May 17th 2022 · 3 min read
This tutorial will explain how many altcoins there are and which one is likely to be a big success. Even though the crypto market crashed in May 2022, altcoins like SHIB, BNB, BAT, ETH & BTC still rule the market. Are we in a bear market and will the trust in blockchain technology recover? In this article, we explain the differences between PoW and PoS, as well as delve into Bitcoin and its underlying technology.
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|— Cryptocurrency isn’t homogenous – there are over 6000 different coins and tokens in the cryptosphere|
— Coins and tokens run on different consensus protocols – this is the system by which each currency validates its transactions. The two principal protocols are proof-of-work and proof-of-stake
— Before deciding which coin or token to buy, it’s important to do your own research by reading up on the rules of how each one operates
Bitcoin might have been the first crypto – but it’s far from the only one. Since then, thousands of coins and tokens have emerged, all using blockchain as a foundation. But what exactly is the difference between coins and tokens, what different varieties are there – and why do we need them?
To really understand what’s going on, and why, let’s take a step back and look at why Bitcoin emerged to begin with.
WHY DID BITCOIN HAPPEN?
THE FINANCIAL CRASH
If you were around in 2008, chances are you’ll remember that year being dominated by the collapse of the financial system. The crisis brought global trust in banks, reserves and governments to an all time low, as the world pondered a way of doing things better – yet still came up short.
A NEW FINANCIAL INFRASTRUCTURE
There are two key limitations with using money, and they explain succinctly why we need(ed) banks. The first is trust: in a world where we transact daily with people we will never meet, how can anyone be sure that a transaction between two strangers will be honoured? And second comes the question of logistics: what infrastructure can we use for actually moving that value around?
For both of these questions, we rely on banks. As a trusted middleman, they oversee processes and ensure both sides of every transaction are honoured, keeping track of the global ledger as money is moved around to ensure the value of our money remains the same. Banks are also entry points (nodes, even) to the global payment infrastructure through which we move our money around. It’s clear than that any feesible alternative to traditional banking would need to not only provide an infrastructure for transferring value, but a failsafe way of keeping track of the ledger of transactions – and thanks to the financial crisis, all of this needed to be done without using an entity capable of manipulating, corrupting or gaining from that system.
HOW BITCOIN CHANGED EVERYTHING
In the tumult that followed the financial crisis, Bitcoin emerged with one central promise: to enable individuals to transfer value between one another, without the need for a cental entity. It was a first step, a revolution and the first step in a much bigger journey, but the important part is this: in its simplest form, crypto was simply a way of transferring value.
WE’VE COME A LONG WAY SINCE THEN
As explained here, most cryptos have their own blockchain with their own rules. These rules are created depending on the specific goals that each crypto wants to achieve.
So what different types of crypto are there? Cryptocurrencies are commonly divided in 3 groups:
- Crypto tokens
This one is pretty easy. If you haven’t checked it yet, this video is exclusively dedicated to Bitcoin. Put briefly, Bitcoin’s goals are about purchasing goods and services and storing value. And its blockchain rules are based on the Proof of Work protocol.
Simply standing for “alternative coins”, this group includes all the cryptocurrencies other than Bitcoin. Today, there are more than a thousand Altcoins in existence. They can be distinguished in 2 subgroups.
- Bitcoin-derived coins: they are alternate versions of Bitcoin with minor changes. Their goals are often to solve any limitations that Bitcoin has. One of the most successful is Litecoin, which aims to improve transaction speed.
- Native coins: they are very different from Bitcoin, in terms of rules, protocols and goals. Among the many rule variations existing between blockchains, there is the choice of validation protocol, between Proof of Work (PoW) and Proof of Stake (PoS). Some famous native altcoins with PoS protocols are TRON (TRX) or TEZOS (WTZ).
Compared to the other two groups, they are completely unique in the fact that they do not have their own blockchain. Instead, they only exist on other blockchains. Wait! What? Have we not just said “one blockchain = one crypto”? Yep. But we also warned you: rules and exceptions. There are several blockchains that allow the existence of tokens on their network. The most famous one is Ethereum.
CONSENSUS PROTOCOLS: PROOF OF WORK VS. PROOF OF STAKE
In the Bitcoin network, the verification and validation of transactions is made according to the Proof of Work consensus protocol. But some more recent blockchains are based on another consensus mechanism for verification and validation called Proof of Stake. Here are the main differences.
Another main difference is what PoS allows you to do with your coins: staking. It provides you with the option to generate passive income. By owning such coins, you can delegate some of your assets to a validator. The validator is rewarded with fees and shares parts of it with you. In other words, PoS allows you to grow your assets without doing anything. You don’t even need to be a validator.
ETHEREUM AND ITS TOKENS
The Ethereum blockchain was launched in 2015 and ushered in a new era for crypto, what was possible and what we, the users, expected.
Ethereum’s native currency is known as Ether (ETH) and it is part of the Altcoin category. Ethereum quickly became the number two cryptocurrency in terms of market capitalization. While being a decentralized and open-source blockchain, it has made its way to the top by having unique goals and features.
The Ethereum blockchain went far beyond simply storing and transferring value – it was designed to be used as an application layer on which others can build on and create their own platforms. Since it’s open source, anyone can create their own crypto tokens on the Ethereum blockchain (ERC20 tokens) and each token can be programmed with its own rules.
This open source blockchain was the foundation of a number of important developments: the booming DeFi system we see today, that allows thousands of services and platforms to spring up and be used composably, is built on the Ethereum blockchain. It is also the base for the vast marjority of NFTs (ERC-720 tokens), another ecosystem that spring up and is continuing to expand thanks to Ethereum’s revolutionary technology.
The world of Ethereum is a far cry from Bitcoin’s initial function of simply transferring value, changing the face of crypto, enabling new types of transaction between individuals, and raising the bar for what we, the users, can do as part of a global distributed community. And we’re not finished just yet.
A CRYPTO FOR EVERY USE
As you now know, crypto is not just a single unit – there are thousands of different cryptos – some coins and some tokens – and each one exists on its own blockchain, with its own rules, functions and capabilities. That’s why it’s really important to do your own research before buying. Or “DYOR” as the common crypto slang term advises you, so that make sound investment decisions.
Once you enter the crypto universe, your options are limitless. You can easily exchange – or swap – one crypto asset for another, without using fiat. It’s also possible to travel with crypto, to ask for a loan in fiat using your crypto as a collateral, or to raise money for your company using coins. Only you have the power to decide what you want to do with your crypto. The only condition is to own some. Ready?
KNOWEDGE IS POWER.
Trust yourseld and keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block episode all about the different coins and tokens available, and what they mean for you.
& EVERYTHING ABOUT BITCOIN
|— Bitcoin was launched in 2008 and is the world’s first decentralized digital currency – its network runs and maintains value autonomously, no state or central bank is involved|
— Bitcoin is powered by blockchain, a digital ledger that is available for anyone to read, and which cannot be changed – this allows the network to function without any central entity
— The consensus protocol for Bitcoin network is proof-of-work; this is the mechanism by which the nodes in the network validate transactions
— Because Bitcoin exists on a trustless blockchain network that does not need a central authority to reliably keep track of transactions, it revolutionized the way we transfer value by enabling peer-to-peer transactions
First outlined in Satoshi Nakamoto’s white paper in October of 2008, Bitcoin is the first successful cryptocurrency ever created. And to this day, it’s still by far the market leader. That’s what makes it worth a closer look. In the following, you’ll learn what Bitcoin is, how it works and some of its popular use cases. Let’s get facted!
BITCOIN’S KEY ELEMENTS
You might remember in the previous article, we told you a bit about why Bitcoin was so significant, and the problems it solved.
As desired by its mysterious creator Satoshi Nakamoto, a key element of Bitcoin is its decentralized nature, which ensures that no one entity can control, throttle or limit access to its network. But it brings much more than that too.
Bitcoin possesses a unique combination of key attributes which makes it stand out against traditional money or other assets. Here is a simple and memorable way to go about explaining those attributes: the old-good yet effective acronym.
Ready? Aaaaand a one and a two and a…
BE YOUR OWN BANK
Bitcoin is the first financial system to successfully offer a fully peer-to-peer network. Thanks to blockchain technology,it was the first cryptocurrency which overcame the yet-insolvable double spending problem. It means that with BTC – and crypto in general – you don’t have to trust banks or other institutions with your money or transactions. You can freely and directly transact with anyone around the globe.
IMPOSSIBLE TO HACK
Decentralization is essential to the autonomy of blockchain networks (and Bitcoin) because it increases their security, and makes them more or less immune to interference.
Let’s take an example. In a centralized environment such as a bank or reserve, if a computer is hacked it could be game over, because the system has a central core where the crucial information is stored and managed.
But in a decentralized network like blockchain, control of the network is spread across many thousands of nodes globally, and impacting that network would mean taking more than 51% control of it. A hacker would need to attack so many different computers to take control that it’s practically impossible. As all the transactions are validated by the community network, there is no possible fraud. If there is a false transaction, it would be rejected. That’s how you can be sure it’s a safe way to transfer your money – it is quite simply impossible to hack.
THICK & FAST
Bitcoin transactions can be sent near-instantaneously from anywhere in the world to any country, regardless of borders. National and international transactions take the same amount of time and fees. Plus, while traditional international transactions take between 1 to 4 working days, a BTC transaction takes about 10 minutes to be completed.
Bitcoin leverages transparency, by being completely open-source. This means that everyone can take a closer look at its code and verify how it works. All transactions are also publicly available on the blockchain, meaning you can verify all the data relating to your Bitcoin accounts and balances.
OWN YOUR MONEY
With Bitcoin, there is no central authority that could tell you what you can and cannot do with your own money. Unlike the money you’ve left in the care of a financial institution, with Bitcoin you can be completely in control of your own funds while retaining complete ownership of your money. No abuse of authority. No breach of trust.
While Bitcoin’s transactions are fully public, you can still remain pseudonymous as you transact. The addresses used in Bitcoin are strings of data which, on their own, cannot point to a single individual. It’s worth nothing that when you buy your forst coins, you’ll normally have to give some real world ID, which could in theory be used to link ypu to the transactions emanating from that very first wallet. However, within the blockchain itself, you can transact to your heart’s content without any personal data being involved.
NOT ONLY FOR SPECULATION
Bitcoin is not just a speculative asset. It has been designed first as a means of payment, like “digital cash”. Its popularity has led to more and more acceptance and use cases. Including the purchase of goods and services, from pizzas to Lamborghinis. The first-ever purchase using Bitcoin was for two pizzas! At the time, these two cost roughly $40. Today, they are worth over US$200,000,000.
In 2017 the phrase “Bitcoin Lambo” became popular street slang: it was a by-word for people wondering when they would be able to buy a Lamborghini with their Bitcoin, following a pretty meteoric rise in value around that time. So emerged the famous crypto slang, “When Lambo”.
Today, it is possible to buy luxury houses or tickets to space with Bitcoin, showing how it has become an acceptable means of settling large transactions and investments. And although it’s not for everyone yet, Bitcoin’s gradual rise to acceptance and mainstream adoption means the future sure is looking bright.
BITCOIN IN ACTION: HOW IT WORKS
Remember, we previously explained how blockchain transactions work. Allowing for transparent, secure and anonymous peer-to-peer exchange of value, free from the control of external parties. Well, Bitcoin – or BTC – works the same. Let’s review the steps:
Nothing new so far. But mastering Bitcoin requires understanding proof-of-work i.e. the process – or protocol – used by the Bitcoin network to verify and validate a transaction. This protocol can differ from one cryptocurrency to another, according to its blockchain rules.
The proof-of-work system validates new transactions by incentivizing miners to solve incredibly complex puzzles – like a giant Sudoku – to verify blocks before adding them to the blockchain. The miner who solves the puzzle fastest gets to add the new block to the chain, and is awarded with an amount of BTC for doing so. This process is called mining.
So why use this competitive system? Because in the process of competing to solve the new block, miners give their combined computing power to the Bitcoin network, which gives it stability, security and decentralization. Indeed, if one miner is acting maliciously or is compromised, all other participants in the network will still verify the correctness of the transactions and only permit accurate blocks to be added to the chain. Taking control of more than 50% of the network to override this consensus would require so much power that it’s more or less impossible for any hacker to do. This is the point of the proof-of-work system.
NOW YOU’VE GOT THE BASICS…THE ONLY WAY IS FORWARD
There you have it – you’re first crash course on Bitcoin basics! Sure, we didn’t cover everything, but you have enough to set you on course for further learning – and maybe even some Bitcoin of your own. You’re also in good shape to pursue your crypto journey with… the others cryptocurrencies! And of course, Ledger Academy can help you with that, so read on.
KNOWLEDGE IS POWER.
So keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block all about why Bitcoin is the word on everyone’s lips.
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