Essential things to know about the crypto world

What is crypto currency?

Crypto-currencies are digital means of payment that are managed by a central office and are cryptographically encrypted. The first functioning crypto currency was bitcoin, which has been in existence since 2009. Now there are now hundreds of other crypto currencies. 

What is the idea behind cryptocurrencies?

Crypto-currencies are supposed to be an alternative to government-issued money (fiat). They are regarded as decentralized peer-to-peer payment networks that are operated by users only and do not require centralized authority or intermediaries.  

What exactly is Bitcoin?

Bitcoin is the largest and best known crypto currency. Bitcoin is a consensus-based network consisting of many distributed computers that allow the transmission of value in the form of bytes without an intermediary. It is an open source software, so the protocols are visible to everyone. Bitcoin is also seen by many as digital gold or cash for the internet. 

Who invented bitcoin?

That is still unclear. The term first appeared in 2009 in a paper by a certain Satoshi Nakamoto. Since all messages introducing bitcoin were cryptographically encrypted, no one knows for sure who Satoshi Nakamato is to this day. Many assume that Nakamoto cannot be one single individual, thus bitcoin was brought to life by an anonymous act of creation. There is therefore no individual person or company behind it that could represent bitcoin alone. 

Who controls bitcoin?

There is no central authority that controls the bitcoin network. So-called “core developers” constantly review and assess the bitcoin code. It is also the core developers who make any changes to the code. The nodes, computers connected to the bitcoin network, must decide whose node (software) they chose to run. Although the bitcoin protocol can be adapted and improved, this change must always be accepted and used by enough users. Thus, consensus occurs.  

How does bitcoin work?

From a user’s perspective, bitcoin is nothing more than a computer program that provides a personal bitcoin wallet and allows users to send and receive bitcoin. The bitcoin network is based on a public notary system called blockchain. It stores all transactions have ever been recorded on the bitcoin network. 

What is a public key?

The public key is a random combination of numbers and letters and can be compared to an IBAN or account number. So if you want to receive bitcoins, you must provide the public key as the recipient address. Unlike the private key, no special precautions apply to the public key. Each public key logically exists only once. 

What is a private key?

If you only have the public key, you can have bitcoin sent to this public key, but you cannot send bitcoin from this public key. For this you also need the corresponding private key. For each public key there is a specific private key that is unique, just like the public key. The private key can be used to create the public key and at the same time the private key allows access to the bitcoin on the corresponding private key. The private key is the key to the bitcoins and should therefore be kept very secure and confidential. 

What is a bitcoin wallet?

Although bitcoins are just bits and as bytes,  cannot be “stored” on the computer just like that. You need a wallet, a digital purse comparable to a bank account, to store them. A distinction is made between cold wallet and hot wallet. The latter is called a hot wallet because it is connected to the internet – it is suitable for actually carrying out transactions. On the contrary, a cold wallet is completely disconnected from the internet and is therefore considered to be more secure. 

How does a bitcoin wallet work?

Each wallet has a public key and a private key. The public key is the public address through which a wallet can receive or send Bitcoins. The public key is in a sense like the IBAN of a bank account. The private key is the password and is needed to access and send the bitcoins stored on the Wallet. The private key should be kept in a safe place so that it cannot be stolen. 

What do I need to know about wallets?

Often the private key is already integrated in the wallet. The wallet is then only protected with an additional password. This password should not be confused with the private key. Only those who have the private key can access the bitcoins at any time. If a wallet is no longer functional for any reason and the private key is not stored separately, the bitcoins on this wallet are lost. For this reason you should make sure that you own a wallet where you also have the private key. 

What is cryptography?

Cryptography describes the science of encrypting information. Cryptographic currencies use cryptographic procedures to create, verify and transfer units of value. Since cryptography is generally considered to be very secure, crypto currencies are also considered to be extremely secure. 

What’s a blockchain?

The block chain is a decentralized accounting database, an openly accessible general ledger of all transactions ever made on this database. As the name implies, it is a chain of blocks. These blocks contain several transactions, which in turn are provided with encrypted signatures. The signatures in turn allow one to identify the respective transaction partners within a transaction. Each block chain has an original block on which all subsequent blocks are based.  

What is so revolutionary about the blockchain?

Until now, it has not been possible to send money or other assets between people digitally without the exchange being controlled and validated by an intermediary. With the blockchain the intermediary is eliminated, the previously necessary trust is fully decentralized. Every blockchain user can view the latest version of the database at any time. In this way, individual computers can keep each other in check. To a certain extent collectively, new input to the database is compared with old corresponding data. Only when old and new data match, is the transaction considered verified and executed. Thus, the scope for potential manipulation is infinitesimal. 

What are coins or tokens and how are they created?

Digital coins and tokens both mean the same thing: entries in the accounting database, or digitally speaking the blockchain. The owner of a token is whoever holds its private key. These tokens are created from scratch by the respective program. 

What is the function of the tokens?

Only those who have tokens have access to the network. Furthermore, the tokens are usually part of an incentive system that keeps the network running. 

Does a blockchain without tokens make sense?

In order to maintain the advantage of decentralized trust, an incentive structure is needed that can hardly be kept intact without tokens. Only when access to the blockchain is restricted and all participants are inherently trusted can the token be left out. However, the real advantage of the blockchain’s decentralization is lost and it degenerates into a common but expensive database. 

What is a smart contract?

A smart contract is a digital contract in which conditions are programmed into the code. If they are met or not met, the consequences automatically take effect. The advantage of automatic contracts. Is that the middleman who controls the contract negotiations becomes obsolete. 

What is meant by a decentralized consensus-oriented network?

Such a network consists of many different computers that can agree among themselves,  thus build consensus. There is no need for a central authority to oversee this process. A programmed incentive mechanism ensures that a consensus is formed between the computers within the network. A distinction is made between proof-of-work and proof-of-stake. 

 What is proof-of-work? 

The incentive mechanism by which network consensus is achieved at bitcoin is called proof of work. To achieve collective consensus, bitcoin nodes perform computational work and are rewarded for correct behavior. Proof-of-work thus aims to reward (positive incentive). 

What is proof-of-stake?

Proof-of-stake is an alternative way to achieve network consensus. With this incentive mechanism, those network participants with the greatest stake in the network are obliged to ensure that consensus is reached. If they do not succeed, their stake in the network is lost. Unlike proof of work, the focus here is on punishment (negative incentive). 

 Which incentive mechanism is better?

Proof-of-work requires enormous computing power and high power consumption – Bitcoin is repeatedly criticized for this. Although the proof-of-stake approach requires much less power, there are justified doubts as to whether this concept is stable in the long term. 

 What are nodes? 

Nodes are the computers connected to the bitcoin network. Nodes have a say in the ongoing debate about what the bitcoin network should be like. 

What are forks?

If the participants in the network cannot agree on a change regarding the source code of a blockchain that is supported by everyone, a fork (in ideas, codes, systems) may occur.  

What is a soft fork?

The softfork is the light version of a fork and refers to any change to the source code that is downward compatible. Using a concrete example, if a block chain, whose blocks were previously 1MB in size, changes to a block size of 500KB, it is a soft fork. The new rule does not conflict with the old rule, because 500KB is less than 1MB. Old blocks still accept the new ones. 

 What is a hardfork?

Hardfork describes a protocol change that is not backward compatible; for example if the block size is changed from 1 to 2 MB. The hardfork thus includes an extension of the rules that cannot be fulfilled by the old blocks, hence, a split-off occurs. In such a hardfork situation, all users with the new software are separated from those with the outdated software. After a hardfork, all users must use the current version of the software to ensure that the new blocks are also recognized. The best known fork is “bitcoin cash”, which has split from bitcoin. 

Is there an analogy to these splitting scenarios?

Imagine the blockchain as a large restaurant that is collectively run. There is no central authority that can enforce decisions on its own. At the beginning, the restaurant only serves vegetarian dishes. If the chefs decide to cook only dishes with meat from now on, it is like a hardfork. Existing customers must either accept these meat dishes or find a new restaurant. An example of a soft fork would be if the chefs decided to have a completely vegan kitchen. In this case, vegetarians could continue to visit the restaurant. 

What are altcoins?

Since bitcoin was the first functioning crypto-currency, it became the epitome of crypto-currencies. Meanwhile, there are hundreds of alternatives, which are summarized under the term “altcoins”. Sometimes the “alternative coins” are also called “alts”. 

Why do we need altcoins?

Bitcoin can be seen as a solution for a specific problem. Altcoins also have a very specific purpose. Some are. used in the area of financial transactions, currencies or finance, others want to improve supply chains (Modum or Civic), decentralize media (Decent) or make the health sector more efficient (Bowhead Health). 

What is an ICO?

ICO stands for Initial Coin Offering and is the digital alternative to a classic IPO (Initial Public Offering). An ICO gives a start-up the opportunity to collect money from investors in an uncomplicated way and with low fees. The conventional, highly regulated process of raising capital can thus be circumvented. 

How does an ICO work?

In an ICO, investors send ether or bitcoin or sometimes other crypto-currencies to a smart contract and receive tokens from the company in return. This exchange can be programmed as desired, usually in the form of an auction. If the targeted amount is not reached, the tokens are returned to the investors – the ICO is considered to have failed. 

What distinguishes an ICO from an IPO?

Tokens purchased by investors differ from ordinary securities in that they do not represent a securitised claim to ownership. Strictly speaking, the term “ICO” is somewhat misleading. Tokens are something like digital vouchers that could in principle be redeemed for shares, but there is no enforceable legal claim to them. Moreover, ICOs are currently hardly regulated at all.