Crypto Basics for Dummies

As my first post I would like to cover some basic fundamentals and explain the most important crypto concepts. Let's dive in to understand what is #blockchain, #bitcoin, #ethereum, #altcoins, #DEFI and #marketcapitalization...

What Is Blockchain Technology?

To explain and understand this in simple words you first need to think of and understand the problem we have in our society. The problem is centralization and trust. Why? Because when you want to send for example money across the globe to someone else or make any type of transaction (that involves data) you need to trust a middle-man (an entity), in our case a bank or any type of service. Trust that they won't steal your money (if you have been around in the 90s you know how easy it was to lose your money to bad actors). Centralization on the other hand is a problem because an entity can go bankrupt or become bad actors ( so again you lose money or some kind of valuable data to you).

Having said that, a Blockchain is a chain of blocks which contain information. The data which is stored inside a block depends on the type of blockchain. For Example, A Bitcoin Block contains information about the Sender, Receiver, number of bitcoins to be transferred. It is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system, essentially it is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

In simpler terms think of a physical notepad where you would write down all the info about who sends what to whom, but anyone connected to the network has the same physical notepad and each page is connected to the previous one (blocks) ,and everyone can see what is being written down which makes it decentralized and trustless. Trustless because the majority of the people who check the notepad need to agree that the transactions are true and they validate this by checking if the one that sends something indeed has that something to send. Why it is safe and secure and almost impossible to hack? Because cryptography is being implemented to hide the "who sends to whom" part, and "miners" use computer power to solve complicated mathematical problems to see and validate the transactions and they get fees and rewards for that. Miners are people with a lot of computers (computing power), anyone can become a miner and validate a blockchain network, it can be Bitcoin network or Ethereum network or any other network that uses this system of validating (proof-of-work, more on this later). I am oversimplifying here... :)

What is Cryptocurrency?

So if we understood what Blockchain is then understanding what cryptocurrency is must be easy as pie. Cryptocurrency is the application of blockchain technology, it is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Think of many casinos (blockchains), in each one you have their chips (tokens) that you can use only in that specific casino (tokens would be cryptocurrency). Or think of DNA that is a record of genetic transactions and information, so we have different species (humans, dogs, bananas etc...) with different DNA sequences, same with blockchain and cryptocurrency ( we have Bitcoin, Ether, Cardano etc...).

What is Bitcoin?

Bitcoin basically is the first cryptocurrency/project to implement blockchain technology, it's the first blockchain ever created. Bitcoin is decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Remember that there are many blockchains with features that differ but on the core they all are some sort of "decentralized public ledger which is also trustless". So Bitcoin is a public ledger that is stored in blocks (think of a page of a physical ledger/notepad) and the blocks contain info about sender, receiver and the amount of bitcoins to be transferred, and this info is stored as many copies on many computers across the globe.

Good way of thinking about it is also to imagine shipping containers that contain products to be sent across the globe, when a container is filled we use another one (same with blocks which connect each new one to the exact previous one, thus a chain), bitcoin is a chain of shipping containers but for money. In Bitcoin, one block is produced every 10 minutes, and it is filled with the latest transactions. That information is sent out to all the computers connected to the network.

What is Ethereum?

Ethereum is a blockchain-based software platform that is primarily used to support the world's second-largest cryptocurrency by market capitalization after Bitcoin. Like other cryptocurrencies, Ethereum can be used for sending and receiving value globally and without a third party watching or stepping in unexpectedly. Ethereum blocks contain much more info then Bitcoin's blocks. Basically to put it simply how does eth differ from bitcoin? Well ethereum is a platform that other developers and programmers can built on their applications, ehtereum supports smart contracts. Here is crucial to understand what a smart contract is.

Smart contracts are self-executing contracts with the terms of the contract between buyer and seller directly written into lines of code. To understand better and in simpler terms imagine a vending machine, it says "put 2$, press button c, and you get a chocolate bar" and this happens automatically. Smart contracts work exactly like that but for more complicated stuff and you can use them for anything, even to make the voting system automatic and it is all trusted and verified by code. Once you write down the terms and conditions for both parties you can not change them.

So as you can understand by now ethereum except for being a cryptocurrency like bitcoin it is used by developers to build their Dapps on ethereum's blockchain and smart contracts are what power all the decentralized applications being built on the blockchain (imagine smartphone apps that run on Google's Android or Apple's iOS operating systems). The creation of ethereum and support of smart contracts is what gave birth to DEFI, next I'm gonna explain what this is. To finish you may be wondering if ehtereum is the only blockchain to provide smart contracts support and a platform to build things on it? The answer is no there are lots of blockchains that things are being built on, ehtereum though is the largest ecosystem and the most tested by time.

What is DEFI?

Defi stands for decentralized finance and are financial services with no central authority. It involves taking traditional elements of the financial system and replacing the middleman with a smart contract. We can also describe it as the merger between traditional banking services with blockchain technology. So to put it simply Defi are applications built on blockchains like ehereum or other that support smart contracts on their platforms, and those apps are focused on providing financial products. One example of such an application is AAVE that was built on ethereum, and it enables you to lend or borrow assets (money) without needing a bank or trusting anyone. Basically you just put a collateral (like ethereum cryptoccurency) inside a smart contract (aave platform) and you may borrow an amount of stablecoins (money, cryptoccurency pegged 1:1 to usd) and use that money however you wish. This is just the tip of the iceberg of what DEFI can offer. The future seems bright people !!!

What are Altcoins?

The word Altcoin came to life from the words "alternative" and "coin", forming Altcoin. Basically Altcoins are every cryptocurrency other than Bitcoin. Ethereum to this day is considered an altcoin as well :)

What is Market Capitalization?

I am going to put it in simple terms and for the cryptocurrency market, market capitalization is how much all coins of a blockchain are worth. For Example, if we take Bitcoin we know that at this time (June 2021) there are 18,737,000 bitcoins in existence with each one having a price of around 38,000$. So Bitcoin market capitalization (or market cap) would be 728,000,000,000 ( 18,737,000 x 38,000 = 728 billion $ approximately).

Why understanding market cap is important? Because price has no importance in how much up can a cryptocurrency go, it is all depended on market cap relative to Bitcoin market cap. Bitcoin until this day is the KING to all the other crypto out there, so no other crypto can be larger in market cap then bitcoin, until something flips the king in the future and takes its place.

Now imagine you having 1 apple and me having 100 oranges. Say I want that apple how much oranges would that apple be worth? If you understand here that the scarcity of apples makes it worth more than 1 orange (as there are 100 oranges) then you can surely understand why bitcoin is worth 38,000$ per one and why say ehtereum is worth 2,400$ per one. Because there are 18,000,000 bitcoins out there and 100,000,000 ethereum in existence. There are cryptocurrencies out there with 100,000,000,000 in existence worth 0.10$ per one and people trying to argue that 0.10 will be worth in a while as one bitcoin. No it won't, and you sir don't understand what market cap is.

Conclusion

Hope this first post by me will be helpful to all the new people getting into the crypto space. I tried to explain things from my point of view as simply as possible. Thank you for the read and follow me on twitter, feel free to leave me a private message there and your feedback as well. Really appreciate it. Stay cool :)