The 5 Crypto Basics to Help You Get Acquainted With the Space
Your guide to understanding the basics around blockchain and cryptocurrencies
Blockchain and cryptocurrencies have become increasingly popular in the last few years. While the market and its future are still highly uncertain, understanding the core points and functions is essential if you want to stay ahead of the market.
Having been involved in a couple of crypto projects, I have gained some knowledge on what you need to know about the space to not feel like a complete noob. Thus, I am excited to share some of my insights into the space in this article.
Crypto is not all bitcoin
Let’s start with an obvious one, I feel like a lot of people, especially from older generations, seem to understand the wrong way (my grandparents taken as an example here) — crypto does not equal bitcoin. While many price fluctuations in other coins and tokens behave similarly to bitcoin, it is just one out of many blockchains.
But what exactly is a blockchain? Investopedia describes blockchain as
“a distributed database that is shared among the nodes of a computer network”.
Put into simplified words, blockchains basically handle and store information digitally, but in a decentralised, more transparent, and immutable, thus also more secure way. The main point of interest around blockchain is hereby the decentralised part, meaning no intermediary is required to handle data.
Bitcoin itself is considered a blockchain, but there are many others, such as Ethereum and Cardano.
What is decentralisation and why should you care
Knowing that blockchains are decentralised, what does that actually entail, and what benefits and risks come with it? Decentralisation in blockchain is defined as
“the transfer of supervision and decision-making from a centralised association (individual, corporation, or group of people) to a dispersed network”
That means that you do not have to trust another party to handle your transactions or data. Basically, the intermediary between transactions — an intermediary could, for example, be the bank in financial transactions — would be eliminated, leading to so-called “peer-to-peer data networking”. Transactions are done directly, transparently, and instantly between two parties.
Though, this concept also comes with its risk. Transferring products or currencies requires wallet addresses — long sequences of numbers. Getting one number wrong and having no intermediary to check your transaction means that your currency is gone for good.
Nonetheless, a benefit of decentralisation lies in the way data is managed. For example, recovery of data is improved in decentralised information storage.
Consensus mechanisms: Proof of work & proof of stake
Since blockchains operate without an intermediary, a “consensus mechanism” creates legitimacy within the space. Basically, that means that devices within a crypto network legitimise transactions to avoid errors. This consensus works in two ways, with some blockchains operating on one and others on the other.
These two are referred to as “proof of work” and “proof of stake”. For example, Bitcoin employs the former, while Cardano uses the newer mechanism, “proof of stake”.
The term “proof of work” indicates what it entails. So-called miners solve mathematical equations and puzzles, thus conducting work. Like an actual mine, the miner receives a reward, namely a certain amount of that blockchains cryptocurrency for successful work. Therefore, if you, for example, mine bitcoin, you would get bitcoin as a reward.
If you are intrigued by reading this, don’t bother starting to mine bitcoin. The more competition arises, the more complex the mining process becomes. Plus, there are extremely high equipment and electricity costs involved now that make chances for profitability very low. And let’s not even think about the costs on the environment.
Those costs were one of the reasons why the newer mechanism was introduced: “proof of stake”. Within proof of stake blockchains, instead of mining, individuals stake their own crypto funds and receive rewards in the form of crypto. Hereby, the amount of time you have consecutively staked your funds and the amount influence the size of your compensation.
DeFi and GameFi
Having understood the basic concepts behind blockchains, we can look deeper into DeFi and GameFi. DeFi is short for decentralised finance, basically doing exactly what the term promises. It encompasses various projects and applications in the finance industry that operate on a blockchain. Those can include anything from insurance to crowdfunding and loans. Basically, anything related to finance and where a middleman could be removed from the equation.
The term GameFi stands for any application based on receiving economic incentives for participating in games on the blockchain. It is based on the concept “play-to-earn”. If you google a bit, you can find games in pretty much any field, for example, horse racing, battlefield, and fantasy games.
DeFi and GameFi are two examples of fields in which blockchain projects operate. These projects or applications run on a blockchain and usually have their own token, like Nezha (a gamified yield aggregator) works with NEZ tokens.
Whitepapers
If you are looking to invest in projects in the blockchain space, an excellent place to inform yourself is by reading so-called Whitepapers. Whitepapers are documents created by the team behind a project, and they provide you with information surrounding the technology, the vision, and the token utility of the application. These whitepapers are reviewed by individual investors and VCs looking to provide funding and can help you understand the project’s potential, professionalism, and legitimacy.
Whitepaper.io is a database that publishes whitepapers of numerous projects in the space, making it easier for you to stay up to date and find the information you are looking for.
While there are still many concepts surrounding the blockchain sphere, these insights help you get a basic understanding of what you are faced with within the crypto world. Blockchain is still a completely foreign subject for many, and it will take some time and research to get comfortable in the space. Don’t feel discouraged if you don’t understand it right away; it definitely took me a while to be able to have conversations around it.
