Since Satoshi Nakamoto has introduced Bitcoins to the world in 2008, the world of Financial Technology has been disrupted. The origin of the term cryptocurrency comes from “Krypto logos” which means secret writing.
We have all heard the term “blockchain”, but we do not fully grasp it. So, what does it mean? It simply describes the way of storage of information in an online decentralized ledger, and “decentralization” means no single authority controls it. The information is stored in a block; let’s think of the block as a 3D shape with each surface having different information stored in it. The first side has the information of the sender, receiver, and the number of coins distributed. The other surface is called hash which includes the code of the block, let us think of it as a fingerprint in which each crypto has its unique hash, and the third and last surface contains the previous hash. Then each block is chained to another block and the chain continues forming the blockchain. Blockchain technology can be used for other non-crypto purposes via smart contracts that are created on blockchains, such as Ethereum Smart Contract that can be used for decentralized voting, car rentals, cloud storage, etc.
There are three types of blockchain:
- Public blockchains: Open-source code such as Bitcoin (BTC) and Ethereum (ETH)
- Permissioned blockchains: Require permission to access the network and are used by private enterprises.
- Private blockchains: Allows only known miners, we can think of it as an Invitation-only network, such as XRP
What about the miners and mining? Miners validate those blocks to be added to the blockchain using their node which is an electronic device that connects to the cryptocurrency’s network to solve complex puzzles which need high electrical power. The miners need to provide “Proof of Work (PoW)” which proves that they could solve the puzzle, and the more puzzles they solve, the more rewards they get. However, since POW requires a huge amount of energy, newer cryptocurrencies avoid the PoW and rather depend on “Proof of Stake (PoS)”, such as Cardano. PoS requires the ownership of the cryptocurrency that is to be mined, and the wealthier you are in terms of that currency, the more likely you are to solve the puzzle, and it doesn’t require highly technological nodes like the ones used for PoW.
Just like your bank account credentials, you get to have your unique “private” and “public” keys. The private key is like the password to your crypto wallet, and the public key is another code that is digitally created from the private key which acts as your bank account number that you use for transfers from your wallet.
There are two types of wallets to store your credentials with which you can access your cryptocurrencies; either hot or cold wallets. The hot wallet stores the keys online, while the cold wallet stores them offline.
Another term that we hear in the world of cryptocurrency is the “cryptocurrency fork”. There are “soft” and “hard” forks. It is said that a fork happened when the developers of the cryptocurrency decide to update the protocol of the currency or basically change the code of the chain, meaning that they would change the number of currencies created, the block size, etc. A hard fork happens when the new protocol causes the blocks to separate and the old protocol is disregarded; however, the soft fork is said to happen when the new blocks follow both the old and new protocols.
There are different forms, types, and usages of cryptocurrencies; mined and those that allow further amendments in their blockchains, while the pre-mined are those with blockchains that are pre-planned and no further amendments can be done.
Cryptocurrencies are either coins or tokens. Coins are divided into either Bitcoin, which is the first cryptocurrency created, or any other cryptocurrency which are called “altcoins”. Coins have their own blockchains, such as Ethereum, while tokens use the blockchain of existing coins, such as ERC20. Cryptocurrencies are created for different purposes, some of which are the following:
- Transactional: the closest in terms of usage to the fiat currency and are created to transfer money for cheap transactional fees, such as Bitcoins
- Platform: created to support decentralized applications on a blockchain, such as Uniswap
- Utility: created for a specific purpose, such as for commercial intent.
- Governance: allow their holders to vote for any change in the chain, and the more tokens you own, the more voting power you get.
- Security: created to represent the ownership of another token. We can think of it as instead of owning a physical commodity, you own a token that is tracked to the price of that commodity.
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