The blockchain, crypto and fintech industries are among some of the most exciting emerging spaces we are seeing in the world today. Brave thought-leaders are developing new projects, platforms and technological innovations that are transforming society around us, by solving some of its biggest problems.
Allow us to deep dive into some of the most important things you should know about blockchain and the impact this technology has on our collective futures.
What is blockchain?
Blockchain is a system of recording information in a way that makes it difficult or impossible to hack, cheat or change a system. A blockchain is a distributed ledger of transactions that is duplicated and then distributed across a network of computers.
Every time a new transaction occurs on the blockchain, a record is added to all participants’ ledgers within the network. As it is decentralised among a large number of participants, it allows for a group consensus who agree on a transaction, rather than a centralised database that lacks transparency. No one person is in charge.
In a world where traditional systems, particularly finance, are showing evidence of flaws, cracks and bubbles that impact individuals the most, this technology allows businesses, institutions and users to have greater trust.
There are varying use cases of this technology in action. Supply chains, for example, have long struggled with opacity. Food fraud or counterfeit products are very prevalent in our society today and supply chains on blockchains allow greater transparency and accountability for products from their fruition to end-user.
We see companies taking advantage of this technology as a solution to existing problems where intermediaries or middlemen take a large cut of profits. We see charities using blockchain to ensure donations can directly go from donor to beneficiary.
We see opportunities for voting transparency, peer-to-peer collateral trading and greater data security where personal information is locked via blockchain’s secure encryption mechanisms where computers, rather than humans, confirm transactions or interactions.
In the healthcare industry, healthcare providers use blockchain to securely store medical records which are encoded and only accessible by certain individuals, ensuring privacy. We are also seeing greater freedom for remittances and transnational transfers across borders, minus unnecessary intermediaries. The future of blockchain is bright.
History of Satoshi
How did blockchain come into existence? In 2008, the mysterious Satoshi (a pseudonym) published a paper in 2008 that jump-started the development of cryptocurrency. For a cryptocurrency to be created or transacted, all participating computers on a network, referred to as a “miner”, solve a mathematical puzzle that helps to verify transactions, then adds them to a blockchain ledger.
The first miner to solve the puzzle is rewarded with a small amount of crypto for its efforts. In 2008, Satoshi wrote about using a peer-to-peer network as a solution to the problem of double-spending where a digital currency or token could be duplicated in multiple currencies.
Solving this problem traditionally requires a third party to confirm double-spending has not taken place. Satoshi’s decentralized approach creates a historical record confirmed by all those on the network, meaning a bad actor cannot gain enough control of the system to write the ledger to their own advantage.
The last correspondence anyone had with Satoshi was an email to a bitcoin developer and while there has been speculation of their identity, this detail has never been confirmed.
What is Bitcoin?
Bitcoin was created not long after Satoshi’s paper. It is a digital currency that was issued in 2009 in response to the US housing market crash. Inefficiencies in traditional financial systems led to the introduction of a new form of financial interaction. Transactions using Bitcoin are made with no middle men.
New Bitcoins are created when people compete to mine bitcoins using computers to solve complex math puzzles. Bitcoins are stored in a wallet which usually exists either in the cloud, with a wallet provider, on a user’s computer or a hard-drive.
While transactions are recorded in a public log, the names of buyers and sellers are not identified, only wallet IDs. There are only 21 million Bitcoins in existence, making them in high demand.
What is Ethereum?
Ethereum is a blockchain-based software platform that was innovated following the development of Bitcoin. Ethereum is the second-largest crypto by market capitalization. Often referred to as a “world computer”, the platform was proposed in 2013 by Vitalik Buterin. It was invented to replace internet third parties who store data or keep track of transactions and financial instruments.
Similar, but different to Bitcoin, complex puzzles are solved by miners who gain a reward in Ether. The network is different to Bitcoin in that it has been built with an intention for companies to build apps on top of the network.
The Ethereum blockchain has been designed so that transactions take place only when specific conditions have been met. These rules are known as ‘smart contracts’. When a contract (built with code) is written, no one can change it. You don’t need to trust anyone on the network. Action on the network will only take place when the conditions of the contract are met.
What are dApps?
Decentralized applications (also known as dApps) are applications that run on top of a blockchain. These dApps use the coding language Solidity. Many of these dApps being built are providing solutions to many of the problems we face today. They are being used for decentralized finance, decentralized real estate and much more.
Because they are decentralized and open source, the smart contracts that run the programs facilitate, verify or enforce the agreement. It functions on a if, then logic, and no intermediary or middleman is needed.
What are Altcoins?
Altcoins were launched after the great success of Bitcoin. There are more than 5,000 cryptocurrencies, many of which are trying to overcome some of the limitations of Bitcoin. Bitcoin has a reputation for volatility, but its fruition led to the development of altcoins like stablecoins or security tokens.
Stablecoins, for example, seek to improve volatility by creating a digital currency that is backed and tied to the value of existing currencies. Security tokens are linked to a business and resemble traditional stocks. They usually offer a dividend of a business.
Other Altcoins, like Litecoin, were introduced not long after Bitcoin and allow additions to the existing structure. Litecoin allows mining transactions to be approved quicker than Bitcoin. Other coins include Monero, a privacy coin and XRP, a digital asset built for remittances that can settle transactions in 3-5 seconds.
How to buy, sell and trade Bitcoin
Most people are very well aware now that Bitcoin is a considerable investment within a portfolio, with its anti-inflationary model and increasing demand from across the globe. To get some, you basically need to use an exchange to buy and sell, as well as a wallet to store it securely.
Firstly, choose an exchange. There are many reputable exchange providers, some not so much. FTX, Binance and Coinbase are some of the most commonly used cryptocurrency exchanges. Open an account on the exchange, verify your identity, deposit money into your account, and if you’re looking to trade, open your first position on the exchange.
Most people who access Bitcoin choose to hold onto it, or HODL, as referred to in the crypto community. This is because many believe the price will ultimately rise. Other traders choose to buy and sell Bitcoin in the short term when they see that a profit can be made.
There are a number of main strategies for trading Bitcoin and other digital assets. Day trading involves doing multiple trades in a day. Scalping is where traders will make the most of small price changes.
Swing trading is where traders take advantage of the natural swing of price cycles. When they identify a particular price movement, they enter the trade and when the movement fades out, they take the profit.
Many swing traders hold these positions for longer-term, often weeks or months until they reach the ideal result.
Analysing methods for trading: Fundamental and Technical
There are two key ways to predict the movement of Bitcoin and other assets. Fundamental takes into consideration the industry, news about Bitcoin, world regulations and many other issues and developments that may increase the price.
Technical analysis involves looking at market statistics, the history, trading volumes and the trends taking place, then making a decision based on that information. Neither truly guarantees success, but both should be taken into account.
Terms you should know
On a trading platform, buyers and sellers are automatically matched. If you choose to use a Bitcoin broker, Bitcoin will be sent to you directly.
An Order Book is a complete list of both buy and sell order, viewable on your trading platform. Buy orders are also known as bids, and selling orders are also known as asks. The terms high and low refer to the highest and the lowest prices seen within 24 hours.
Volume refers to the number of overall coins traded in a timeframe which can be used to analyse the amount of interest, or the trend in an asset. A strong trend is signified by high volumes and a low trend signifies low volumes.
If there is a sudden change of direction in price, you can look at the size of the trading volume to tell if it is a small correction or a new trend has been introduced.
A Market Order is set on a trading platform and fulfilled usually immediately. The platform will identify the best sell for execution. Often your order is met by multiple people at different prices. So if you order 3 Bitcoins, your order will present the 3 cheapest trades available, so they may not all be the same price.
You stop selling or buying when the amount requested is reached, but this search means you might pay more or less.
A Limit Order enables you to buy or sell at the specific price you want. This doesn’t always guarantee your order however, as it depends on where your trade can be matched by a market maker.
A Stop-Loss Order is a price you’d like to sell at in the future. This is a common strategy for avoiding a loss in case the price suddenly drops. So if the price drops by a certain amount, you can request selling at that specific price. When the price reaches the chosen stop price, the market sells your coins at any price until the sell is fulfilled.
Taker and Maker fees are the fees added to when you make or take an order. Exchanges want more people to trade, so if you request an order, such as Bitcoin at $34,000 but there’s no market maker available, you will pay a smaller fee because you’re adding more trade to the market.
If you request an order at $37,000 instead and someone can match you, you can take the asset and you pay a larger taker fee, because you’re taking a match from the market, and the exchange would prefer to have more matches than less.
What is a crypto wallet?
Crypto wallets are essential for crypto trading. Exchanges are sometimes prone to being attacked or hacked, so having a secure wallet will ensure you can protect your new shiny digital assets.
A wallet is a public address where your funds are sent, and a private key is used to unlock your funds and send Bitcoin to other people. There are various different wallets you can use, some more safe than others.
Mobile: this is an app on your phone and can be used to pay for things directly. It is good when using assets regularly, but apps are vulnerable to hackers.
Web: a web wallet stores your assets on an online service that are usually controlled by a third party, like a cryptocurrency exchange. These are at risk of hackers, or the third party may risk the loss of your assets.
Desktop wallet: these wallets can be downloaded on your computer so that your private key can be stored on a hard drive. They are more secure than a third-party but as they are connected to the internet, they can still be attacked by hackers.
Hardware: this is the most widely used form of wallet. They are secure hardware devices that store your keys, and when disconnected via USB, they aren’t prone to being digitally hacked.
Paper wallets: a little more old-school, paper wallets involve printing off your public address and private code in the form of a QR code you can scan.
How to choose the right wallet?
Before purchasing a hardware wallet or using an online wallet, do some research into:
- The company’s security history
- How powerful the company is at preventing hackers
- How easy the wallet is to use
- Whether the wallet fits with your lifestyle
What is DeFi?
DeFi is a very new, nascent and exciting development in the blockchain and cryptocurrency space. DeFi, or decentralized finance, refers to financial services using smart contracts instead of intermediaries.
DeFi is widely hailed as the answer to the 2008 financial crisis, where poor decision making and financial regulation crashed the world’s economy. DeFi is when financial transactions operate on a decentralized ledger without intermediaries like legacy institutions. Today, we are seeing DeFi used for loans, insurance, margin trading, exchanges and yield farming (explained further below.)
DeFi fulfills the promise that money and payments can be accessible to anyone with the internet. Predominantly built on the Ethereum network, DeFi is considered the next revolution in disruptive financial technology.
It allows users from across the world to create stablecoins, borrow and lend cryptocurrencies and earn high interest rates that no banks can offer, exchange one asset for another or implement automated advanced investment strategies.
At the time of writing, more than US $17 Billion has been deposited into DeFi, and we’re just getting started.
What is yield farming?
One of the most popular executions of DeFi technology is yield farming. This allows you to earn a reward with cryptocurrency holding via permissionless liquidity protocols. Users can earn a passive income by allowing others to access it instead of keeping them idle.
Yield farming involved yielding rewards from staking digital assets on a network to help facilitate network liquidity. It means locking up assets and getting rewards for doing so. The liquidity providers add their funds to a liquidity pool – a smart contract containing funds. In return for providing liquidity to the pool, the providers gain a reward, usually fees generated by the DeFi platform.
What are DAOs?
A DAO, or a Decentralized Autonomous Organization, are rules governed by programmed smart contracts, publicly verifiable by everyone and working autonomously from a central authority. They are usually operated by a community who are incentivized via a token mechanism.
Rules, decisions and actions of a DAO are collectively made by the community who make a vote. DAOs have no hierarchy, unlike traditional organizations. Once deployed, it cannot be controlled by one single entity but by participants in the network. It greatly enhances open collaboration.
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