There’s no denying that the cryptocurrency realm is complex.
There are so many cogs in this machine that understanding how it works can be nothing short of overwhelming.
What Is a Blockchain?
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Cryptocurrencies exist on something known asa blockchain.
Below is a simple representation of a standard blockchain.
Blockchains store data in chronological order using hashing, a cryptographic method.
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Hashing converts plaintext to random characters, making data much harder to exploit.
These are one-way algorithms that map arbitrary-sized data to fixed-size data.
In short, they are required to maintain the integrity of the blockchain data.
Different cryptocurrency networks have different block sizes.
Bitcoin, for example, has a relatively small block size of 1MB.
Each block also contains the hash of the previous block.
When the online grid verifies a transaction, it is recorded in a block.
This record is immutable and permanent and can be viewed by anyone if the blockchain is public.
These transactions are confirmed via consensus mechanisms, which we’ll get into soon.
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How Do Cryptos Gain Value?
Various factors play into a crypto’s value, including hype, marketing, and sheer luck.
When Nakamoto launched Bitcoin, each Bitcoin was worth nothing.
It required investment to increase in value.
Bitcoin gained a loyal following in its early years and started to bleed into the mainstream in 2017.
Hype can also give a coin value.
This can also happen if a project or asset is marketed well enough.
Crypto marketing often takes place on social media platforms, such as Twitter.
This is why crypto investments are risky.
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Coins vs. Tokens
When you hear about cryptocurrencies, you may hear them described ascoins and tokens.
So, what’s the difference between the two?
A coin is an asset that exists on an original blockchain.
In other words, it is the native asset of the blockchain.
For example, Dogecoin is the original and sole currency existing on the Dogecoin blockchain.
A token is an asset that exists on top of a pre-existing blockchain.
Tokens are common on the Ethereum blockchain, as it’s a popular choice for building crypto projects.
Ethereum’s native asset is Ether, which is used to pay for services on the blockchain.
Because Ether is native to the Ethereum chain, it is a coin.
But Shiba Inu is an asset developed on the pre-existing Ethereum blockchain.
Therefore, it is a token.
What Is a Crypto Exchange?
A cryptocurrency exchange is a platform it’s possible for you to use to trade crypto assets.
Many crypto exchanges exist today, including Coinbase, Huobi, Kraken, Uniswap, and Binance.
Exchanges can also hold your funds for you between trades.
You don’t lose your assets; you dedicate them to the staking process.
But what are consensus mechanisms?
How do they work?
Consensus Mechanisms
The two most popular consensus mechanisms used by crypto blockchains areproof of stake and proof of work.
Validators are also known as nodes.
When a validator confirms a block of transactions, all other nodes on the web link must verify it.
In other words, they must reach a consensus on the block’s validity.
Validators secure the data pipe by staking a holding of crypto funds.
They get paid for securing the data pipe via staking rewards.
For example, validators on the Ethereum connection must stake at least 32 Ether to validate independently.
But users can stake smaller amounts of crypto, contributing to a validator’s 32 Ether minimum.
Next up, you’ve got the proof of work mechanism.
This is an older method used by the likes ofBitcoin and Dogecoin.
Proof of work involves miners.
If a miner solves the problem, they canmine a block on the blockchain.
This kind of widespread teamwork makes the internet more fair and trustworthy.
CeFi vs. DeFi
CeFi is a shortened version of “centralized finance.
Binance, Kraken, and Coinbase are all examples of CeFi platforms.
CeFi lets you use traditional currencies, like USD, GBP, and EUR, in your crypto trading.
However, centralized platforms are more vulnerable to technical crashes and malicious attacks.
DeFi is a shortened version of “decentralized finance.
“Decentralized finance uses decentralized platforms, which spread power and data across all users.
Crypto Wallets
Crypto wallets store your private keys.
Private keys are what you oughta authorize a transaction.
So, if someone has your private key, they can take your crypto.
There are two main kinds of crypto wallets:hardware and software.
Hardware wallets are physical devices, whereas software wallets are entirely virtual.
Most crypto wallets are software, the likes of which have become incredibly popular.
But some prefer hardware wallets because they are isolated from the internet, and therefore remote attacks.
