How does Cryptocurrency actually work? What is Blockchain?

How does Cryptocurrency ACTUALLY work? What is Blockchain? 

All right bitcoin blockchain dogecoin ethereum everyone is talking about cryptocurrencies right now but good lord what does all of it mean.


So I welcome you to this blog that will take you from crypto noob to crypto genius I'm going to tell you what it is why it keeps becoming more important what I've actually invested in myself and the dark side of it.

HISTORY OF CURRENCY :

When society was in its early stages there was no such thing as the money we'll call this stage one the only way to buy something off someone was to go up to them and be like oh I really like your horse I'll trade you my cat for it sorry milo I never trade you but the issue with a system like that is that even though you might be perfectly happy to give up your horse you just might not want a cat so that trade will never happen but that's where currency came in stage two coins which because they were made of precious materials like gold and silver everyone just accepted that they were worth something you've heard of the British pound right well the reason they're called pounds. 

Because one pound literally just used to be one pound of silver and so all of a sudden in trade it doesn't matter if you don't want my cat as long as I have coins we can still trade for your horse even if you have no use at all for the silver because it's a precious material you have that reassurance that you can take that coin to give it to someone else and trade for something that you do want convenient right but then this evolved to stage three as banks became established and governments had control we realized that as long as there was trust in the system. 

We could move away from needing to carry blocks of precious metal towards something even more convenient paper money it does the same thing but now the money doesn't have value because it's made of pure silver it just has value because the government says it has value like this 10-pound note here in the UK the note itself is just made of well it's actually made of plastic they changed it recently because it's more durable but if you look closely you can see that all this actually is the bank of England promising that they will pay the bearer of this note 10 pounds.

This is just a receipt a kind of proof that you own a certain amount of money but as technologies improved even further we found even more convenient ways of storing and trading our stuff. 

THE ONLINE ERA OF CRYPTOCURRENCY :

We're now in what I would call stage four were more people than ever are buying things online and using credit cards and really when you're at that stage we don't see our money anymore it's not about coins or notes or cats it's just entries on a spreadsheet-like when I buy a music album from amazon all that's happening is that my bank adds an entry in my spreadsheet that says Aaron now has ten dollars less and then amazon's bank adds an entry that says they have ten dollars more.

So the reason I've given you this entire intro is to give you context on where cryptocurrency sits it's seen by many people as the most convenient era of exchange ever stage five the way to think about a cryptocurrency is that it's 100 percent virtual.

WHAT IS BITCOIN ? HOW IT WORKS ?

I know the logo for bitcoin kind of looks like a physical coin it really is a bitcoin now but with crypto, there is no gold there is no silver there is no paper it really is just the transfer of digital assets the core concept is exactly the same think of them as literally just running spreadsheets of who's paid what to who but instead of multiple banks keeping their own separate records with crypto there is just one enormous spreadsheet of every transaction made using that currency and this is called a ledger.

We all have a good spreadsheet but what's all the fuss about why is everyone going crypto crazy well there are some distinct advantages to a currency system like this one it's decentralized which means that while every transaction of a given cryptocurrency is all recorded on the same ledger there are many-many copies of that ledger.

WHAT IS MINING ?

Anyone who is a part of the network has one you might have heard of cryptocurrency mining or bitcoin mining well all that is is someone who set up a computer to crunch through transactions on their copy of this ledger or spreadsheet.

There are already about a million bitcoin miners around the world and bitcoin is just one type of cryptocurrency the reason they're doing it well if you dedicate your computer's power to mining say bitcoin then you will earn some bitcoin as compensation.

So the result of this is that if I go into a store and spend five bitcoins on something then instead of just checking with one bank's records the shop instead checks with every single computer on this network if I have enough and assuming I do each computer will give the go-ahead and then every single one will update their records independently so because you end up having this many copies of exactly the same ledger. 

IS THIS SAFE ?

It becomes very easy to tell if anyone's trying anything fishy did you who bought this like if I try to hack into someone's computer that's on the network and give myself more money by adjusting figures on their copy of the ledger it's not going to get through the system will realize that 99.9 of the copies on the ledger are saying one thing but one of them is saying something else so must have been tampered with there's a very clear organization to the system and I think people believe in it because they see the future as open traceable transactions much more so than having like some bits of the record over here and other bits over there.

I know it seems complex at this point but as we go through this I think you'll realize that for a lot of people in a way it's simpler there are plenty of areas in the world that have internet access which is all you'd need for crypto but don't have access to traditional banks which require a lot of paperwork and documentation.

I've kind of implied this already but the main perk of crypto is that you don't need banks anymore because everything is stored by the people on this ledger you can make international payments almost instantly instead of it taking half a day with no spending limits plus you don't need to worry about exchange rates you don't need to worry about interest rates and even transaction fees are close to zero for some cryptocurrencies.

This is where the real fun begins I'm fine at parties I promise the reason that cryptocurrencies are called cryptocurrencies is that they're secured by cryptography.

WHAT IS BLOCKCHAIN? HOW ACTUALLLY IT WORKS?

One example of this which a lot of the major cryptocurrencies like Bitcoin use is blockchain now people often get confused by this blockchain is not bitcoin blockchain is not a currency itself blockchain is just a secure type of ledger so you know that big spreadsheet that everyone has that's recording transactions blockchain is just a way of organizing it funnily enough into blocks so every time I pay for something with bitcoin that transaction is recorded as a block.

Each block contains transaction data like who was paid and how much a hash which is a unique identifier and the hash of the previous block in the sequence or the last transaction that was recorded and the pivot on which this system rests is that if something in a block is changed then that block's hash will change.

You might be starting to see where this is going because each block also contains the data of the previous block if the hash of the block here changes then the next block will no longer have a matching hash with it and so every subsequent block after that one becomes invalid so if you combine this with what we talked about earlier this whole idea of a million different users all having their own copy of the blockchain ledger.

HOW TRANSACTION TAKES PLACE ?

Then if I wanted to fraudulently create a transaction that says paid me money I'd have to not just tamper with a block and every single block after it but I'd also have to do this on at least half a million computers around the world so that the majority of computers in the system are also consistent with the one I've tampered with probably not gonna happen whereas just hacking into someone's dollar account and sending myself money that does happen and it's sometimes as simple as just literally guessing someone's six-digit pin but there's a massive jump between that and trying to hack into 500 000 uncorrelated computers at once.

So Cryptocurrencies have their issues I'm literally going to get to them but hopefully you can see why some people are excited about them and that brings me on to investments you've probably heard of people putting money into cryptocurrencies and all that means is that they're exchanging normal currencies like dollars for cryptos like bitcoin they're hoping that those cryptocurrencies become the next big thing.

 Therefore suddenly shoot up in value at which point they can then either spend them or just exchange them back for more dollars than they bought them for there's actually a term for cryptocurrencies that skyrocket like this going to the moon or mooning but that can mean something very different depending on who you talk to but the one decision that someone would have to make at this point is which cryptocurrency because we've talked about bitcoin.

DIFFERENT TYPES OF CRYPTOCURRENCIES - ETHEREUM, CARDANO, LITECOIN

But bitcoin is just one of over 4,000 different cryptos already and each of them has different properties for example ethereum which is the second most invested in can process transactions even faster than bitcoin there's one called Cardano, which is considered to be technologically superior there's one called litecoin, which has a newer algorithm.

To be honest, the way I'm seeing it is more as an optimistic gamble as opposed to a strategic investment the only thing that you absolutely should buy is one of these hats best purchase I've ever made that is financial advice so I've put 40 in ethereum 20 to polygon 20 in Cardano 10 in cartesi and 10 in litecoin and this portfolio has basically gone up and then down and then up and then down and then honestly you probably get more consistency from wish.com so crypto is in a pretty weird place right now.

DIGITAL ASSETS ARE NOT STABLE :

This brings me onto its problems the dark side one of the main ones is exactly this the reason I think a lot of people don't take crypto seriously is its volatility because these currencies are so new and they're completely digital unlike say the market for gold no one really knows what they should be worth and so you find that crypto prices are quite heavily speculative they're tied to the news cycle like when a glowing article comes out about them prices spiral upwards but then when Elon musk posts a tweet that puts them down they go way down two is the fact that they're not really accepted as a form of payment in well most places.

SOME COMPANIES DO ACCEPT THIS CRYPTO :

If I can now book holidays with crypto I can donate to Wikipedia with crypto but there's been a lot of companies who are pretty back and forth with it Microsoft tesla even burger king are examples of companies who said they were going to accept bitcoin and then they said they weren't going to accept bitcoin three there can be an environmental concern see the whole reason why a lot of these cryptos are so secure is because of this concept of transactions being verified many many times by many many computers.

BAD USAGE OF CRYPTO :

So I think it's a fair criticism that that in itself creates a fundamental inefficiency that much computing power requires a lot of electricity but at the same time, you could counter this by saying that traditional banking uses more electricity that there are newer coins with better technology that are more efficient and that one day we'll be able to get that electricity from renewable sources depends who you ask and four there's also a pretty strong sentiment that because there's no real policing or regulation on crypto right now it's like the perfect currency for criminals.

 To be honest, I think the data speaks for itself on that one according to chain analysis 0.34 percent of crypto transactions are criminal up to 5 of normal cash transactions are criminal and I think that's because it's a bit of a misconception that currencies like bitcoin are anonymous they're actually pseudonymous which means that even though your actual details aren't visible to everyone your public key your unique identifier will be permanently baked into the blockchain upon making transactions with it.

CASH IS THE MOST CONVIENCE TILL NOW AS ITS NOT TRACEABLE :

So cash is just a better currency for most types of criminal activity because by its very nature it's untraceable don't ask me how i know that but as well as the negatives there are also just some straight up odd things that have come about because of crypto for example you might have heard of an nft a non-fungible token if you haven't you might want to take a seat for this one i don't want to call it stupid but uh this one's a head scratcher so you know how now you can go into an art gallery and you can pay to own a painting well now thanks to the blockchain you can pay just to have digital ownership over something so it doesn't stop anyone from using or sharing that thing but all it means is that you'd effectively be the owner of the original and they'd all be sharing copies of it even if for most intents and purposes they look and behave identically like a lot of these nfts are literally just jpeg images i think the reason some people find this stupid and kind of funny is that there's a distinct difference between buying an nft and buying the rights over something so.

If you buy the right service something that's a very legitimate purchase because you can create merch or sell licenses with an nft you can't the original owner still has all the reproduction rights over that piece all it is is that you're using the blockchain to prove that you have some ownership over that asset but clearly just being able to say that has some value because an nft of this Gucci ghost sold for 3,600 the CEO of Twitter Jack Dorsey he sold the first tweet he ever made as an nft for 2.9 million dollars.

IS DOGECOIN WAS A JOKE? HOW IT HAPPENED? 

Finally, you might have heard of dogecoin dirt coin is based on the same tech as litecoin but it was created as a joke people started sharing it and putting a bit of money into it because they thought it was funny but that propelled its value to the point where now we have people who have actually become millionaires just because they bought dogecoin when it was cheap it's an interesting world out there if you did find this useful then do consider sharing it with a friend or family member you could benefit I would really appreciate it.

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