Crypto 101: The Blockchain Basics For a Newbie
You will agree that the persistence of cryptocurrency is remarkable. After countless backlash and scepticism, Blockchain technology remains a prominent part of the digital world.
The rate at which the crypto space is evolving is amazing and investing there is one of the best options available today.
However, we suggest that you will take some time to understand the fundamentals of cryptocurrency before allocating your funds to crypto. This sphere involves so many technicalities that could overwhelm the average user. Therefore, this guideline will serve as a basic introduction to the dynamic world of crypto.
When you think of cryptocurrency, the first thing that naturally pops into mind is virtual money. In a sense, a cryptocurrency is a form of virtual money that has value against fiat currencies, such as Dollar, Euro, Yuan, etc.
Unlike traditional money transfers, cryptocurrency transfers are based on a technology called blockchain that makes them almost unsusceptible to hacks. Among other things, the high levels of security are achieved through cryptography. So, what is it and how it actually works?
In its simplest form, cryptography is a form of data encryption which involves the use of keys to decrypt data. For example, if I encrypt the word “John” and it becomes “Ingm,” then the key to decrypting is changing the letters to the letters that follow them in the alphabet. Hence, without the key, decrypting the text would be difficult.
This is the basis for the sort of cryptography for cryptocurrencies. In fact, the difficulty level of the cryptography at Blockchain networks is far more complex, making it nearly impossible for hackers to damage the system.
Since cryptography is at play in crypto networks, participants own keys which give them access to the contents of the blockchain as well as their coins. Therefore, keeping these keys safe is of the utmost importance.
Cryptocurrencies use blockchain to ensure the smooth running of the network. Blockchain has attracted so much attention recently that it is becoming one of the most implemented technologies in the world. What are the special features that make blockchain the perfect underpinning technology for cryptocurrency?
Roughly speaking, it consists of a ledger, and its distributed nature makes things a little complex for potential attackers. Since all the participants of the network have a copy of the ledger, an attacker would need to manipulate the contents of the ledgers simultaneously.
Another fantastic feature of the blockchain is its immutability. Apparently, it is impossible to alter or delete the data on a blockchain.
In addition, the concept of the blockchain technology revolves around decentralization. This means that the network does not rely on central figures like banks for the verification of transactions as well as the supply of new coins. Instead, blockchain uses consensus protocols to ensure that there are no frauds. Members of the network work hand in hand for verifications and this ensures there are no cases of double spending.
We have a number of consensus protocols today; however, all of them have the same purpose - maintain the networks. The first consensus protocol was the proof-of-work mechanism which governs the validation process of the Bitcoin network.
As you know, Bitcoin is the king of crypto not just because it’s the first cryptocurrency, but because it has been consistent for nearly a decade now. It is a cryptocurrency which basic functionalities include the servicing of cheap and instant transactions.
As already mentioned, the Bitcoin network utilizes the proof-of-of work consensus protocol to validate transactions. This protocol also governs the creation of new bitcoins as users utilize their computing power to solve difficult puzzles before new blocks of transactions are eligible for validation. The network automatically rewards users that successfully solve these puzzles with bitcoins. This is the only way to generate new units of this currency.
Users who dedicate their time, resource, and computing power to solving mathematical problems are known as “miners” (more technically - “nodes”) and the process of creating new bitcoins is called “Bitcoin mining.”
After the introduction of Bitcoin, developers began to tweak the Bitcoin protocol, and as a result, we saw the emergence of new cryptocurrencies with similar functionalities. The crypto community went on to name these cryptocurrencies altcoins (alternate to Bitcoin).
Nonetheless, many of these coins are not just pure imitations of Bitcoin. Some have incorporated innovative features that go beyond the basic transaction-based features of Bitcoin. For example, Ethereum introduced smart contracts while IOTA’s innovative features facilitate IoT-enabled transactions (IoT - Internet Of Things).
In addition, some altcoins utilize Bitcoin’s type of consensus, while others have adopted unique consensus protocols which better suit their particular functionalities.
Smart contracts are big deal, and they are one of the reasons blockchain and cryptos are gaining attraction. Generally, smart contracts are programs that automatically execute the written terms without the need for supervisions.
For example, you can choose to buy a product from a retailer and specify in a smart contract that if you are not happy with the products, you are eligible for a refund. Once the retailer agrees to the contract, the contract takes it upon itself to follow the terms to the latter, and immediately after you reveal your discontent, the contract automatically retrieves the money you paid the retailer.
Hence, smart contracts are self-executing contracts which servicing a trustless network and avoiding any costs on disputes and breaches.
Unlike traditional currencies, we store cryptocurrencies in crypto wallets. Wallets are not physical storage tools for coins; instead, they store the keys which allow users to access their coins.
Once these keys are lost or stolen, the coins are lost forever. This is why it’s extremely important for crypto holders to secure their keys from prying eyes.