Crypto deciphered in ten words – a reading guide

1 Bitcoin

The first and by far the most important cryptocurrency on which everyone else is based. Created by a person (or persons) under the pseudonym Satoshi Nakamoto. He announced the idea in 2008, when the financial crisis was at its height: a few weeks after the collapse of investment bank Lehman Brothers. Nakamoto devised a decentralized currency system. To guarantee that the account is correct, no central authority, such as a bank or government, is required.

All bitcoins combined are now worth about $ 700 billion. The total value of all cryptocurrencies combined is just over a trillion dollars. Nakamoto has retained about 5 percent of all bitcoins that have ever been mined.

Bitcoin fluctuates too much in value for smooth payments, and transactions are also too slow and expensive. The currency has mainly become an investment instrument. Bitcoin cash is a variant that has been split from Bitcoin (a ‘fork’ in the jargon), intended to be more suitable for daily payment transactions.

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2 Blockchain

According to many, this is the most important innovation of cryptocurrencies, more important than the cryptocurrencies themselves. Blockchain is an online register in which transactions are stored, such as a payment in cryptocurrency or the sale of a non-fungible token or NFT (see 6)† There are several identical copies of blockchain, stored on different nodes or computers.

The chain is immutable, which is guaranteed through cryptography. Only at the end of the chain can blocks be added. New transactions are converted to a block that is added with a timestamp to all instances of the chain.

Adding blocks to blockchain requires heavy calculations. The computers that take care of that calculation are paid in cryptocurrency – this activity is called ‘mining’. In addition to the bitcoin blockchain, ethereum is particularly important, it is the blockchain behind the ether coin, a very versatile blockchain that can be used for smart contracts (see 9)

3 cryptocurrencies

Today, there are thousands of cryptocurrencies. All cryptocurrencies that are not bitcoin are called altcoins or alternative cryptocurrencies. Ether is the second major cryptocurrency. so-called memecoins are cryptocurrencies that are mainly dependent on a nice name or another find. A typical example is dogecoin, which was originally conceived as a joke, but which has grown into a major cryptocurrency due to billionaire Elon Musk’s (whether seriously or not) backed.

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Mining cryptocurrencies requires a huge amount of computing power and (therefore) energy. Therefore, it usually happens in large computer rooms, in places where power is particularly cheap. In response to the popularity (and unverifiability) of cryptocurrencies, many central banks are now considering launching digital coins themselves. These are called Central Bank Digital Currency (CBDCs) and they do not necessarily use a blockchain.

4 DeFi or Decentralized Finance

One of the buzzwords in the crypto world. Many new businesses offer financial services such as loans on top of blockchain, then decentralized. No bank, government or other centralized entity is involved. So in theory, you do not have to rely on any device either. Zero confidence is an important slogan in crypto country.

Critics point out that the crypto world, after all, is not so decentralized (anymore). Some players are drawing more and more power to themselves. Anyone who wants to trade in NFTs is virtually obliged to pass for example OpenSea and therefore also rely on OpenSea.

5 Exchange

An online place where cryptocurrencies are traded. You can usually also store your cryptocurrencies there, though intensive users prefer a separate one wallet (see 10)† Larger exchanges include Coinbase and Binance, founded in 2016. Because money has already been stolen from exchanges on a regular basis, many crypto investors choose their own hardware or software wallet.

6 Non-fungible token (NFT)

An NFT is a digital proof of ownership, registered on a blockchain – usually ethereums. Where does the name come from? One polet is something that has value and is stored on a blockchain. A common cryptocurrency is interchangeable or can be exchanged for another. One non-fungible or non-redeemable token refers to something unique, such as a work of art or a collectible.

The most popular place to trade NFTs is the OpenSea website. Trading in NFTs has mainly focused on projects like the Bored Ape Yacht Club: 10,000 almost identical drawings of boring monkeys, which are traded for hundreds of thousands of euros each.

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In principle, any asset – even a house – can be traded via an NFT, as long as local law recognizes that type of digital sales contract.

7 Proof of work and proof of effort

The basic mechanism by which bitcoin works is called proof of work† To add a block to blockchain and earn bitcoins this way, perform heavy cryptographic calculations. This makes transactions slow and relatively expensive and has large ecological costs.

A number of alternative mechanisms have been proposed. The cryptocurrency ether wants to switch to during this year proof of effort for its blockchain. To add a block to the blockchain, make fewer calculations, but use your own cryptocurrencies – effort or bet. The more cryptocurrencies you bet, the greater the chance you have of adding a block, and the more new cryptocurrencies you can earn.

8 smart contract

A piece of program code that runs on blockchain when certain conditions are met. For example, a smart contract may stipulate that each time a particular NFT (for example, of a work of art) is resold, the artist will receive 10 percent of the sale price.

Basically, they are contracts that consist of program code and perform themselves automatically. For example, they can also be used to issue loans.

9 stablecoin

The value of bitcoin and ether varies greatly, which is why speculation in these coins can lead to large gains and losses in a short time. But there is also stablecoins whose value is usually linked to a (relatively) stable currency. USDC is a stable currency whose value is pegged to the dollar.

10 wallet

You can store cryptocurrencies and NFTs on a stock exchange, but you can also store them in your own crypto wallet or wallet† It can run on your smartphone or PC connected to the Internet. It will be one warm purse called.

It can also be a device that looks like a USB stick and is not connected to the internet. Sun cold purse is in principle more secure because there is less risk of hacking and theft. A crypto wallet has an address that others can use to insert cryptocurrencies into it.

Strictly speaking, a crypto wallet contains no coins, only the cryptographic keys (you private keys), which proves that you own these coins.

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