Making CRYPTO simple for beginners!
Crypto for beginners can be one daunting world to begin with. You will have people throwing jargons your way, words like Proof-of-Stake are part of normal discussions, people wake up to a project whitepaper instead of a newspaper and this is just scratching the surface of the digital money ecosystem. In this article, I will handhold you and clear some concepts that you would apply to your Pro-Crypto journey:
- What is Blockchain?
- Mechanisms and project frameworks
- What is Mining/Lending
- What is a Decentralised Exchange (DEX) & and Centralised Exchange (CEX)
- What are Layer 1 and Layer 2? Is there a Layer 3?
Let us first discuss BLOCKCHAIN
A BLOCK here represents DATA. So multiple fragments of Data make 1 Block (depending on the crypto we refer to). For example, 6.25 Bitcoins make 1 Block.
Now, each Block contains a cumulative ledger of every transaction on it and as every block is connected to the previous block, it creates a CHAIN. So this is what a Blockchain can be defined as in simple terms.
Currently, all our data on the internet is centralised. Meaning one entity has complete control over what we have put out on the internet. Photos and videos you upload on Instagram, Facebook, Whatsapp & Messenger are all centralised to Meta (parent company of Facebook), tomorrow if Meta decides to shutdown their entire online service business, your data might still exist on their servers and you cannot truly wipe that off. Blockchain aims at solving that issue by making all data owned by an individual truly decentralised in nature.
Mechanism & Project Framework
There is not a singular blockchain that exists in the crypto world. There are multiple blockchains in existence and with each enjoying its own characteristics. Talking strictly about Bitcoin here: each new block that needs to be added to the Bitcoin network, a group (miners here) needs to execute calculation and validate the data to successfully process the addition of a block.
Mechanisms and Project framework can be of different types:
- Proof-of-Work (PoW)
- Proof-of-Stake (PoS)
- Proof-of-History (PoH)
- Proof-of-Authority (PoA)
Today if we take the two most common mechanisms as examples, they will be PoW & PoS. As pointed above different blockchains use different mechanisms, Bitcoin needs miners validation through Proof-of-Work mechanism, whereas Ethereum with its upcoming ETH 2.0 will be moving to a Proof-of-Stake mechanism.
The difference between mechanisms comes down scalability, Transactions per second (Tps), method of coin issuance etc
What does Mining mean?
Mining here does not mean the traditional way of sending workers down a cave to physically mine resources while putting their lives at risk. Mining here simply translates to miners being rewarded for validating the data on the blockchain. It is through this process that Bitcoin is mined and brought into circulation.
As stated above, BTC uses Proof-of-Work mechanism, the process requires miners to use computing power harnessed through specialised mining rigs to solve a mathematical equation and the miner who solves it the fastest is rewarded with a part of the bitcoin block. This form of mining takes up maximum amount of electricity and is not a feasible option for many new entrants now.
Lets talk about Lending
Lending or what it’s more famously called in Crypto is Staking. It is a very popular source of passive income and it’s quite simple to understand.
The above screenshot is from the CoinDCX Pro app and is super simple to use. You can lend your tokens from any of the available assets on offering and you earn an APY ( Annual Percentage Yield) accordingly. The best part of Lending is that your tokens are wholly owned by you, there is no lock-in of funds and you can repeat this process as many times as possible. Also this function is available with multiple assets. You can try the Lending feature on the CoinDCX pro app directly without any website revisits or complicated procedures.
This mechanism operates on the basis of how much of an asset a validator has staked on the network. Currently ETH will move from a PoW to PoS mechanism. Now every individual who wants to be a validator will need to STAKE a minimum of 32 ETH on the network to validate transactions and be rewarded in return.
This form of mechanism reduced electricity consumption by almost 90% and is also a much faster way of data validation.
Trade on Centralised Exchanges or Decentralised exchanges?
As a new entrant to crypto, you must have surely come across multiple exchanges to trade on, but did you know that all crypto exchanges in existence can be divided in CEX (centralised) or DEX (decentralised).
CoinDCX is an example of a Centralised exchange. It operates like a traditional asset exchange and has a similar business model. They follow strict KYC rules and have very stringent AML policies in place. Also they list projects after due diligence and no one can make their own token and list it on CoinDCX. Everything has a strict protocol attached to it. Also, they have a strong customer support system in place and are always available to help when it’s needed. Trading on a CEX has multiple advantages where real money is concerned.
Uniswap is an example of a Decentralised exchange. Here anyone can easily create a token with a contract address and list it for trading. There is no one for due diligence nor will you have any customer support if things go south. Transactional fees keep varying depending on the demand and congestion of the blockchain (Ethereum’s ERC20 in this example).
Layer 1 vs Layer 2
Layer 1 crypto coins are a part of the main blockchain framework and architecture. Example, Ethereum is a Layer 1 solution. DApps, NFT marketplaces, DeFi are all developed on the Ethereum blockchain.
Layer 2 crypto coins are projects that are built on top of a Layer 1 solution. Example, Polygon (Matic) is created on top of Ethereum for scalability and improvement of transactions-per-second.
I hope this article would help you in clearing your basic knowledge about crypto and will help you in understanding beginners fundamentals in a much better way.
A huge thank you to CoinDCX for giving me the opportunity to be a part of the #CoinDCXpathbreaker ambassador program and enabling me to share such knowledge with my crypto community out there.