Part 1: Crypto 101
The first in my new series about Crypto, NFT's, and the upcoming Metaverse!
Part 1: The Beginning: Bitcoin
Bitcoin was created by Satoshi Nakamoto, a pseudonymous person or team who outlined the technology in a 2008 white paper. It’s an appealingly simple concept: bitcoin is digital money that allows for secure peer-to-peer transactions on the internet.
Unlike services like Venmo and PayPal, which rely on the traditional financial system for permission to transfer money and on existing debit/credit accounts, bitcoin is decentralized: any two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government, or other institution.
Every transaction involving Bitcoin is tracked on the blockchain, which is similar to a bank’s ledger, or log of customers’ funds going in and out of the bank. In simple terms, it’s a record of every transaction ever made using bitcoin.
Unlike a bank’s ledger, the Bitcoin blockchain is distributed across the entire network. No company, country, or third party is in control of it; and anyone can become part of that network and review the transactions.
There will only ever be 21 million bitcoin. This is digital money that cannot be inflated or manipulated in any way. (Ha, just kidding the whales have figured out how to move their bitcoins around and effect supply and demand).
It isn’t necessary to buy an entire bitcoin: you can buy just a fraction of one if that’s all you want or need.
Next there was: Ethereum
The Future Of Crypto
What are Stablecoins? Did you know there is already a US Dollar Coin?
USDC is a stablecoin pegged to the price of a US dollar. Its goal is to make transactions faster and cheaper than traditional payments while reducing the volatility typically associated with cryptocurrencies like Bitcoin. Stablecoins, which have their price fixed to a reserve asset (often the US dollar), are one of the most popular and versatile classes of cryptocurrency to emerge in the last few years. USD Coin (USDC), as its name would suggest, is one such dollar-pegged cryptocurrency. USDC is always redeemable on a one-to-one basis for US dollars. As of August 2021, more than $20 billion in USDC has been minted.
How does USDC work?
USDC runs on Ethereum, which is a decentralized, programmable blockchain that allows developers to create a huge range of apps and tokens. USDC was created to be a highly useful form of digital money that wouldn’t see value swing dramatically in the middle of a transaction. It is backed by dollar-denominated assets of at least equal fair value to the USDC in circulation, in segregated accounts with US regulated financial institutions. You can buy USDC via exchanges like Coinbase, and hold it in any Ethereum compatible wallet. There are no fees for transferring a US dollar to USDC. The launch of USDC was powered by a collaboration between Coinbase and Circle through the co-founding of the CENTRE Consortium.
Stablecoins like USDC have a wide range of uses. You can:
Send money cheaply and near-instantly anywhere in the world without a traditional bank account (a huge improvement over wire transfers which can be expensive and take days).
Earn rewards on USDC held in a Coinbase account.
Earn even higher yields by lending your USDC via a variety of decentralized finance (or DeFi) applications.
Think of USDC as being a programmable dollar. Being programmable unlocks a whole new world of applications and businesses: developers can create accounts to store money with one line of code; lending that is faster, cheaper, and more transparent; faster and cheaper payments, including payroll; global crowdfunding; transparent and stable donations to charity.
What’s next for USDC?
Billions of people around the world are locked out of the global economy because they don’t have bank accounts. USDC allows unbanked individuals in any country in the world to hold dollar value with nothing more than a mobile phone and a digital wallet — making USDC a crucial link between traditional finance and the blockchain-powered open financial system. It’s not necessary to buy an entire USDC — you can hold as little as 0.000001 worth of USDC.
Cardano is one of the biggest cryptocurrencies by market cap. It’s designed to be a next-gen evolution of the Ethereum idea — with a blockchain that’s a flexible, sustainable, and scalable platform for running smart contracts, which will allow the development of a wide range of decentralized finance apps, new crypto tokens, games, and more.
As of March 2021, however, smart-contract functionality has yet to be rolled out by developers. 2021 upgrades included unlocked smart-contract features, bringing Cardano one step closer to its goal of providing developers with a blockchain platform that is robust, secure, scalable, and highly energy-efficient.
Much like the Ethereum blockchain’s native cryptocurrency is ETH, the Cardano blockchain’s native cryptocurrency is ADA — which can be bought or sold via exchanges like Coinbase. Today, ADA can be used to store value (perhaps as part of your investment portfolio), to send and receive payments, and for staking and paying transaction fees on the Cardano network.
Solana is a crypto computing platform that aims to achieve high transaction speeds without sacrificing decentralization. It employs a bundle of novel approaches, including the “proof of history” mechanism. Solana’s native cryptocurrency is SOL, which is used to pay transaction fees and for staking. It also gives holders the right to vote in future upgrades.
In August 2021, prices for SOL — the cryptocurrency that helps power the smart-contract-compatible Ethereum competitor Solana — suddenly spiked from around $30 at the beginning of the month to around $75 three weeks in, drawing mainstream attention to the altcoin.
SOL got a boost from one of the biggest crypto trends of the summer: the launch of a primate-themed NFT collectible project. Specifically, the Degenerate Ape Academy NFTs, the first major NFT project to launch on the Solana blockchain. But what exactly is Solana?
Like Ethereum, Solana is both a cryptocurrency and a flexible platform for running crypto apps — everything from Degenerate Apes to the Serum decentralized exchange (or DEX). Its major innovation is speed, via a bundle of new technologies including a consensus mechanism called proof of history. Solana can process around 50,000 transactions per second — compared to 15 or less for Ethereum (the ETH2 upgrade, which is currently underway, is designed to make Ethereum much faster than it is now).
Because Solana is so fast, congestion and fees remain low. Developers hope high speeds and low fees will eventually enable Solana to scale to compete with centralized payment processors like Visa. Solana’s native cryptocurrency is SOL. It’s used to pay transaction fees and for staking. SOL is available to buy and sell via exchanges like Coinbase.
What makes Solana unique?
When Bitcoin was invented more than a decade ago, it solved a really tricky problem: how to make it possible for strangers anywhere in the world to make financial transactions over the internet without a payment processor like Visa or PayPal in the middle.
The technology that makes decentralized transactions possible — and which created the whole universe of cryptocurrencies we now know — is called a blockchain. But blockchains typically have one major downside compared to centralized networks like the ones credit-card companies use: they’re slow. As of August 2021, Ethereum typically processes fewer than 15 transactions per second, compared to tens of thousands for Visa’s network.
Solana is one of many new crypto solutions aiming to make crypto networks faster and more scalable. It uses a suite of clever technologies, including a novel mechanism called “proof of history.”
What is proof of history?
As you may know, Bitcoin uses a consensus mechanism called proof of work, which uses miners to validate transactions and produce new BTC. Many newer cryptocurrencies, like Cardano, use a consensus mechanism called proof of stake — in which network participants “stake” their own crypto to get a chance to validate transactions and earn newly minted crypto and fees.
In either case, all the computers in the network need to come to a consensus on certain facts — including when a transaction took place. Solana uses a combination of proof of stake and a new mechanism called “proof of history.” Proof of history is designed to keep time between computers on a decentralized network without all the computers having to communicate about it and come to an agreement. Here’s how it works:
In the Bitcoin network, for instance, miners perform the critical role of timestamping transactions, which are then bundled into blocks, which are confirmed by the entire network of computers every ten minutes. In the proof of history whitepaper, the technology’s creator notes that “some argue that Bitcoin’s Proof of Work algorithm’s most essential feature is functioning as a decentralized clock for the system.”
In a centralized system, this clock doesn’t exist because the computers can all trust that timestamps are accurate. Proof of history, on the other hand, is similar to the way that Reddit AMA participants often take a photo with today’s issue of the newspaper. As the technology’s creator puts it, proof of history creates “a historical record that proves that an event has occurred at a specific moment in time.”
As the blockchain infrastructure experts at Bison Trails describe it: "This process is profoundly different from every other blockchain in which block producers (validators) must communicate with each other to produce blocks and synchronize the state of the network. Solana side-steps this communication requirement and, therefore, can produce blocks much faster: the key to handling more transactions as the network scales."
How does staking work with Solana?
The computers that secure the network are called validators. Participants stake their own SOL to become a validator, in exchange for a chance at earning new SOL and a cut of fees. (Becoming a validator also requires a fairly high level of technical knowhow.) SOL also serves as a “governance token,” meaning that holders also are able to vote on future upgrades and governance proposals that are submitted by the Solana community.
What kinds of applications run on Solana?
Like Ethereum, Solana is a computing platform that can interact with smart contracts. Smart contracts power a wide range of applications, from NFT markets and DeFi to games and decentralized lotteries. As of August 2021, many of the most popular Solana applications are DEXs and lending apps. The crypto app ecosystem on Solana supports billions of dollars worth of assets. One reason a user might choose an app that runs on Solana over, say, Ethereum, is that speeds are high and congestion is low — resulting in very low fees.
The Solana blockchain can also support stablecoins and wrapped assets. As of August 2021, over $700 million worth of USD Coin has been issued on Solana. (USDC’s launch was powered by a collaboration between Coinbase and Circle through the co-founding of the CENTRE Consortium.)
There are, of course, risks associated with emerging crypto applications and technologies, from extreme volatility to the potential for undiscovered smart-c. Especially as a beginner, don’t risk money you can’t afford to lose.
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Next in the Series: Part 2: Crypto Wallets