Dear Ape,

Welcome to the decentralized world of Web 3.0, I hope that you will enjoy your stay here! Thoughts on Crypto and DeFi? Let me know what I should cover next!

Cheers,

Ape Digest

• A cryptocurrency is a form of digital asset based on a distributed network of computers. Their decentralized structure allows them to exist outside the control of governments and central authorities.

• Cryptocurrency is a new paradigm for money with cheaper and faster transfers with decentralized systems that do not have a single point of failure.

• Proof of Work makes the blockchain more centralized as opposed to decentralized while requiring massive amounts of energy, making it unscalable and defeating its original purpose.

• Proof of Stake was created as an alternative to Proof of Work. It works better in the long run as it incentivizes validators to hold their coins for greater staking rewards and punishes them for participating in fraudulent activities.

In 2008, the concept of Bitcoin was published in a white paper written by an anonymous figure under the alias of Satoshi Nakamoto. This has led to the creation of a long line of foundational blockchains as we know today.

Created in January 2009, Bitcoin was meant to be an electronic peer-to-peer cash system, but it has since attracted investors as a store-of-value currency, similar to gold.

Following the rise of Bitcoin, Ethereum was introduced to the world in the summer of July 2015 as the second most popular digital token.

Since then we have seen the revolutionary impact of over 35 different general purpose blockchains, all on full display with the rise of decentralized finance (DeFi) and now the explosion of activity around non-fungible tokens (NFTs).

So what are cryptocurrencies?

A cryptocurrency is a digital or virtual currency secured by cryptography. Cryptography is a method of protecting information through the use of codes, securing various transactions occurring on the network and verifying the transfers of digital assets. This makes it nearly impossible to commit fraud such as counterfeiting or double-spending.

Cryptocurrencies are generally not issued by any central authority. This decentralized structure allows them to exist outside the control of governments and central authorities, rendering them theoretically immune to interference or manipulation.

Cryptocurrencies run on decentralized networks that use blockchain technology, a distributed ledger enforced by a varying network of computers.

A blockchain is essentially a set of connected blocks on an open online ledger. Each block contains a set of data, the hash of the current block and that of the previous block.

The data stored in a block varies from different blockchains, some of which include

1. Transaction hash

2. Method of transfer

3. Block number

4. Block age

5. Wallet address of the sender

6. Wallet address of the receiver

7. Transacted amount

8. Transaction fees

The hash of a block is calculated every time a new block is generated. It is the unique fingerprint that separates one block from another. An attempt to change the properties of a block will cause the hash to change, making it very easy to uncover potential fraud. By verifying the current and previous hash of a block, this creates a chain of blocks that provides security for the blockchain.

Every new block generated must be independently verified by each member of the network before being confirmed, making it almost impossible to forge transaction histories. The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.

If that was too complicated for you, let’s simplify it.

Cryptocurrency, in its simplest form, is a digital asset based on a network that is distributed across a large number of computers. This network of computers has to solve complicated equations to confirm the validity of the transaction. These blocks are then chained together, creating a long history of irreversible transactions.

Cryptocurrencies represent a new, decentralized paradigm for money. This system removes the need for centralized intermediaries, such as banks and credit card companies, to enforce trust and monitor transactions between parties, eliminating the possibility of a single point of failure.

Cryptocurrency transfers between two transacting parties are much faster compared to traditional money transfers since they do not use third-party intermediaries. Such transfers are secured by the use of public keys, private keys and different forms of incentive systems.

At its peak, the cryptocurrency market was worth over $3 trillion with around 300 million users globally, a global economic system running on two key secure mechanisms - Proof of Work and Proof of Stake.

Proof of Work (PoW) is a decentralized consensus mechanism that requires members of a network to solve an arbitrary mathematical puzzle to prevent anybody from rigging the system. This is used widely in cryptocurrency mining and validating transactions, allowing them to be processed in a peer-to-peer, secure manner without the need for a trusted third party.

However, since the network only rewards the first miner to solve the puzzle, this has encouraged the use of mining pools, causing groups of people to rally together, combining their equipment and hashing power to earn the rewards and distribute them evenly across everyone in the pool.

This makes the blockchain more centralized as opposed to decentralized, which defeats its original purpose. Furthermore, this requires massive amounts of energy, increasing exponentially as more miners join the network, causing the PoW model to be extremely unscalable. Yes, I’m talking about you Bitcoin.

To solve this, a new consensus mechanism was introduced. In 2011, the Proof of Stake (PoS) was one of several consensus mechanisms created as an alternative to PoW. The PoS mechanism replaces miners with validators that forge or mint new blocks.

To become a validator, a node has to deposit a certain amount of coins into the network as a stake. The network randomly assigns a validator to validate a block transaction according to the number of coins staked. The more coins held in a wallet, the more staking power is effectively granted to it.

Sounds unfair right? This is however even worse with PoW, as the rich get to enjoy the power of economies at scale. Basically, the more the equipment or electricity they pay for, the bigger the discount they get to enjoy. Similar to bulk discounts, when buying something in large quantities, their expenses do not increase linearly. Did I mention that PoS uses much less energy consumption compared to PoW?

Validators receive transaction fees for every correct block they sign off on. A part of their stake is lost or slashed if they are caught approving fraudulent transactions. This provides assurance that the validators will do their job properly as long as their stake is higher than their earnings.

There is an unstaking period for validators that wish to withdraw their stake from the network. This allows the network to punish validators if any dishonest activities were uncovered during their time as a validator.

The PoS model works better in the long run as it incentivizes validators to hold their coins for greater staking rewards instead of mining and dumping them as seen in the PoW model. Of course as with every system, the PoS model is far from perfect, having its fair share of flaws such as the 51% attack that need to be addressed. I might cover this in another article.

So now that you understand the basics of cryptocurrencies, the blockchain, Proof of Work, Proof of Stake, and the problems that they solve, or at least I hope you do. Let me be the first to welcome you into the decentralized world of web 3.0, where your social circle drastically changes and your friends and family think that you are crazy!

If you enjoyed this article, do consider subscribing as that would motivate me to publish more articles. Thanks for reading my first article!

Leave a comment

Dear Ape,

Welcome to the decentralized world of Web 3.0, I hope that you will enjoy your stay here! Thoughts on Crypto and DeFi? Let me know what I should cover next!

Cheers,

Ape Digest

• A cryptocurrency is a form of digital asset based on a distributed network of computers. Their decentralized structure allows them to exist outside the control of governments and central authorities.

• Cryptocurrency is a new paradigm for money with cheaper and faster transfers with decentralized systems that do not have a single point of failure.

• Proof of Work makes the blockchain more centralized as opposed to decentralized while requiring massive amounts of energy, making it unscalable and defeating its original purpose.

• Proof of Stake was created as an alternative to Proof of Work. It works better in the long run as it incentivizes validators to hold their coins for greater staking rewards and punishes them for participating in fraudulent activities.

In 2008, the concept of Bitcoin was published in a white paper written by an anonymous figure under the alias of Satoshi Nakamoto. This has led to the creation of a long line of foundational blockchains as we know today.

Created in January 2009, Bitcoin was meant to be an electronic peer-to-peer cash system, but it has since attracted investors as a store-of-value currency, similar to gold.

Following the rise of Bitcoin, Ethereum was introduced to the world in the summer of July 2015 as the second most popular digital token.

Since then we have seen the revolutionary impact of over 35 different general purpose blockchains, all on full display with the rise of decentralized finance (DeFi) and now the explosion of activity around non-fungible tokens (NFTs).

So what are cryptocurrencies?

A cryptocurrency is a digital or virtual currency secured by cryptography. Cryptography is a method of protecting information through the use of codes, securing various transactions occurring on the network and verifying the transfers of digital assets. This makes it nearly impossible to commit fraud such as counterfeiting or double-spending.

Cryptocurrencies are generally not issued by any central authority. This decentralized structure allows them to exist outside the control of governments and central authorities, rendering them theoretically immune to interference or manipulation.

Cryptocurrencies run on decentralized networks that use blockchain technology, a distributed ledger enforced by a varying network of computers.

A blockchain is essentially a set of connected blocks on an open online ledger. Each block contains a set of data, the hash of the current block and that of the previous block.

The data stored in a block varies from different blockchains, some of which include

1. Transaction hash

2. Method of transfer

3. Block number

4. Block age

5. Wallet address of the sender

6. Wallet address of the receiver

7. Transacted amount

8. Transaction fees

The hash of a block is calculated every time a new block is generated. It is the unique fingerprint that separates one block from another. An attempt to change the properties of a block will cause the hash to change, making it very easy to uncover potential fraud. By verifying the current and previous hash of a block, this creates a chain of blocks that provides security for the blockchain.

Every new block generated must be independently verified by each member of the network before being confirmed, making it almost impossible to forge transaction histories. The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.

If that was too complicated for you, let’s simplify it.

Cryptocurrency, in its simplest form, is a digital asset based on a network that is distributed across a large number of computers. This network of computers has to solve complicated equations to confirm the validity of the transaction. These blocks are then chained together, creating a long history of irreversible transactions.

Cryptocurrencies represent a new, decentralized paradigm for money. This system removes the need for centralized intermediaries, such as banks and credit card companies, to enforce trust and monitor transactions between parties, eliminating the possibility of a single point of failure.

Cryptocurrency transfers between two transacting parties are much faster compared to traditional money transfers since they do not use third-party intermediaries. Such transfers are secured by the use of public keys, private keys and different forms of incentive systems.

At its peak, the cryptocurrency market was worth over $3 trillion with around 300 million users globally, a global economic system running on two key secure mechanisms - Proof of Work and Proof of Stake.

Proof of Work (PoW) is a decentralized consensus mechanism that requires members of a network to solve an arbitrary mathematical puzzle to prevent anybody from rigging the system. This is used widely in cryptocurrency mining and validating transactions, allowing them to be processed in a peer-to-peer, secure manner without the need for a trusted third party.

However, since the network only rewards the first miner to solve the puzzle, this has encouraged the use of mining pools, causing groups of people to rally together, combining their equipment and hashing power to earn the rewards and distribute them evenly across everyone in the pool.

This makes the blockchain more centralized as opposed to decentralized, which defeats its original purpose. Furthermore, this requires massive amounts of energy, increasing exponentially as more miners join the network, causing the PoW model to be extremely unscalable. Yes, I’m talking about you Bitcoin.

To solve this, a new consensus mechanism was introduced. In 2011, the Proof of Stake (PoS) was one of several consensus mechanisms created as an alternative to PoW. The PoS mechanism replaces miners with validators that forge or mint new blocks.

To become a validator, a node has to deposit a certain amount of coins into the network as a stake. The network randomly assigns a validator to validate a block transaction according to the number of coins staked. The more coins held in a wallet, the more staking power is effectively granted to it.

Sounds unfair right? This is however even worse with PoW, as the rich get to enjoy the power of economies at scale. Basically, the more the equipment or electricity they pay for, the bigger the discount they get to enjoy. Similar to bulk discounts, when buying something in large quantities, their expenses do not increase linearly. Did I mention that PoS uses much less energy consumption compared to PoW?

Validators receive transaction fees for every correct block they sign off on. A part of their stake is lost or slashed if they are caught approving fraudulent transactions. This provides assurance that the validators will do their job properly as long as their stake is higher than their earnings.

There is an unstaking period for validators that wish to withdraw their stake from the network. This allows the network to punish validators if any dishonest activities were uncovered during their time as a validator.

The PoS model works better in the long run as it incentivizes validators to hold their coins for greater staking rewards instead of mining and dumping them as seen in the PoW model. Of course as with every system, the PoS model is far from perfect, having its fair share of flaws such as the 51% attack that need to be addressed. I might cover this in another article.

So now that you understand the basics of cryptocurrencies, the blockchain, Proof of Work, Proof of Stake, and the problems that they solve, or at least I hope you do. Let me be the first to welcome you into the decentralized world of web 3.0, where your social circle drastically changes and your friends and family think that you are crazy!

If you enjoyed this article, do consider subscribing as that would motivate me to publish more articles. Thanks for reading my first article!

Leave a comment