Cryptocurrency and Blockchain: What You Need to Know

Cryptocurrencies like Bitcoin are the first blockchain projects of many.

Blockchain technology and crypto explained

Cryptocurrency often gets a lousy rapport from traditional investors because they claim it is just fake internet money. While the intrinsic value of cryptocurrency is literally nothing, the technology that runs cryptocurrency is where the actual value lies. The technology I am referring to is blockchain.

What is a blockchain?

A blockchain is a public digital ledger composed of records called blocks. When a new block is generated, it contains the cryptographic hash of the previous block, and they are linked, forming a chain. Every new block is verified by the next one generated after it, and they are all connected to the original block, called the genesis block.

Blockchains are highly resistant to modification of their data because doing so would require you to remine blocks. Remining a block is essentially impossible because once a transaction has a couple of confirmations, remining the block needs a large amount of computing power.

What is cryptocurrency?

Cryptocurrency is simply the first project based on blockchain technology. Cryptocurrency is revolutionary because it is the first currency that can transact without the need for intermediaries.

You can imagine crypto wallets as bank accounts that anybody in the world can easily create and transact with worldwide. This means somebody in a foreign country can create a crypto wallet and send and receive funds from somebody in the U.S. or anywhere else in the world. Creating a crypto wallet can be done in just minutes.

Before crypto, there was no way to quickly send funds overseas, especially without a bank to help out. Crypto can be unique for international business because now anybody in the world can buy and sell services without the need for validated bank accounts. However, cryptocurrencies are not insured, so you are likely not getting your crypto back if you get scammed.

Crypto wallets

Creating a crypto wallet does not require you to have a form of ID or anything to prove who you are. All of the transactions on the blockchain are stored forever, so they can easily be tracked. However, all that can be seen is a wallet ID which is just a bunch of characters, and it is hard to identify who is in control of the wallet.

Crypto wallets created on centralized exchanges like Coinbase can easily be tracked. You must create a Coinbase account that will link your data to the wallet. You can download many wallets that do not require you to input any personal information or bank accounts.

The two largest cryptocurrencies

1- Bitcoin

Bitcoin is the largest cryptocurrency in popularity and by market capitalization. It was the first cryptocurrency created and runs on a proof-of-work algorithm. The proof-of-work concept was invented in 1993 by Cynthia Dwork and Moni Naor.

Bitcoins can be mined by using computer processing power. Most people who mine use graphics processing units (GPUs). As more bitcoins are mined, it becomes more difficult to mine new ones. Bitcoin has a block time of 10 minutes, which means new blocks can only be validated every 10 minutes.

Bitcoin is decentralized, which means there is no central authority. Therefore, anybody can become a miner, create a bitcoin address (wallet), and send a transaction to the network without the need for any approval. Bitcoin is scarce because there is a limited supply of 21 million that can be mined.

2- Ethereum

Ethereum is the next largest cryptocurrency by market cap under Bitcoin. It is also decentralized and currently operates under a proof-of-work algorithm. However, it is planned to upgrade from proof-of-work to proof-of-stake by a series of upgrades called Ethereum 2.0. The Ethereum blockchain is unique compared to Bitcoin because it allows for smart contract functionality. Ethereum also has a block time of just 12–14 seconds which is much lower than Bitcoin's block time of 10 minutes.

Proof-of-stake versus proof-of-work

Proof-of-stake differs from proof-of-work because it does not require hardware to validate transactions. Instead, owners of the currency can validate transactions by staking their blockchain tokens. Staking requires that owners of the currency provide their coins as collateral for a chance to validate blocks. Unlike proof-of-work, validators are chosen randomly to “mine” or validate a block. This allows many more people to become validators as you do not need any hardware.

Proof-of-stake is much better for the environment because it requires less power usage to validate new blocks. Mining Bitcoins on a proof-of-work system requires lots of computational power and electricity.

It can be argued that proof-of-stake is less secure than proof-of-work because it favors those that own a large amount of the cryptocurrency. The 51% attack threat is a concern for proof-of-stake cryptocurrencies. This is when somebody owns 51% or more of the staked cryptocurrency and can threaten to alter the blockchain. However, whoever tries to revert a block through a 51% attack would lose all of their coins, discouraging it from happening.

NFTs

Ethereum allows for creating unique digital art known as non-fungible tokens or NFTs. NFTs are non-interchangeable units of data that are stored on the blockchain. This data is often associated with digital files such as images that can be traded and sold. NFTs on the Ethereum blockchain can be purchased directly with the ether token. Many of these NFTs have sold for millions of dollars or thousands of ETH.