Beginners Guide

Think Smart, Learn Blockchain Before Investing in it

Author: Sohrab Khawas

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    By the end of this article, you will understand Blockchain Technology – Cryptocurrency and the other necessary factors that are connected to this ecosystem. You will also know topics that are very important for any beginner or pro who is interested in Blockchain and Cryptocurrency

    In this contemporary and fast swelling world of the internet, gathering knowledge on the latest trending technologies is becoming imminent. And if the technology enables you to invest your funds, then having a deep knowledge is mandatory and primitive. We will have a detailed study of one such technology which has accumulated much traction in recent times.

    2020 has been a year for the blockchain industry, New technological use cases, Smart contracts, Defi, and the aggressively growing Interest of millennials. 

    Is Blockchain, Bitcoin, Cryptocurrency on your mind? Are you struggling to understand how Blockchain operates? Are you looking for core information about this ecosystem that will help your investment ideas? You’ve been on the right Page and at the right time.

    Blockchain! A Term that is surfacing on the Internet, Social media, News and grabbing high volume attention globally for more than a decade now. 

    Blockchain & It’s Working 

    Blockchain technology is referred to as ‘Distributed Ledger Technology’ or ‘DLT’ is a technology that allows digital information to be distributed but not copied.  In this technology, the digital information is transferred in the form of ‘Blocks’ which is stored in the public database called ‘Chain’. 

    Blocks in the blockchain are specifically made up of digital information like transaction date, participant details, etc. Each block stores a unique code called ‘Hash’ which distinguishes each block from one another.

     How does the blockchain Operate? 

    Consider a spreadsheet that can be easily shared with a network of computers where-in thousands of duplicates can be created. You update any data in your spreadsheet and it gets updated on all the computers within the network. Blockchain works similarly.

    Whenever a new transaction is requested on the blockchain network, a new block is created with the details of the transaction. This block is given a unique Id called ‘Hash’. The block is sent to all nodes in the network for the confirmation of the transaction.

    The nodes validate the transaction and share their Proof-of-Work. Nodes receive a reward for a successful proof-of-work. The transaction is completed by adding the block to the existing chain.

    Why is Blockchain Untampered and Untraceable? 

    Every block contains three main information: – Data, Previous Hash value, and current Hash value.

    When a person called A has to transfer $100 to a person B. A block is created with the details of the transaction and a unique hash value. Further, if person B transfers $50 to person C, a new block is created with the previous hash value and the new hash value is calculated and stored.

    As we can see, every new block carries the Hash value of the previous block. And for this reason, the possibilities of any illegal activities would be nullified. If in any case the transaction is altered, the hash values are not replaced but the new block is created with a new hash value.

    Find it Interesting -> Read more about the Blockchain technology features, applications, drawbacks, Recent updates, the future, and much more. 

    Blockchain technology revolutionized the banking and finance markets, cybersecurity space, supply chain management, artificial intelligence, etc. It has been seen that since after its launch it began disrupting many industries through its technological features.

    Among all such Use cases of Blockchain Technology, Cryptocurrency (Finance) is the First and Majorly used domain. 

    Let’s Read about 

    The First Cryptocurrency – Bitcoin, Built on Blockchain Technology 

    Bitcoin is the first-ever invented Cryptocurrency built on Blockchain Technology. It operates in a decentralized, Peer-to-peer network system with no central authority or bank to manage funds or transactions. BTC is the Symbol of Bitcoin identification. 

    Bitcoin was created in 2008 by an anonymous person whose identity remains a mystery over a decade. It is rumored that a Pseudonym named “Satoshi Nakamoto” ( A person or group of people)  is believed to be the creator. 

    It was officially released in 2009 with a Whitepaper( A Document contains structural, functional, and organizational details) as an alternative to the existing fiat money banking system. 

    There are only 21 Million Bitcoins (21,000,000) ever created, so this is the Maximum supply of bitcoin. Bitcoin transactions are processed using a method called “Bitcoin Mining” wherein a global network of computers use complex mathematical algorithms to verify each BTC transactions to execute the blocks and are rewarded for successful mining.

    Today, We have over 7.1 million active Bitcoin users globally who are able to easily store and exchange it easily in multiple forms over multiple platforms under the ecosystem. Just like and more than the normal Fiat currency does. 

    Bitcoin is not a complex term to understand, it’s Simple and Worth. Read more about Bitcoin working, history, purpose, advantages / Disadvantages.

    As of 2020, we record more than 6000 + active cryptocurrencies like bitcoin, which may have different technical setup but all function the same way. 

    These different cryptocurrencies other bitcoin are called Altcoins ( alternate coins) and are built on Standard blockchain or a blockchain ledger system of their own. 

    Some of the Popular altcoins are Etheruem(ETH), Ripple(XRP), Litecoin(LTC)……. Altcoins built on Ethereum 

    The whole blockchain network is depending upon the block confirmations done by the miners(discussed below). And the miners use concepts like Proof-of-Work and Proof-of-Stake to compete among themselves. Lets know more about these concepts.

    Proof-of-Work and Proof-of-Stake

    Proof-of-Work(PoW) is an original consensus algorithm in a blockchain network. This algorithm is used to confirm transactions and add up new blocks to the blockchain. With PoW miners compete with each other to complete the transactions so that they receive the rewards.

    Basically, miners solve a puzzle to form a new block on blockchain. The complexity of the puzzle depends on the number of users, the current power and the network load. The most famous application of PoW is Bitcoin. Here the puzzle is the Hashcash and the average time taken for PoW and to create a new block is 10 minutes. The other cryptocurrencies also follow the similar system.

    Proof-of-Stake(PoS) concept gives more mining power to the person with more coins. In simple words, if a miner has more bitcoin or any altcoin, he/she can mine or validate more block transactions. 

    Crypto mining requires immense computing power to solve different puzzles which are nothing but cryptographic calculations. The computing power consumes huge amounts of electric resources. Sometimes, miners sell off their rewards in order to combat the electricity bills.

    Therefore PoS attributes the miners according to their holding with an aim to address this issue. For an instance, if a miner possesses 3 percent of the Bitcoin available then he can mine only 3 percent of blocks.

    Initial Exchange Offering(IEO)

    In an IEO, the cryptocurrency exchange raises funds on behalf of the start ups. Unlike ICO, the IEO audience is limited to the users of that particular exchange. IEO allows users of the platform to acquire the shares in the form of tokens.

    IEO is considered as a more secure platform to invest as they are carried out with the help of a third party. All the projects that wish to launch an IEO have been examined thoroughly as the exchange reputation might get a pull back with scam projects being listed for raising funds.

    Cryptocurrency Exchanges  

    Cryptocurrency exchanges are online platforms just like the stock market trading sites where buyers and sellers are connected to exchange Cryptocurrencies for other Cryptocurrencies or regular fiat currencies with the current market price. 

    Cryptocurrencies are the hot topic of this century and quite an intimidating and intrigued topic that everyone wants to learn about. Now if you are a beginner then it is strictly advised that do not perform any kind of trading or exchanges without having complete knowledge about the exchanges.

    Cryptocurrency exchanges are online platforms just like the stock market trading sites where buyers and sellers are connected to exchange Cryptocurrencies for other Cryptocurrencies or regular fiat currencies with the current market price. 

    These exchanges are generally owned by a team or a person, but they also come Decentralized exchanges that operate without any central authority in a decentralized peer-to-peer system. 

    The Exchange platform offers multiple methods of exchanging cryptocurrencies. 

    There are 2 main types of Exchanges

    • Centralized Exchanges(CEX)

    Centralized usually means an authority keeping a close eye on the transactions and also to secure the assets on behalf of the buyer and seller. Therefore,a Centralized exchange is a place where the trade of cryptocurrencies takes place within the monitored environment. The transactions are not recorded on the blockchain. 

    The customers are also required to submit and verify their identity details in order to trade on this platform. The more details the user provides to the exchange, the more benefits are provided including high withdrawal limits. 

    Eg of Centralized exchanges are Coinbase, Binance, LocalBitcoins, etc

    • Decentralized Exchanges(DEX)

    Decentralized exchange on the contrary, works the same as the centralized exchange but without any interference of third parties. The trader is not required to verify himself, he can keep his identity as anonymous and trade. 

    Unlike the CEX, DEX does not charge any fees for using the platform without having any possibility of a hack. However, DEX is considered more volatile as the control is in the hands of users rather than any platform. All the transactions are recorded on the blockchain.

    Cryptocurrency Wallet

    A cryptocurrency wallet is a virtual device or physical medium that is used to store and secure cryptocurrencies. The Wallets also allow you to Send and Receive coins to a similar address. 

    Crypto wallets function on Cryptographically encrypted Public and Private keys that Identify, store, and protect your assets. A wallet can support multiple currencies, each identified by their Unique address. 

    There are basically two types of crypto wallets

    • Hot Wallets or Online Wallets

    Hot wallets are virtual devices which are used to store cryptocurrencies. As it is connected to the internet, it is easy to set up and access. But at the same time, it has more chances to get infiltrated or hacked. 

    The hot wallets are provided by the centralized exchanges also. User can open his account on the exchanges and store the cryptos. 

    • Cold Wallets or Offline Wallets

    Cold wallets as the name suggests are the external devices used to store cryptocurrencies. It works similar to any USB device. But it is considered as the most secure way to store your cryptocurrencies.

    However, the cold wallets cannot be accessed at your fingertips to carry out any immediate transactions. Most trusted offline wallets are Tresor Wallet.

    Cryptocurrency Mining

     Cryptocurrency mining is a process of verifying the transactions on the blockchain and adding it to the ledger. This is done by programmed computers(miners) by solving some complex equations. 

    Each transaction initiated on the blockchain must be verified by multiple computers in the mining network to complete the transaction and then add these records to Blockchain ledger called Proof-of-Work ( POW). 

    The mining process is basically new coins in exponential value which is the reward for miners on each successful verification. 

    Bitcoin mining, altcoin mining, or Cryptocurrency mining has been a very popular term since the time of the invention of bitcoin, it involves interesting factors like halving, Pool, Schemes.

    Follow our detailed guide in Cryptocurrency mining to understand more about mining and how to start your own mining setup 

    What is Defi – The Decentralized Finance 

    DeFi – Decentralized finance is a financial application of the decentralized ecosystem, where-in one can get access to a wide range of DeFi features like staking, lending of cryptos etc. Generally built on Smart Contracts – Blockchain, DeFI module can be used to develop a decentralized alternative to any existing financial services.

    DeFI has emerged to be the most prominent use case of blockchain technology, as all the financial services can now have easy access to decentralize themselves for an untampered, no-hackable, Wide, and high return generating revenue model. 

    As in decentralized exchange, DeFi also has no room for the third party. The buying or selling or lending happens between the two parties and all the terms and conditions are mentioned in a ‘Smart Contract’. The smart contract would be considered as completed only when the conditions in the contract are completed. 

    That has been a Good time! and I believe it is worth reading. 

    The Article Keeps adding all the latest information about this category in a more friendly and convenient way.

    So by now, you have understood the necessary information you need to have before beginning with Blockchain-Cryptocurrency.

    Well Done! You have now completed the Lesson.

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