A Beginner’s Guide to Crypto
Covering some basic terminology and ideas to help improve your understanding
This year cryptocurrencies have become a hot topic of discussion for a lot of people, no matter the age. This guide is for anyone and everyone who feels like they need a little bit more understanding and knowledge of the crypto world. I’m not going to be diving deep into the technicals but instead I will provide a high-level view which you can use to do own research on whichever area you are drawn to.
The crypto space is ever-changing and is inarguably one of the most innovative inventions in this century. Firstly, I want to explain the term cryptocurrency.
What is a cryptocurrency
Cryptocurrencies are digital currencies that are secured using cryptography, which make the currency safe, secure and difficult to counterfeit. These are all important attributes for a currency to succeed, however whether a coin is centralised or decentralised is also important to consider. Most cryptocurrencies follow a decentralised approach rather than a centralised one.
Decentralised vs Centralised
In a centralised system, there is only one entity that governs it, such as a nation’s federal reserve bank which is responsible for dealing with national currency. A decentralised system on the other hand relies on many different entities working together to ensure the system works as intended.
Our current financial world is very centralised, which can have serious implications in our economy. Take for example, the federal reserve of the USA — which printed almost 20% of all of the US dollars in circulation in 2020. It can be easy to see how actions like these can cause issues with inflation as senseless printing of a currency would lead to devaluing of a currency. A centralised approach encourages these actions as only one entity is overlooking the system and acting in their own best interest.
A centralised financial system is susceptible to fraud and manipulation, however, since a decentralised system has no central point of control and no intermediaries, it is less likely to be affected by these. A decentralised financial system would mean that people would have more control over their finances. Additionally, the system would be more transparent, as it is censorship resistant and publicly, preventing corruption and manipulation. Most cryptocurrencies are decentralised and they often make use of blockchain technology to implement this.
What is blockchain?
Now this is a term that is frequently used incorrectly by newcomers in the crypto space. Blockchain can be thought of as an ever-growing database which can be viewed by anyone but not edited. Blockchain is a collection of blocks, where each block can hold specific data. In the case of Bitcoin each block stores multiple transactions and their IDs. Once one block is full a new block is chained onto the previous one, forming a chain of blocks, hence the name.
A decentralised blockchain is immutable, meaning that data entered onto the blockcahin is irreversible. This allows transparency and security, which are desirable qualities in any cryptocurrency. A decentralised blockchain means that no single entity or person has control over the blockcahin instead each user has some control over the blockcahin. For a transaction to be added onto the bitcoin’s blockchain, you require multiple different people/entities to verify the transaction — as opposed to one financial authority. This allows the system to be fairer and significantly reduce the risk of corruption and manipulation.
Unlike the US Dollar, Bitcoin has a finite supply of 21 million. Meaning there will only ever be 21 million Bitcoins in the world. In order for all 21 million Bitcoins to be in circulation, they need to be mined. As of writing this article there are 18.7 million Bitcoins in circulation, meaning there are 2.3 million bitcoins left to be mined. But what is mining?
In a decentralised cryptocurrency, anyone can send and receive cryptocurrencies without the authorization of a central bank or authority to approve these transactions. But without a central bank, how are these transactions being approved and added to the blockchain? This is where mining comes in. Miners ensure that the transactions are safe and correct (for instance, ensuring that a sender is not sending more bitcoin than they possess). Miners make use of their computers to solve complex cryptographic calculations to verify each transaction and allow new transactions to be added onto the blockchain. As a reward, they are given a small amount of the cryptocurrency. This process of successfully verifying transactions by solving cryptographic calculations and consequently earning a small amount of cryptocurrency is known as mining.
NFT stands for Non-Fungible Token. NFTs are digital assets that much like cryptocurrencies cannot be counterfeited as digital ownership can be proven over them. The key difference comes from the term ‘non-fungible’ which means that it is unique and cannot be replaced by something else. For example, bitcoin is fungible, one bitcoin can be traded for another and it’s value will remain the same. An NFT on the other hand is unique, like a piece of art. For example, if you were to trade an amateur’s painting for a Monet’s painting, you would be receiving something completely different in both the content and its value.
Another key aspect of NFTs is that they are impossible to fake ownership of. For instance, you could take a screenshot of the above NFT and claim that you own it, however since you did not buy it there will be no proof of transaction in the blockcahin of your sale. Instead, the owner could show that the NFT belongs to him/her by showing the proof of purchase which will be recorded in the blockchain.
Smart contracts can be thought of as self-executing contracts that have the terms of agreement between two parties written into the code of the contract. For example, if I were to promise you that I will pay you $5 if condition x is met, as soon as the condition is met, the smart contract would execute and transfer the $5 to you. This allows two parties to create contracts between each other without relying on the trustworthiness of each involved party or requiring a third party to mediate.
I hope you enjoyed this article and it answered some of your questions or misconceptions about crypto. If you found anything that I mentioned more interesting and you want me to write more about it, let me know and I would be happy to do so.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.