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Cryptocurrencies 101: An Introduction

  • 6 September 2017
  • 9 replies
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TylerM
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  • TylerM
  • Sr. Security Analyst & Community Manager
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What if there was a technology that can fundamentally change the way our economy, business, and government function while also transforming our understanding of trade, ownership, and trust? No need to wonder; this technology already exists -- cryptocurrency.
 
Cryptocurrencies have much more potential than a transaction system of “internet money.” Historically, money was created to enable trade. It documents:
  • Who owns what
  • Who has what
  • Who owes what and to whom
You needed an entity to stand as the central issuer or the trusted third party to guarantee that the money was real and record the transaction in a centralized ledger. Over time, trade has become complex as everyone is trading with others on a global scale. Here are a few third-party examples we rely on:
  • Governments
  • Banks
  • Notaries
  • Accountants
  • Paper money in our wallets
This is where the blockchain comes in and it's the most important new technology that cryptocurrencies rely on.
 
What is the blockchain?
 
Great question.
 
The blockchain is a decentralized, open ledger of all transactions across a peer-to-peer network.
 
Think of this as a bunch of computers (nodes) that maintain collective bookkeeping through the internet. This bookkeeping is public and is not controlled by one party. Instead, it’s distributed across the network as one digital ledger. All transactions are logged and each node on the network owns a full copy of the blockchain.
 
These transactions are validated by state-of-the-art mathematical hashing algorithms from the computing power of “miners.” The same mathematical principles also ensure that these nodes automatically update and agree on each transaction within the digital ledger. This allows the data quality to be maintained by massive database replication. No centralized, official copy exists and no node/miner is trusted more than another. If anyone tries to corrupt or hack one of the ledgers on a node, the rest of the nodes will not agree and will refuse to record that transaction on the blockchain.
 
By using blockchain technology as a shared single source of truth, it automates the function of traditional trusted third parties and removes the need for them entirely. Also, being decentralized by definition means it can’t be shut down. We will see more and more adoption and uses for it. This is where we have varying cryptocurrencies emerge all with different technology and problems they solve, all operating on the blockchain.
 
What are the most prominent tokens in the cryptocurrency space? We'll cover that in Part 2.
 
Do you have any questions about cryptocurrencies?
What else would you like to know?

 
Reply in the comments below! 

9 replies

B
Great explanation, Tyler, thank you!
I have some questions for you:
  • Won't the ever increasing size to the chain eventually grow to be too large and possibly crash the net?
  • Where is all of this massive amount of data going to be stored?
  • Like every other algorithm, isn't it likely that the author(s) built a backdoor which could allow for hacking of the nodes?
  • If they ever are hacked after this system has become widely accepted and used, wouldn't the hacker effectively be able to control money, businesses and governments?
TylerM
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Hey Burt
 
  • Won't the ever increasing size to the chain eventually grow to be too large and possibly crash the net?
As of right now the blockchain increase in size does not grow at the same rate as our ability for storage (blockchain is slower growth). So there is no end in sight of how large the blockchain can grow. For example, most cryptocurrencies blockchain size are less than 10GB. Bitcoin and Ethereum, which are obviously the largest blockchains have only just this year surpassed 100GB and 200GB respectively. We have flash drives larger than that. Plus, I believe developers on varying currencies have talked about this already and experimented with making changes down the road that wouldn't require ALL nodes to store the entire blockchain. I'm not too sure how that would work and no blockchain system works like that yet. 
  • Where is all of this massive amount of data going to be stored?
On the harddrives of the miners. The miners are who are responsible for maintaining the open ledger. They all have to have the same data and agree on each transaction. Also, anyone can download the entire blockchain ledger to their computer without being a miner. Just install a PC client and let is sync to the bitcoin network.
  • Like every other algorithm, isn't it likely that the author(s) built a backdoor which could allow for hacking of the nodes?
Developers of each currency want it to succeed since almost always their compensation is paid in the cryptos they work on. They work on bugs to make sure that security is top notch and make improvements for problems down the road - like scaling. As far as "hacking each node" that is basically impossible right now. The miners that the blockchain relies on are decentralized and there is no one place to hack. If there was any backdoors in any blockchain not only would the developers see it, but so would hackers and they would quickly exploit this for serious cash - we would have seen this already. So far blockchain technology is sound and most serious hacks have been on wallet security from other 3rd parties infrastructure. 
 
  • If they ever are hacked after this system has become widely accepted and used, wouldn't the hacker effectively be able to control money, businesses and governments?
If the blockchain ever were to be hacked meaning that a hacker had control of all current nodes and somehow was able to control every new node as soon as they joined (really stretching here) then yes they would have complete control over the currency and could say "you didn't send 10 bitcoins to this address, but instead only sent 1 and sent 9 to my address" 
T
Great info!
How does one buy and sell Bitcoins?
Are there any Bitcoin Mutual Funds?
T
My understanding of transisters is that in an elctro magnetic pulse they cease to work. Can you give us a what if scenario?
S
What affect, if any, is there on a miners computer/node? What are the requirements on that computer/node to serve as a miner in the Block chain? Does it have to be on at all times, or can it just update to stay current? 
Thanks for the awesome explanation.
TylerM
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How does one buy and sell Bitcoins?
Through exchanges. For beginners who just want to start investing, I recommend Coinbase. They have BTC, ETH, and LTC all of which are legit coins. However, this community isn't for investing or trading calls so I STRONGLY recommend that everyone do their own research on the blockchain tech of each coin you are interested in before buying.
 
Are there any Bitcoin Mutual Funds?
Yes, I believe there are already a few out there and huge players are just now getting into the investment space of it. We're still in the infancy stages. I would talk to an expert about portfolios weighted for cryptos.
 
EDIT: Looks at this - news just today
https://www.wsj.com/articles/goldman-sachs-explores-a-new-world-trading-bitcoin-1506959128
 
 
My understanding of transistors is that in an elctro magnetic pulse they cease to work. Can you give us a what if scenario?

Well, you can always have bitcoins protected in cold storage, or the private key printed out and in a safe. However, you wouldn't be able to transfer and withdraw them since you need a computer and internet connection and those would all be shut down too. If all the nodes of the blockain were taken out by a giant EMP bomb then it would take out the world of anything electronic. If we lose electricity then we have plenty more things to worry about. Basically, every service we rely on would be down and any money you had in the bank would be gone since banks use electronic ledgers as well. Even if you had cash I'm sure that would be useless too. This really is an "end of the world" scenario so the most important things would be food, weapons, and medicine.

What effect, if any, is there on a miners computer/node? What are the requirements on that computer/node to serve as a miner in the Block chain? Does it have to be on at all times, or can it just update to stay current?
 
Ideally you want it on all time, mining all the time. There is no "requirement" of up time, it would just be time that you're not earning currency. There also aren't really any requirements for mining, its just about efficiency - which is the ratio of hashes/sec per watt of electricity. You could mine on your laptop CPU right now if you wanted, but you would make less money in bitcoin then you would be spending on your electricity bill. Currently ASIC miners are the most effecient as their chips are designed for those hashing algorithms. However most cryptos other than bitcoin are mined using GPUs. A couple months back gaming graphics cards were on shortage because miners were buying them up to mine currencies like Ethereum.
F
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Please keep posting more in this series.
 
Crypto currency is a very confusing topic.  Specifically cover the aspects of how the crypto currency is obtained and used, with some examples please.
F
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Thanks for the suggestion @ and I'm happy to hear that you like it! I'll be sure to let @ know :) 
TylerM
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Hey Famenis,
 
The easiest way to obtain all the different types of cryptocurrencies is through exchanges. Most don't actually handle any fiat currency like USD, so you'll have to come to them with BTC (Bitcoin) or ETH (ethereum) and then trade for whatever currency you like - I'll cover that further below.
 
If you're a beginner and just want to enter into the space and start owning some Bitcoin or Ethereum, then the simplest way would be to go to coinbase.com. They take credit card, bank account, and paypal. All of your wallet balances for each currency are very clearly shown and you can sell back to your bank account or paypal as well. 
 
You can also receive currency from others by clicking on the "receive" button on each of the currency's wallet. It will provide a public address that you can give out to anyone. This is the address for you to receive coins. Coinbase and other exchanges, do you the favor of handling your private addresses (unlock key) for you. When you want to send you just input the public address of where you want to send your coins. This is as simple as it gets for the beginning user. Most other non-exchange wallets require you to know and securely store your private address to send any amount out of the wallet. 
 
Here is a postal analogy for public and private addresses that are required for pretty much all cryptos
You have a public address that identifies your wallet of coins - You can give this out freely to anyone as it is just like a PO box address at a post office. This address will only allow people to send coins in the wallet
You have a private address that unlocks your wallet and allows you to send coins out of it - this is just like the key the Post Office gives you to unlock your PO box and take things out of it. 
 
Since in the cryptoworld, you don't have a physical key and instead a private key (which is just a long string of characters) it is your job to make sure that you keep it safe. This means never storing it on your computer as a plain text file. Make sure to zip it up and password protect it, or print it out and keep in safe. You can also purchase hardware for more security, but they are more complex and wont be covered in this howto.
 
To purchase cryptocurrencies other than Bitcoin and Ethereum
To really get into the crypto space and start owning tokens from all the other blockchain projects you will need to send BTC or ETH to a crypto exchange. There are plenty out there, but I’ve personally used bittrex, poloniex and binance. To get started you will have to create an account there. Once you’ve set everything up go to your wallets and find where BTC and ETH are and click the “deposit address” Copy this address. Then go to your corresponding BTC or ETH wallet that already has a balance in it (that’s coinbase if following this howto). Click on send and it will ask for recipient address, paste in the address you copied earlier and then pick how much you want to send. Once you click “send” the transaction cannot be undone, so make sure everything is correct. It may take some time (10-30min) for the transaction to have enough confirmations on the blockchain before the exchange lists your balance.
 
Once you’ve deposited an amount of BTC or ETH into an exchange you can now start exploring all the different types of currency and then start trading your deposited BTC or ETH for them. You can do it at market price and instantly own them, or set buy orders if you think you can get it at a better price later. The fees on crypto exchanges are quite low and range from .15-.25%
 
This should serve as a basic howto on starting with your first cryptocurrency exchange.
 
 

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