CRYPTO-4-BEGINNERS

Crypto for Beginners, An Introduction to Important Concepts

Chapter 1: Important Concepts

The term “crypto” means “hidden”, or “secret”.  It's the prefix of cryptography, which is what crypto-currencies were built upon.  However, in this guide, “crypto” will be used to refer to the cryptocurrency space in general. 

Decentralization:

Centralization is the control of a system by one sole authority. 

Decentralization is the control of a system by a consensus of all of its users. 

 

Blockchain:

 

A blockchain is a digital decentralized public ledger.  It is a revolutionary way to store data digitally without worry of it being tampered with.  The way it works is every part of the data’s history is tracked and stored in “blocks”, and each “block” is “chained” to a  prior block and to the following block, preserving the entire history of the data.  

What makes blockchain such a special idea is that it can be decentralized, making it tamper proof.  Since it is a publicly distributed ledger, every member of the system has a copy of the ledger and can verify each block's accuracy.  If one member tried to be malicious and change the record in any way, the rest of the members would see that the change did not correspond to their copy of the records. 

In order to manipulate a blockchain a member would need to control 51% of the entire network, which is not an easy task. If such does happen, the network is likely no longer decentralized. 

Crypto-Currency:

Cryptocurrencies operate on a blockchain. Some are decentralized, some are centralized.  There are many different cryptocurrencies, each unique in its own way, with a variety of differences and use-case. 

The most popular cryptocurrency is Bitcoin.  Bitcoin is a first generation cryptocurrency.  Over time, Bitcoin has become to be called “digital gold” because it has similar qualities as precious metals.  Gold is mined physically from the ground, Bitcoin is mined digitally by computers solving complex cryptographic equations, and both require time and energy.  Both are thought to be finite in supply as there will only ever be in existence 21 million BTC (Last BTC will be mined in 2140).  

The second most popular cryptocurrency is Ethereum, it operates on another blockchain network separate from Bitcoin. Ethereum is a second generation cryptocurrency and is more than just a storer of value, it also allows for “Smart Contracts” and “Non-Fungible Tokens”. 

Smart Contracts:

 

A smart-contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into the lines of code, and exist on a blockchain network.  For now, the Ethereum blockchain is the most popular network for smart contracts, but many 3rd-generation cryptocurrencies are working towards implementing smart contracts. 

A smart contract solves the problem of trust between buyer and seller who’ve never met and have not built up any reputation of trust between each other, because the transaction is executed by, and enforced by code. 

I’ll give you an example;

 

If you want to purchase an item on Amazon.  You are comfortable to send payment first and wait for your product to arrive because you trust Amazon to fulfil its obligations.  But if you just met someone online and want to buy a digital item from them, you may be reluctant to send them the payment first.  You have no reason to trust the person will send you the digital item after they receive your payment.  With smart contracts, the agreement is locked, so that if you send payment and the person doesn't send you the item, the entire contract fails and your payment is refunded to you.  The smart contract acts as a third party intermediary, except its only code, and there is no central organization acting as that intermediary, its completely peer-to-peer.  

The eliminates the need for brokers, notaries or other costly intermediaries that acts as trust mechanisms.  

 

Non-Fungible Tokens:

Non-Fungible Tokens  (NFTs) can be thought of as digital collectables that cannot be duplicated. 

Fungible tokens are things like money.  I can give you a 5$ bill from 2017, and you’ll exchange it for a 5$ bill from 2019.  Even though the serial number is different, these items have the same value.  Bitcoin, and Ethereum are examples of fungible tokens. 

NFTs would be more like baseball cards.  You could have a rookie card for one player from one set of cards that is worth way more than another card of the same player from a different set of cards.  What makes them valuable is how rare or how much supply of the item in question, and the demand for it. 

NFTs are already a billion dollar industry and it is still in its infancy.  Current uses of NFTs are for digital art, or various collectable card games, but new innovative ideas are building this space every day.  

NFTs are not your typical “digital product”.  Digital products can be copied, and its impossible to know the number of items in supply.  Furthermore, the creator of the item could just produce more diluting its rarity.  NFTs operate on the Ethereum blockchain and each have a unique digital ‘finger print’ that prevents it from being duplicated.  Individuals take ownership of NFTs by storing them in their digital wallets once purchased or created.  

NFTs are more than just a digital product, it becomes a digital asset, since it cannot be duplicated and because its ownership is verifiable by the blockchain.  Secondly, 

Blockchain-Games: 

 

Crypto-Games, also called Blockchain games are games, such as collectable card games, video games and now even virtual reality games, where the player takes real ownership of the in-game assets via NFTs, and the game currency is interchangeable. 

In traditional video games, when the player purchases an in-game item, the item does not actually belong to the player.  If the player is banned from the game, they lose all their in-game assets the’ve acquired by playing the game.  Traditional games also do not have interchangeable currency, meaning, once you exchange real fiat currency for in-game currency, the money is trapped in the game and cannot be exchanged back for fiat.  In blockchain games, the game currency is a cryptocurrency that can be bought/sold/traded on exchanges for other cryptocurrencies or fiat.  The in-game items acquired by a player also belong to them in the form of NFTs, which are stored fully in their possession in their digital wallets, and verified by all users by the blockchain.  The in-game items are digital assets, which can be sold or traded, whether on the game platform or on various market places on other platforms. 

Blockchain games are evolving fast, but we’re still at the forefront of this revolution in gaming.  To give an idea, lets look at a few crypto-games. 

CryptoKitties was launched in 2017 and allowed users to purchase digital cats with unique features and breed them to create different unique combinations.  Users could then go to marketplaces like OpenSea and buy, sell or trade these digital kittens.  One sold for as much as 100,000$, where as the typical crypto-kitty sells for about 0.60$ (USD$). 

Next you have virtual land, which combine real-estate with the digital world.  Once virtual land is purchased you become the legit owner of the parcel of land, not the gaming platform.  The purchase is recorded on the blockchain for all to verify, and the land is represented as an NFT which is stored in your digital wallet.  Virtual land can be purchased at a number of different virtual world platforms such as The Sandbox, Decentraland, Somnium Space or World 2 - all of these are accessible by PC or virtual reality.  Once virtual land is purchase, the owner is free to develop the land as they wish, and can even monetize the land by building something such as a theme park, lounge or whatever and charge admission to other players in the space. 

Tokenization: 

This is an idea to build a bridge between physical commodities and the digital world.  Often referred to as an important part of the 4th industrial revolution and/or internet 3.0 - “bringing value to the internet”, tokenization will be a major component of the new “share economy”. 

Imagine you go to a store to purchase an item.  You use your phone to scan a special QR code that cannot be removed or tampered with, or else it no longer works.  You scan the code and immediately get the entire blockchain history of the item from its individual components, whether or not the item or any part of it was produce using slave labour, or if the item is authentic and not a counterfeit duplicate.  You'll know how fresh, or not, a specific piece of food is - all because of blockchain technology. 

Tokenization brings it a step further.  Imagine you own a car and you’re out of town, but your friend has an emergency and needs to use your car.  Normally you’d need to physically get your friend the key to your car.  But what if the key was tokenized?  The “key” could be represented as a ‘token’ and the owner would have possession of it in their digital wallet.  The token would be used to access the car.  You could easily transfer the token to your friend as simple as you would send BTC.  At the push of a button on your phone or computer, your friend could access the car.  This is especially useful for emergency responders that need access to gated communities, or for services such as car rental agencies, hotels, or taxi and public transportation drivers, or even for share-economic business such as AirBNB, Uber/Lyft or various bicycle share services.

Tokenization is easier to understand once you understand the different types of tokens on the Ethereum network.  ERC-20 tokens are fungible tokens, where as ERC-721 are NFTs.  There are also different types of tokens which preform different functions. 


Chapter 2: What is a Digital Wallet & How do I buy Cryptocurrencies?

 

Cryptocurrency Exchanges:

Cryptocurrency exchanges are where people go to buy, sell or trade various cryptocurrencies or fiat.  This is where you can use fiat currency such as; U.S. Dollar, the Canadian Dollar, Euro, or any other accepted fiat currency to purchase various cryptocurrencies such as Bitcoin, Ethereum and many others.  This is also where you exchange cryptocurrencies back to fiat.

Digital Wallet:

To store cryptocurrencies you will need to have a digital wallet.  There are different types of digital wallets that we will discuss. 

Exchanges have digital wallets, but when you use a wallet on an exchange, you don’t actually have possession of the fund.  Instead the exchange holds it for you.  Most people prefer to move their crypto-assets off of exchanges if they plan to save them for long term.  Exchange’s are susceptible to hackers.  Some exchanges offer refunds if accounts are hacked, but sometimes the amount is lost and not refunded.  Always do research on the exchange you choose to use. 

Software wallets are digital wallets that are downloaded on to your computer.  With these wallets, you have full control of your funds, but if you lose or forget your password and/or 12-word-secret-backup-phrase, you won’t be able to recover your fund.  It is important to save your password and backup phrase offline in a safe location, because if anyone gets a hold of that they can access your digital wallet. 
Hackers, if they gain access to your computer, can steal your private keys and gain access to your digital wallet.  However, if you don’t click on strange links online and/or download random stuff off the internet you should be safe from ‘key logger’ hackers. 

Hardware wallets are similar to USB-Key’s. These are devices which store your digital wallet offline.  These are the most secure, but, if you lose the device or if it gets destroyed, you lose access. 

There are also paper wallets, which is just a piece of paper that gives you the public and private keys in a alpha-numeric code. 

Hardware wallets and paper wallets are considered cold wallets because they are both offline, and less susceptible to hack attempt. 

No digital wallet is 100% safe from hackers, so its important to stay vigilant.  Two ways hackers may try to attack you is to try to find your private key, or to guess your password, so keep your private keys safe and a strong password. 


Chapter 3: Bonus Concepts for Monetization in the CryptoSpace

Bitcoin:

Bitcoin was first created in 2008 by an anonymous identity called Satoshi Nakamoto.  A Bitcoin is divided into 100,000,000 units called Satoshi’s.  New Bitcoins come into existence by mining.  Mining is a process in which computers connected to the network work to solve complex cryptographic functions that secure the validity of transactions on the network.  When a computer reaches a solution, the computer’s owner is rewarded in Bitcoin and this is how new Bitcoin’s come into existence.  

Alt-Coins:

Altcoins are a general term used to describe the very many cryptocurrencies that came into existence after Bitcoin.  Crypto such as LiteCoin or BitcoinCash were forks off the original Bitcoin, and others like Ethereum were created on their own networks. 

1st, 2nd, and 3rd generation cryptocurrencies occupy the crypto-space. 

Mining:

As mentioned, mining is how some cryptocurrencies come into existence.  This process is called “Proof of Work”.   

 

Proof of work is verification of a piece of data, which is difficult to produce, but easy for others to verify and which satisfies certain requirements.  In order for a new “block” within a “chain of blocks” to be accepted by network participants, miners must complete a proof of work which covers all the data in the block. 

This is how transactions are verified and secured on the blockchain. Whenever a transaction takes place on the network, the miner that completes the proof of work has secured and verified the transaction and is awarded a reward for doing so.  The reward is paid in newly minted tokens. 

To prevent the infinite creation of new tokens, some cryptocurrencies like Bitcoin are set to reduce mining rewards after the creation of a certain number of tokens. 

But there are some challenges to this process.  Firstly, its very costly.  Mining is being done by computers acting as “nodes” in the network, and the transactions are secured by a cryptographic puzzle that miners via their computers compete to solve.  The more miners there are, the more difficult it becomes for any specific miner to solve the puzzle.  If there are 10 miners, then the miners have a 1/10 chance solve the puzzle.  If there are 100 miners, then the chance is now 1/100.  This incentivizes miners to build larger and larger mining farms, which in turn use a lot of electricity and makes mining costly.  Furthermore, mining farms can merge together creating mining pools which increase the pool’s chances of solving a block and they evenly split the reward.  The problem then arises that these large mining pools start to make the blockchain less and less decentralized. 

Validating:

Due to the costly nature of mining, the proof of work concept has started to shift towards a new concept called “Proof of Stake”, and under this system, miners are changed to validators. 

Where as “proof of work mining” is competitive, in a proof of stake, nodes are randomly selected to verify a block.  Miners are called validators, and instead of expensive equipment to mine, validators must “stake” some of their tokens. 

Validators “stake” their tokens, which means they pledge to have these tokens “locked” and can’t spend them.  When a transaction is done on the blockchain, the validator that has been randomly selected verifies the ‘block’ and adds it to the blockchain.  The validator is awarded the fee’s attached to the transaction. 
If by some chance a validator tried to be malicious and verify a fraudulent block to the blockchain, the rest of the participants on the network would see, and the validator would be punished.  The punishment is the validator would lose a portion, or all of their stake. 

The benefits of proof of stake are that its less electricity and time dependent, and it allows for faster transaction processing.  It also reduces the likelihood of the network becoming less decentralized, or victim to fraudulent transactions. 

Staking:

This allows holders of various cryptocurrencies to ‘pledge’ their tokens into a “savings account” that collects them interest on their crypto-savings.  It has become popular among proof-of-stake networks because not only does your crypto increase in value (assuming you bought on the lows), but you gain interest on it and receive more tokens. 

DeFi:

Decentralized Financing or DeFi relates to an array of financial actions such as borrowing or lending cryptocurrency, and staking, whether in liquidity pools that loan out crypto or to validator pools.   What makes DeFi interesting is it is permission-less, with no barriers to entry.  Anyone can borrow, lend, join a pool or stake, without a central authority and this is made possible via Smart Contracts. 

AirDrop:

An “AirDrop” in the world of cryptocurrencies, is a marketing stunt that involves distributing tokens to wallet addresses in order to promote awareness of a new virtual currency.  The company that issues the tokens will give some of the tokens away for free.

There are various AirDrops taking place all the time, you just gotta find them.  Usually being in a company discord, or being involved with the company in some way, like being on their mailing list is a good way to be notified for AirDrops.  There are also websites that track new up coming projects that list their AirDrop dates.  A simple google of “Crypto AirDrops” will give you a list.  Keep in mind, most AirDrops won’t yield much profit as some tokens never gain value.