Learn Crypto 101 is designed to give you the confidence and knowledge of cryptocurrency basics. It’s important to understand this new technology before investing your hard earned money in it.
Cryptocurrencies are a type of digital currency that uses encryption techniques to allow for secure transactions over a peer-to-peer network. This makes them a safe and convenient alternative to traditional banking.
What is a Blockchain?
Blockchain is a secure and transparent public ledger that records transactions. It can be used to track tangible and intangible assets including cash and houses. Blockchains are created using advanced coding which ensures that data cannot be altered once it has been verified. The verification process is performed by thousands of computers and devices. This removes human error and creates a reliable record of transactional information.
Each block in a blockchain contains transactional data that is encrypted. New information is then added to the previous block, creating a chain of information that can be viewed and validated in real time. A blockchain is maintained by a network of computers, known as nodes, which are rewarded with cryptocurrency for their computing power and participation in the network.
A blockchain system allows the recording of transactions to be distributed across many different platforms and locations, reducing the risk of data breaches. The technology is incredibly useful for businesses that need to record and share information quickly and efficiently.
What is a Cryptocurrency?
Cryptocurrency, also known as crypto or crypto-money, is a digital payment system that eliminates the need for physical money. It exists solely in a digital format and uses cryptography to verify transactions without the need for central authority.
The value of a cryptocurrency is determined by its demand and supply, much like other assets such as stocks and bonds. Unlike national currencies, however, cryptocurrencies do not derive their value from being legislated as legal tender and can experience large price fluctuations.
Most cryptocurrencies are created through a process called mining, in which participants contribute computer processing power to maintain the blockchain and are rewarded with cryptocurrency tokens. These tokens can then be used to purchase goods or services online and at some physical stores. They are also a popular investment vehicle and can be traded on public exchanges. In the United States, cryptocurrencies are taxed as property rather than currency. This means that when you sell your cryptocurrency, you’ll pay capital gains tax.
What is a Crypto Wallet?
A crypto wallet keeps private keys safe, allowing users to access their cryptocurrency balance and send coins through the blockchain. They come in a variety of forms, from hardware devices like Ledger’s to mobile apps and even pieces of paper with your private key written on it.
Crypto wallets are often attacked through phishing and cyber attacks, making them an attractive target for hackers. If you lose your private keys or seed phrase, your wallet will no longer be accessible. Additionally, if you don’t back up your wallet regularly, you may lose your assets forever.
To prevent these risks, make sure to use a wallet with strong security measures, including a noncustodial model that gives you full control of your private keys, as well as user-friendly interfaces and support for the cryptocurrencies you want to store. Also, choose a wallet with reasonable fees for transactions and account maintenance. This will keep your wallet secure without breaking the bank.
What is a Smart Contract?
A smart contract is computer code built into the blockchain to facilitate an agreement between two parties. It executes the terms of that agreement automatically. This eliminates the need for intermediaries like banks, lawyers or house brokers and reduces costs for all involved.
For example, a smart contract can be programmed to send a door code to the new tenant of an apartment once the landlord receives a security deposit. The contract can also be set up to alert the landlord if rent isn’t paid on time or if other conditions are met.
Nick Szabo likens smart contracts to soda machines that are hardwired to dispense a snack when the correct amount of money is inserted. Because they’re automated and precise, they create trust and cut down on fees. Contracts published on the blockchain can’t be changed, which prevents fraud or manipulation. A smart contract can be bundled with other contracts to handle more complex tasks and is often the foundation of a decentralized app (dApp).