- Cryptocurrency for Beginners: Understanding the Blockchain
While meme coins like Dogecoin are in the headlines every day, other projects like the Cosmos Network and Tezos seem to be left out of the news. How does Dogecoin compare to Bitcoin and what does Ethereum do?
All these questions can be overwhelming and lead people to not want to be a part of decentralization. With all the horror stories of crime and scams, it makes it that much more unappealing.
After diving headfirst into the crypto scene for the last 3 months, I can break down the basics into why I think the future lies in decentralization. Whether that be through existing platforms like Bitcoin or Ethereum, or why I think smaller networks have a much higher chance of succeeding.
Here are the basics of cryptocurrency and how to get started in the decentralized scene.
Blockchains are a chain of transactions on a network. When a transaction takes place on a network like Ethereum, that transaction gets added to the block.
The “miners” and “stakers” on the network help verify the legitimacy of the transaction. Once that block has been mined, it then approves the transactions on that chain and sends the tokens that were in that transaction to their designated space. Once the blocks have been mined onto the blockchain, there is no way to remove them and you can verify transactions for the rest of the time that these platforms exist.
Other coins can exist on these networks. Certain coins like MANA from the Decentraland game are created by utilizing a portion of the Ethereum network. Despite being their own platform, they were designed to use the Ethereum mainnet, which processes all the transactions.
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Bitcoin was the original cryptocurrency created and holds the top spot for valuation. At the time of writing, Bitcoin recently broke $60,000 USD a coin and has a market cap of over $1 trillion USD. Bitcoin works by a Proof of Work concept (PoW). These transactions require that miners be on the network to approve transactions.
Bitcoin focuses on becoming a new type of currency, once that is decentralized and has no fiat money backing the system. It focuses on solving the problem of paper money being printed too much and leading to crazy inflation numbers. It also focuses on decentralization to take the power of any one person or government controlling the motion of the currency.
Because Bitcoin was the first crypto created, there are faults in the system that can’t be addressed. The first being the limited amount of Bitcoin available ever. While it is a good thing that Bitcoin is limited in terms of coins minted, the block rewards for helping process blocks on the Bitcoin blockchain have decreased significantly.
Because the reward has decreased significantly and there are more people mining on the network, eventually there won’t be enough people processing blocks to help keep the network afloat. Once all 21 million Bitcoins are mined and rewarded, Bitcoin will need to switch to a Proof of Stake (PoS) network.
These networks will reward users that “stake” their coins or tokens on the network. By staking, you’re helping verify the transactions on the network without needing the computational power from your GPU or other hardware, other than when you need to create a block. So rather than a bunch of people competing for the block reward, the block will choose stakers at random to create and validate blocks.
Ethereum focuses on creating a platform that hosts decentralized apps, otherwise known as “dapps”. Think about Ethereum as an app store for your phone or computer. The Ethereum network wants to create a place where you can create apps and process those transactions without being tied to a centralized location like the App Store for Apple or the Google Play Store for Android.
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Ethereum is currently on the same process as Bitcoin, with that being a PoW. The plan is to switch to PoS with the inclusion of Ethereum 2.0 and the eventual merging of Ethereum with Ethereum 2.0.
Unlike Bitcoin, there is no set amount of Ether to be created. That means that until brought forth by developers, there are plans to stop the production of Ether. With EIP 1559, there are plans to burn Ethereum with every transaction, making Ether a deflationary asset rather than inflationary.
Ethereum does suffer from its own problems. It was supposed to be ASICs resistance, meaning that there were no GPUs that could be created with the sole purpose of mining Ether, but that seems to have changed recently. Because of the onset of ASICs, the mining “fees” have drastically shot up and it now can take anywhere between $20 to $60 USD to just complete a transaction on the network, even if that transaction was only for $5 to $10 USD.
Most individuals will want to keep their tokens and coins in a decentralized wallet. That means a personal wallet, whether it be a software or hardware wallet, that only you can access and can make transactions from.
Think of a decentralized wallet as a way form of security. No bank, financial institution, or government can access your wallet without the seed phrase that you set up for the wallet.
The most common type of wallet that people will use is a software-based wallet. These are wallets that can be kept on your phone or computer and are programs created to give individuals a wallet that automatically connects to the platform you choose, whether that be Ethereum or Bitcoin.
Hardware wallets are another step to protecting your tokens. These are physical devices that contain their own address and seed phrase just like with a software wallet.
But these wallets can be put into cold storage where they are not connected to the internet, meaning that you’re not even at the risk of someone hacking your computer or phone and stealing the password or seed phrase to your wallet.
When you need to access the coins, you can simply connect the wallet through a USB port on your computer or Bluetooth through your phone. From here, you can choose what to do with your coins.
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The other method to owning your coins or tokens is through the usage of a centralized exchange. These exchanges don’t give you access to your wallet or the coins you own but do give you the option to liquidate these tokens into fiat currency relatively easily.
While a centralized exchange is something everything in cryptocurrency needs, you shouldn’t keep your tokens or coins in them. At the end of the day, you don’t have your wallet or keys and if the service shut down, you would lose the tokens. Even worse, apps like Robinhood don’t even give you the option to transfer your cryptocurrencies, meaning that they are essentially worthless.
In the event that a software wallet shut down, all you would need is the seed phrase and wallet address and go to another software wallet. Your seed phrase and address are embedded on the network itself, rather than in the software of the program you’re using.
NFTs, or otherwise known as non-fungible tokens, have become more popular since the beginning of 2021. These tokens are actually mini tokens that are minted on an already existing network like Ethereum or XDAI.
These tokens are limited quantities of artwork, videos, or other forms of assets that can be traced back to the original creator. By doing this, claims of ownership or forgery can be easily determined by tracing the asset back through the network that it is minted on.
Once an NFT has been minted and sold, the original creator then gets a cut for every transaction that occurs with their NFT. This helps protect artists from being taken advantage of. This cut can be anywhere from 5% to 40%, depending on how they set it up.
For instance, say an artist sells an NFT at around .5 Ethereum, which would translate into roughly $800 to $900 USD. Down the road, that artist blows up and the NFT they sold for .5 ETH becomes worth 1000 ETH. Rather than missing out on any portion of that blow up, they still can get a cut if the person decides to sell the NFT to someone else, gaining around 50 to 400 ETH.
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Crypto mining refers to users that offer their computational power for a PoW token. Each network has its own specifications and difficulty attached to it. For easy to understand wording, just think of the mining as a computer solving a problem for you.
Because crypto mining is at an all-time high, difficulty in tokens like Ethereum has skyrocketed, making it more competitive and harder for people that own a single GPU or a tiny mining rig to make any money. It also contributes to the GPU shortage that has affected many looking to create gaming desktops and workstations.
Cryptocurrency for beginners starts with one key principle, “not your keys, not your coins”. Utilize different platforms like centralized exchanges, software wallets, and hardware wallets to both keep your tokens safe as well as have easy access to liquidate them whenever you feel like. We’re still only 10 years into cryptocurrency, so get in now and become part of decentralization.
- Date of publication:
- Thu, 04/08/2021 - 08:32
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