system running, not to pay an intermediary. Next up, let's talk about on-chain versus off-chain. You'll hear these constantly, and they're actually pretty intuitive. On-chain just means a transaction that's recorded directly onto the blockchain, which as you know, is that public permanent ledger. So it's verified by the network used, written to the record, and then it stays there forever. Anyone can look it up, information cannot be changed. Off-chain, on the other hand, means the transaction happened outside the main blockchain. It can be on a secondary network, inside an exchange's internal system, or through some other mechanism. Here's a quick analogy. Imagine you're in a bar and you start a tab. Every drink gets noted on a private slip that the bartender keeps. That's off-chain. Real record, not public, not permanent yet. But at the end of the night, you settle up and pay. That final payment gets recorded, that's when it goes on-chain. Off-chain is faster and cheaper. On-chain is permanent and secure. Both have their place, and understanding this sets up the next term perfectly. So next up, we have layer two, also known as L2. It sounds incredibly technical but solves a completely understandable problem Main blockchains which are called Layer 1s are secure and reliable but often slower and expensive when a lot of people are using them at the same time because of those gas fees we just talked about Bitcoin processes roughly seven transactions per second. Other networks, like the XRP Ledger, can handle much more. But as more people use these systems, speed and cost can still become challenges. is, that's where layer two comes in. Layer two is the solution. It's a second network built on top of the main blockchain that handles the transactions faster and cheaper, and then it periodically reports back to the main chain to settle everything. Think of it like the express lane on a highway. The main highway is that layer one, and it's still there doing its job. But the express lane, the layer two, lets you move faster at a lower cost. And when your trip ends, the record still goes into the main system. So a couple of examples of this. The first is the Lightning Network, which runs on Bitcoin and helps process small everyday payments quickly with very low fees before settling on Bitcoin. Arbitrum and Optimism run on Ethereum and bundle many transactions together, then post the results back to Ethereum for security. There are also newer extensions like the XRPL EVM sidechain, which brings Ethereum-style apps into the XRP ledger without changing the main network. So these systems make it possible to pay for something small with crypto without having to pay for high fees or any waiting periods. Layer two is actually where a lot of the real crypto innovation is happening today. And last but not least is Block Explorer. This one might actually be my favorite. A Block Explorer is a search engine for the blockchain. It's free, publicly available, and it lets you look up any transaction, any wallet address, and any block on any blockchain in real time. Do you want to know if your transaction went through? Block Explorer. Want to verify a charity actually received your crypto donation? Block Explorer. Want to see how many confirmations your transfer has? Block Explorer. Think of it like a FedEx or UPS tracking number but for money Same as when you ship a package you type in that tracking number to see exactly where it is A Block Explorer does the same thing for every crypto transaction You type in your transaction ID, and then you see the entire journey. Who sent it, when it was sent, what fee was paid, and where it went. The most well-known Block Explorers are Etherscan for Ethereum, SolScan for Solana, XRPScan for the XRP Ledger, and blockchain.com for Bitcoin. These are free to use with no account or personal details required. And here's what makes this really special. Nobody can lie to you about whether a transaction happened. You can go check it yourself as long as you have the information you need. That transparency is one of crypto's most helpful features, and a block explorer is how you can access it. All right, so to quickly recap, you've got gas fees, what you pay some networks to process your transaction, like a toll on a blockchain highway. You've got on-chain, which are recorded directly on the public blockchain, permanent and verifiable by anyone. You've got off-chain, which are faster and cheaper and happen outside the main blockchain, but are still real transactions. Then you've got layer two, that secondary network that's built on top of the blockchain and makes transactions faster and cheaper without having to sacrifice any security. And then last but not Block Explorer, the public engine for the blockchain, where you can look up any transaction anytime for free. Okay, so now we know how crypto moves. We know why it costs what it costs and how we can track it. If you want to go even deeper, the NCA has a free crypto simulator at nca.org where you can practice buying and selling crypto without ever connecting it to your real bank account. So think of it like a safe sandbox where you can just play around to really master the behaviors before you really dip your toes into crypto. And by the way, if you're not already subscribed, you can find new episodes of Crypto Explained on YouTube, Spotify, Apple Podcasts, and pretty much anywhere else you get your podcasts. Remember, crypto was always meant for everyone, including you. See you next time.