CRYPTOCURRENCY
A digital currency in which transactions are verified and records are maintained by a decentralized system, rather than a centralized controlling authority. Before going forward, there are some terms related to this sector that need to be understood.
Bitcoins, blockchains, cryptocurrency and NFT’s are very fascinating because there are so many elements to understand. Let’s start with the most basic, and that is blockchain.
Units of cryptocurrencies can also be described as digital assets. This unique data has information on ownership and can be passed from account to account. These accounts are technically called “addresses”. When these digital assets change ownership, in simple statements sent from one account to another they are recorded on their respective transaction databases, these databases are known as blockchain. All transactions related to cryptocurrency including destruction, creation, change of ownership are all recorded on blockchains. Also known as replicated databases that act as ultimate books and records also known as the golden source.
For example, Bitcoin’s blockchain is an ever-growing list of every bitcoin transaction that has ever happened right from the very first Bitcoin on 3 January 2009, same for Ethereum.
Different blockchains have different characteristics, that it is almost impossible to make a general definition of a ‘blockchain’. Now there are two types of blockchains, public and private. Bitcoin and Ethereum chains are public or permissionless, their list of transactions can be written to by anyone.
Other blockchains can be private or permissioned, in that there is a controlling party who allows selected participants to read or write to them. For example, Ripple (XRP) and Hyperledger. India plans on banning all private crypto’s and have no plans for the same in public cryptos. Rumor suggests that they are planning to ban private crypto’s because it is used for laundering money and financing terrorism.
There are so many cryptocurrencies, each working differently with different rules and mechanisms.
Let us only confine our study to two of the well known crypto’s: Bitcoin and Ethereum
1) Bitcoin: Bitcoin uses a mechanism called proof-of-work a PoW algorithm, which in simple words lets anyone add blocks to the blockchain without a central coordinator providing access or permission, inshort its decentralized, not controlled in one particular hands. Many believe bitcoin is wasteful as it consumes a lot of electricity- a lot!. So it makes no sense in generalizing that all blockchains and cryptos are energy intensive and ‘wasteful’.
Bitcoins are digital assets or per say ‘coins’ whose ownership is recorded on an electronic ledger( blockchain) simultaneously on about 10,000 independently operated computers around the world, this ledger is called Bitcoin’s blockchain. Every Bitcoin transaction is recorded and shared publicly on Bitcoin’s blockchain, and it is not encrypted. Anyone can create bitcoins for themselves, this process is called mining.
Purpose of Bitcoin according to the founder Satoshi Nakamoto:
Source: https://bitcoin.org/bitcoin.pdf
Abstract. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.
The first sentence sets out the purpose of Bitcoin. Value can be sent from Person 1 to Person 2 without using any third party intermediaries. Literal formation of Bitcoin by Satoshi Nakamoto was for the transfer of value from A to B without any third party interference. Bitcoin’s blockchains doesn’t store balances of account, it stores transactions. So practically to get the current balance of any account, one needs to refer to all the inbound and outbound transactions through that account. Bitcoins are stored in wallets.
2) Ethereum: The Ethereum blockchain’s token is called as Ether, currently the second most popular cryptocurrency. It is a public blockchain running on 15,000 computers. The vision of Vitalik Buterin founder of Ethereum blockchain, is to make it a unstoppable, censorship resistant and a decentralized cryptocurrency. Ethereum like Bitcoin is a bunch of protocols written out as code which is run as Ethereum software which creates Ethereum transactions containing data about Ether coins recorded on Ethereum’s blockchain.
Ethereum can contain more than just payment data, and the nodes consisting in Ethereum are capable of validating and processing much more that simple payments.
What is a Ethereum Virtual Machine (EVM)?
In order to understand EVM we need to understand what nodes are. Ethereum is a distributed network of computers running software known as nodes which help in verifying blocks and transaction data. So, this implies that, nodes help as a redistribution or a communication end point, here ‘transacting data’. So EVM in short is an engine which acts like a decentralized computer that has many projects to be executed. EVM- Bedrock of entire Ethereum’s operating structure. Every Ethereum node runs on the EVM to maintain consensus across the blockchain.
Ethereum’s token is called as Ether (ETH) and ownership and transactions are tracked on Ethereum blockchain.
Fact- Like One US Dollar can be split into 100 cents, 1 BTC can be split into 100,000,000 Satoshi.
The smallest unit is a Wei and there are: 1 ETH can be split into 1,000,000,000,000,000,000 per ETH.
Now comparing the block time of ETH and BTC. The time between two blocks of ETH is 14 seconds when compared to BTC which is 10 minutes. Which means if you made a BTC and an ETH transaction, the Ethereum transaction would be recorded way faster than the Bitcoin transaction. Implying Bitcoin writes to its blockchain database roughly every 10 minutes, whereas Ethereum writes to its blockchain database roughly every 14 seconds.
Another to note is that: Bitcoin’s blocks are a little under 1MB in size whereas most Ethereum blocks are about 15-20kb in size.
NFT’s
NFT’s also known as Non-Fungible Tokens have taken the world and social media through a strong source of demand and trend. NFT’s are pieces of digital content linked to their blockchain. In short, these are ‘non- fungible’ as in no identical copies can be made, they are unique and the only one in existence, whereas cryptocurrency is fungible they can be replaced or exchanged with another identical of the same value.
· It provides a ‘premium’ value to the digital artists as only one remains in existence and NFTs were partially created to help artists earn more money in a digital landscape. NFTs can’t be changed or replaced in any way if their authenticity is verified on the blockchain.
Creating your own NFT’s can be an easy process and doesn’t require an extensive knowledge of the crypto industry. First you need to decide in which blockchain you want to issue the NFT. Ethereum is the most commonly used blockchain. Now you can also create them through other blockchains as well such as Binance Smart Chain, Polkadot etc., After creating them, you can only sell them in those marketplaces that support the particular blockchain. For example: Opensea only supports the Ethereum blockchain.
Pre requisites:
A Ethereum wallet that supports ERC-721(Ethereum based NFT token standard) such as Coinbase wallet.
Around $100 in ETH (minimum).
Once you have these, there are a number of NFT- centric platforms that allow you to connect your wallet and upload your chosen file as an NFT artwork. Opensea is one of the most popular and famous NFT marketplaces. NFT’s and cryptocurrencies are similar to the sense they both store digital records on a blockchain. Both NFT’s and cryptocurrency are not regulated by the government and are also highly volatile.
Ethereum is popularly used in the world of NFT’s and generates more than 97% of sales, dominating the field. Some accepted reasons are:
1. Transaction history and token data are publicly available making the ownership history of NFT’s available.
2. Once a transaction is checked it virtually can’t be stolen by manipulating the data behind it.
3. The availability of Ethereum means that your tokens can be sold at any time.
4. The peer-to-peer execution also eliminates on costs in the form of commissions to intermediaries during the transaction.
5. Ethereum also integrates with major wallets- both DeFi (Decentralized Finance) and centralized.
Conclusion: Cryptocurrency and NFT’s have their own pros and cons, my personal opinion would be that, until they are regulated, I would not prefer any retail investor to invest in it, main reason being their volatility. Yes, I might be proved wrong if Bitcoin and other cryptos still rise in prices, but I still feel it's something like the tulipmania, the speculative bubble that occurred in the 17th century Netherlands. The use of cryptocurrencies and Bitcoin at its heart is for making payments (as mentioned in the Bitcoin white paper by the founder Satoshi Nakamoto), but majorly it is being seen and used as a speculative asset class.
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