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What is a Cryptocurrency or Crypto Token?

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through the release of a  cryptocurrency or Crypto token to fund project development. It is similar to an Initial Public Offering (IPO) for stocks, with critical distinctions which are explained in the article.

What You Will Learn

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  • What makes a cryptocurrency?

  • What is unique about cryptocurrencies?

  • What properties do they have which make them exciting?

  • How are they different from traditional currencies?

 

Cryptocurrency

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A cryptocurrency uses encryption is to verify the transfer and ownership of digital coins across a network of computers.

What Makes a Cryptocurrency Unique?

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  • No central authority
    • Rules are set and transparent unlike traditional fiat (government backed) currency
  • Often balances are held on a massively distributed ledger called the blockchain
    • More on this in Lecture 4
  • Held entirely electronically often with no physical counterpart
  • Have a total supply and a price which lets you derive a “market capitalization”
    • Market Capitalization represents the total theoretical value of all of the tokens in existence

      Throughout this course, you will understand how to use the checklist to analyze any cryptocurrency!

 

Why is Crypto so Exciting?

  • Freely Tradable
    • Nothing stopping anyone from transferring cryptocurrencies anywhere in the world
  • No Trusted Intermediary
    • Fiat currencies often require clearinghouses and trusted third-parties to move large sums
  • Low Cost
    • Miner transaction fees are low cost and don’t scale with amounts making cryptocurrencies very effective and efficient store of value

      Most attractive of all, cryptocurrencies are experiencing hyper-growth! More on why they are growing in Lecture 2

Fiat vs. Cryptocurrency Comparison

  • Centralized authority

  • Rules are not set

  • Supply can be manipulated

  • Almost always inflationary

  • Requires trusted intermediaries

  • Widely accepted payment method

  • Infrastructure for high transaction throughput

  • No centralized authority

  • Rules are set and verifiable

  • Supply cannot be manipulated

  • Some inflationary, some deflationary

  • Trusted intermediaries not required

  • Not widely accepted as payment

  • Blockchain scaling still area of research and development

 

 

Why Now? Why Cryptocurrencies?

  • How much is the cryptocurrency space growing?
  • What is driving the growth of cryptocurrencies?
  • Why are people so excited about blockchain?
  • What sorts of projects are utilizing the technology?

 

But What is Driving this Growth?

  • Cryptocurrencies are aiming to be better money
  • Major media attention
  • Unique benefits that we covered in the last lecture
    • No central authority
    • No intermediary
    • Low cost

      But most of all…

  • More than just currency – blockchain technology can revolutionize computing as we know it

 

Crypto Investing

  • Due to the open nature of cryptocurrency…
    • Anyone can participate
    • You have transparency and insight
    • High liquidity – easy to buy and sell
    • Rapid growth

      For the first time, the average person can participate in revolutionary ideas

 

How to get started with cryptocurrencies

  • What is needed to hold and send Bitcoin?
  • What is needed to hold and send Ethereum?
  • How to create and use an Ethereum and Bitcoin Wallet?
  • How to turn Bitcoin into Ethereum?

If you are familiar with how to do all of this already, feel free to skip this lecture.

The first thing you should do is create a Bitcoin wallet.

Creating a Bitcoin wallet is relatively simple and important if you want to have full control over your funds.

A simple wallet that will manage your keys with a login is wallet.btc.com.

For a wallet that runs on your computer and lets you manage your own keys, consider using electrum. The wallet syncs to your computer, but you don’t have to sync the entire blockchain to your computer. We will be covering more on the blockchain and transactions in the next lecture.

In both cases, keep your private key safe (the PDF from btc.com or wallet file in electrum) since these will be required to recover your wallet.

Never share your private key with anyone if you want to manage your own keys!

Here is what the wallet should look like for both electrum and BTC.com.

Clicking “receive” will usually give you the public wallet address on whatever application you are using which is where funds should be sent in order for you to take ownership.

Then to send funds, click “send”, enter the public wallet address of where you want to send and the amount and the wallet should handle the transaction.

To take your first step into the crypto market, you will have to acquire Bitcoin which typically happens through fiat currency.

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We have a blog post here, which will be linked to the additional resources document available to you, which details many different methods of buying Bitcoin. There are lots of ways to buy so if you want to explore your options, that document will be helpful.

Using the wallet you created in the last step, you can send any BTC you buy to your personal wallet.

Alternatively, you can opt to keep your funds with the third-party if you believe that they are trustworthy.

Once you have Bitcoin, you can begin to exchange and buy other currencies.

Now we are going to go through the process of turning some of your Bitcoin into Ethereum.

The first thing you have to do is create an Ethereum wallet. This can be done easily through myetherwallet.com

Double check that the web address you are using is myetherwallet.com and not anything else.

Then enter your password and don’t forget it!

Next, download the keystore file to your computer.

This file is your private key and can be used to restore your wallet on other platforms and also is used to interact with myetherwallet.com

Be sure not to lose this key and keep it very secure. You will also need your password to open it up.

Now, lets open up your new wallet on myetherwallet.com Go to the send either and tokens tab,

Then upload and unlock your wallet

Once you open it up, you should see your public address on the right side.

Now go to shapeshift.io and select BTC to ETH. Shapeshift lets you quickly and securely convert funds from one currency to another. Now that you have a Bitcoin and Ethereum wallet, you can use it to turn your funds from Bitcoin into Ether.

Precise takes a little longer but is more accurate.

On Shapeshift, select the amount of BTC you want to convert to ETH.

Use your BTC wallet address in case the trade doesn’t go through and they have to refund you

Use the ETH wallet that you just created for the destination address. After you deposit, it will take some time to finish, but then it will convert your BTC into Ether and send it to your address.

Congratulations! You have just completed your first cryptocurrency trade! If that was a lot of information all at once, don’t worry! We will be talking more about how everything works in the next lectures.

This concludes the third lecture, how to get started with cryptocurrencies. Thanks and we hope you found this lecture helpful!

 

What is Bitcoin?

Bitcoin is the first and most popular cryptocurrency.

Founded by the anonymous Satoshi Nakamoto in 2009, it has launched a lot of innovation in blockchain technology which underpins its network.

What is the blockchain?

  • Massively shared ledger of transactions

    • All transactions on the network get recorded

  • Has “blocks” that get created at certain intervals which contain data

  • Blockchains are “append only” so they only get larger over time

    As of July 2017, the full Bitcoin blockchain was about 126 GB

 

  • Bitcoin Blockchain Implications

  • Transparent transactions (on Bitcoin at least)

    • Every person has a copy of every transaction

  • Block explorers like blockchain.info allow you to view blockchain data

  • Every transaction has a unique ID that can be referenced

    You can see the balance and past transaction history of any address!

 

 

 

 

  • How does a transaction work?

  • Bitcoin works with inputs and outputs
    • When you receive Bitcoin you receive an input to your address
    • When you send Bitcoin, you are using outputs to your address to send an input to another address
  • Transactions send unspent outputs as inputs to another address
    • Your balance is the sum of all unspent outputs
  • To send a transaction, you use your wallet’s private key to sign a transaction with an output and an amount
    • Signed transactions can only send the exact amount to the address specified and nothing else!
    • This is what keeps the network secure since you never need to expose your private key

      Wallet software handles the transaction signing for you and broadcasts only signed transactions. You can give signed transactions to anyone and signed transactions are what is stored on the blockchain

       

What is Bitcoin mining?

Mining is the process by which transactions get added to the blockchain. Mining also ensures that transactions are valid and that nobody is creating a fraudulent chain through proof of work.

  • Miners verify transactions, bundle transactions into blocks then solve the proof of work
    • The miner who solves the proof of work creates and issues a valid block to the network (More on proof of work in next slide)
    • After solving the proof of work, the miner gets an unspent output for themselves as a reward
  • The mining process ensures that nobody is trying to spend an invalid output (i.e. that they actually have the inputs required to create the outputs)
  • Miners have a lot of checks on transactions to ensure their validity

What is Proof of Work?

  • Using the one-way hash function, Proof of Work is the process by which miners prove they did work

  • Miners “ask questions” using this function extremely quickly trying to get a result from the function within certain parameters

    • Example: Only hashes where the first 7 digits are 0s will be accepted

  • This is why when a new block is created, a lot of computational work was put into it

    • Example: Whoever finds an input that creates a hash with 7 leading 0s will have “solved” the puzzle

  • Furthermore, the “question” you give the function has to include the previous block’s “answer” creating a “blockchain”

    • As part of your input, you have to include the previous block’s hash

    • If you want to reverse a transaction, you will have to undo all the blocks that came after that transaction as well which means a lot of computation

 

What Mining Enables

  • Confirms transactions

  • Allows value to be transferred

  • Secures and ensures no malicious parties attack the network

  • Creates Blockchain “Repository of Truth”

  • Underpins trustless consensus

  • Allows Bitcoin and other currencies to work

Why does Bitcoin have value?

  • Derived from the trust that someone else also values it.

  • If you use BTC as payment, trust that someone else will also accept BTC

  • Shared acceptance of value

  • Intrinsic rarity and fixed supply

 

Bitcoin has an Emission Rate and Market Cap

  • A certain predefined number of Bitcoin get created in every block

    • Currently 12.5 BTC/block

    • Halves every 4 years (“The Halving”)

    • Cap of 21 Million

  • Market Capitalization can be calculated

    • (Price of coin)*(Current Supply of Coins)

    • Gives an estimated “valuation” of a coin

 

 

Market Depth and Liquidity

  • Liquidity is the amount of value available in a market

    • Highly liquid markets are easy to buy/sell in

    • Market depth is the number of open orders there are on the market

 

 

What is Ethereum?

  • Open-source public distributed computing platform
  • Features a “smart contract” scripting language
    • Decentralized and “Turing-complete”
    • EVM (Ethereum Virtual Machine)
  • Provides a cryptocurrency token called “Ether”
  • Also features “gas” to allocate resources on the network
What is a Smart Contract
What is a Smart Contract
  • With Ethereum, there is no trust or centralized machine
    • Your contract gets executed exactly as written
  • This means you need to be careful to write your contract correctly!
  • Smart contracts enable a new class of applications called Dapps (Decentralized Applications)
    • Dapps can’t be stopped and are 100% transparent

 

What’s Possible with Smart Contracts?

  • Anyone can issue their own token using ERC20 standard
  • Decentralized Exchange
    • Exchange of value with no central party
  • Decentralized governance
    • Secure voting and governance structure
  • Ownership and financial structures
    • Create blockchain based companies

 

Bitcoin’s Problems Ethereum Solves

  • Ethereum can handle around 2-2.5x Bitcoin’s transactions per second
    • Bitcoin estimated to be around 7-10 txps where Ethereum is around 15-20 txps
  • Ethereum has a full scripting language and use cases outside of a store of value and currency
  • Faster block time means faster confirmations
    • 20 seconds vs 10 minutes for 1 confirmation

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