Crypto and Blockchain for Beginners: The Ultimate Guide

Blockchain is the word on everyone’s lips these days. Of course, blockchain is best known as the engine, or software, behind digital currency - otherwise known as cryptocurrency.  Blockchain technology is used by millions of people daily for the use of payments, transfers and transactions. But blockchain isn’t only about sending and receiving money! Far from it. It is important to understand about the use of blockchain as you will ultimately become the beneficiary of all its benefits, and if you were not aware of all those benefits, now is the time to start learning.

Blockchain is a digital ledger that is run by a network of computers working in a Peer-to-Peer (P2P)configuration.

This means it is a collection of data and transactions that are stored and processed by computers around the world, all working together.

This configuration uses the network of computers and cryptography to create a system that is secure,

transparent and at the same time anonymous (don’t worry if this doesn’t make sense right now. We will explain it all in detail in this course).

Decentralization is the main factor with regards to the security of the blockchain.

Decentralization means that instead of one centralized server holding all of the information, there are many computers around the world that store a copy of this information.

All of the data that is broadcast to the blockchain is put into blocks, which are subsequently linked to the previous block, creating a chronological order of blocks – or a ‘blockchain’.

This chronological order of transactions is immutable, meaning that once something is broadcast and recorded on the blockchain, it cannot be altered.

All of the information about transactions on the blockchain is transparent and public, except for the users’ personal information and the contents of their messages.

This means that although all of the transactions are easily seen, the individuals who made the transactions are completely anonymous (the users are only identified by usernames or user IDs).

Cryptography is a mathematical practice used to keep data hidden from third parties.

This practice uses complex mathematical processes to encrypt information and keep it away from prying eyes, and these encryptions can only be decrypted by using certain keys.

Blockchain offers speed, security, anonymity and accessibility among other advantages.

The new possibilities presented by blockchain technology can make the world a better and more efficient place. Businesses could be more effective, faster and autonomous. People can transact with others across the world in seconds and data can be kept safe. And it doesn’t end with that since new possibilities are found almost every day.

A lot of sources connect the birth of blockchain with the invention of Bitcoin, but in reality, while Bitcoin incorporated all of the concepts and created a functioning system, the concepts and technologies behind it were described long before Bitcoin was born.

A few years later, in 1995 one of David Chaum’s former employees, cryptographer Nick Szabo, came up with the idea of smart contracts.

Smart contracts are essentially contracts that work on the blockchain.

Satoshi Nakamoto published a white-paper called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ in 2008, describing the idea behind Bitcoin – electronic currency that is run on blockchain technology and that is not controlled by any central authority.

The following year, in 2009, the concept was made a reality with the creation of Bitcoin.

This marked the beginning of public blockchains and cryptocurrencies.

The main concept behind Bitcoin was that it acted as a currency for the internet, allowing users to make transactions without the need of middlemen, like banks, but that was it.

More and more new uses for the blockchain were developed, and by the year 2014, this technology advanced to the point where people could use the blockchain beyond digital currencies.

This was called Blockchain 2.0.

Blockchain is showing its usefulness in almost every sector of business, starting from the use of cryptography to seal digital documents and prove ownership, to being able to track the can of tuna throughout its journey, from sea to supermarket - from first being caught, to processing, logistics, shipping, and ending up on your plate.

From an idea on paper, to a currency that has risen from nothing to over thousands of dollars the span of 8 years, we are now able to trade different cryptocurrencies in real-time, and use cryptocurrencies to buy products in physical and online stores.

Estonia was the first country in the world to implement blockchain technology on a national basis. It started building up its information society in the year 1997. At this time, there was no digital information being collected about Estonians, and the general population had neither access to the Internet, nor devices with which to use it. After years of development, Estonia rose to the forefront of technological advancement as a nation. In 2005, Estonia introduced internet voting in a nationwide election, becoming the first country to do so. By this time, Estonia had also already developed its digital identity, e-tax and e-governance solutions.

Even though there have been over 700 million new bank accounts opened from 2011-2014, there are still over 2 billion people unbanked, meaning they don’t have access to any kind of financial institution.

Having no bank account makes having financial stability much more difficult.

You most probably have heard about Bitcoin and stories about people who got rich almost overnight with their cryptocurrency investments, or maybe you have heard how people have lost a lot of their money on crypto exchange, or have been scammed.

But what exactly are cryptocurrencies and why are some people getting a ridiculous return on investment while others lose almost all of their investment?

Cryptocurrencies are run on blockchain technology.

This means that all of the transactions are validated and recorded by the underlying network of computers.

This enables transactions to take place in milliseconds and because it doesn’t require big and expensive databases to be built, it reduces transaction fees.

“But aren’t cryptocurrencies meant for drug dealers and money launderers?”

This is usually the main reason people think twice before talking about the benefits of cryptocurrencies and anonymity.

The main concern is that, because cryptocurrency transactions are anonymous and can’t be traced back to the person of origin, it makes it perfect for criminals to send and receive money for their criminal activities, without having the fear of getting caught.

Or does it?

In order to make transactions, the money and the information has to be encrypted so no-one other than the recipient has access to receive this money or use the information sent.

This is where the public and private keys come into play.

Now you might be wondering, what are coins, what are tokens and what’s the difference?

The value of cryptocurrencies are based on the supply and demand of the marketplace.

If there are a lot of people selling, but not a lot of people buying, then the price drops.

When there are a lot of people wanting to buy, but there are no sellers, then the price increases.

The same thing applies to traditional FIAT currencies (government issued monies like USD, EUR or CNY, but what makes the cryptocurrency market so volatile?

“Wow, cryptocurrencies seem like fun!

How can I create my own?”

Bitcoin is the world’s first cryptocurrency, described in 2008 by an unknown person or a group called Satoshi Nakamoto.

The purpose of Bitcoin is to become an alternative to traditional payment solutions, offering worldwide payments incredibly fast and cheap, without having a central authority, like the bank, controlling the transactions.

Ether is one of the top cryptocurrencies, proposed by Vitalik Buterin in 2013, as a next step in cryptocurrencies and blockchain.

Ethereum is a blockchain-based, open-source smart contract platform.

Ripple is the world’s first enterprise blockchain solution for global payments.

It connects banks, payment providers, digital asset exchanges and more through its network to provide frictionless global payments.

Bitcoin Cash is a Bitcoin hard-fork that happened on the 1st of August, 2017.

The fork was initiated because of scalability issues with the classic Bitcoin.

Bitcoin Cash changed the size of the blocks from 1MB to 8MB, making it possible to process roughly around 60 transactions per second, compared to the 7 transactions per second by the classic Bitcoin, including the SegWit update.

Cardano is considered a 3rd generation cryptocurrency, led by one of the founders of Ethereum, Charles Hoskinson.

Cardano is a smart contract platform like Ethereum, but takes the idea to a new level by trying to solve issues with scalability, interoperability and sustainability of current cryptocurrencies.

Litecoin is a cryptocurrency that like Bitcoin, offers peerto-peer, near-instant, and almost zero cost payments to anyone in the world.

Created by Charlie Lee who has worked for Google and Coinbase, Litecoin is an open source global payment network that is fully decentralized without any central authority.

The network is secured by cryptography and emPoWers individuals to control their own finances.

NEO is a blockchain platform and cryptocurrency which enables the development of digital assets and smart contracts.

The project was founded by Da Hongfei in 2014 in China.

The project was initially named AntShares, but later it was renamed to NEO.

NEO is quite similar to Ethereum. Both of them strive to create an ecosystem of decentralized applications (DApps), ICOs and smart contracts.

Stellar is an open-source protocol for exchanging money founded by Jed McCaleb and Joyce Kim in early 2014.

Stellar was initially based on Ripple systems, with the aim of redesigning the global economy for more inclusiveness.

But citing the complexity of the system, Stellar later redesigned itself with a brand new system of its own.

Monero is an open-source cryptocurrency created in April 2014 that focuses on privacy and decentralization.

Monero aims to improve on existing cryptocurrency design by obscuring the sender, the recipient and the amount of every transaction made, as well as making the mining process more equal.

EOS is a blockchain-based, decentralized operating system, designed to support commercial-scale decentralized applications by providing all of the necessary core functionality, enabling businesses to build blockchain applications in a way similar to web based applications.

One of the co-founders of EOS is Dan Laimer, who has previously developed BitShares, Steemit and invented the Delegated Proof-of-Stake consensus algorithm (which is used in both, BitShares and EOS).

Dash is a peer-to-peer open-source cryptocurrency like Bitcoin, acting as digital cash that can be sent without the need for middlemen like the bank.

Dash was created by Evan Duffield and launched on the 18th of January, 2014 as a fork of Litecoin.

IOTA is a next generation public distributed ledger that, unlike other cryptocurrencies that utilize blockchain, uses a novel technological approach called the “Tangle”.

The Tangle is a new data structure based on a Directed Acyclic Graph (DAG).

The New Economy Movement (NEM) is an enterprise-grade solution created to power the impending blockchain economy,

focused on creating a smart asset blockchain which could effectively work under heavy workloads.

The natural habitat of cryptocurrencies is the internet.

There are more and more online stores accepting cryptocurrencies as a payment method and that is just the beginning.

Ethereum is a blockchain-based, open-source, smart contract platform, meaning that while the early cryptocurrencies, like Bitcoin, acted only as a store of value that could be transacted with, Ethereum allows users to create smart contracts, issue their own tokens, and run decentralized apps (DApps), making it possible to do a lot more things on the blockchain than before.

Sending gas is a sacrificial ritual to the Ethereum gods (otherwise known as miners) who make it possible for mere mortals to use the magical powers of the Ethereum blockchain.

Gas price is the value of one unit of gas.

So, if anyone can change the gas price, why would someone want to increase it, when they can just keep it low?

When miners set up their mining operations they create a set of rules for it.

They can define the minimum gas price of transactions that they’ll add to their blocks.

Setting a threshold for the gas price allows miners to only concentrate on profitable transactions, maximizing their profits.

Now let’s quickly illustrate how gas is calculated and spent.

Like we said before, all of the unmined/pending transactions are in a pool, waiting for their time to be added to blocks.

During normal times everything works just fine, and the amount of new transactions being broadcast to the pool is around the same as the number of transactions getting mined and added into blocks.

But during hectic periods, like ICOs, or when someone creates an app that uses a lot of micro-transactions, like CryptoKitties, then the network can clog up quite fast.

One of the most popular use cases for Ethereum is issuing your own token and launching an ICO.

Tokens created on Ethereum are called ERC20 tokens.

These tokens, as well as their ICOs, are based on Ethereum’s smart contracts.

Smart contracts are contracts that work on blockchain technology.

In its essence, a smart contract is a software program that contains an “If-This-Then-That” function, meaning if something happens on a smart contract, it triggers another action.

Smart contracts are programs that trigger certain actions once they are acted upon, or not.

This idea is nothing new – contracts have been around for a long time and automation is also nothing revolutionary.

Smart contracts tie both of them together and put them onto the blockchain.

Automation, trust, speed are only few benefits in the list.

To illustrate how smart contracts can be used in the real world, let’s use an example.

One of the best use cases for smart contracts is the voting process.

Governments can create a smart contract so that instead of citizens waiting in lines to cast their vote, they can cast their vote via their phones or computers.

Another thing that can be improved upon is record keeping.

You can be the boss of your personal information by being able to give and remove access to your data through smart contracts.

Of course there is banking.

Like we mentioned before, currently, many people have to trust their money to a bank.

You have to hope that the bank does not misplace, mismanage or steal your money, and that the transactions you make do in fact reach the right person.

Plus, you have to trust that the bank’s servers don’t get hacked.

One of the main tools used to make blockchains secure is called cryptography.

Cryptography is the practice of secret communication in the presence of third parties.

It uses mathematical algorithms to encrypt information in a way that resembles complete nonsense.

Cryptographic practices are used daily, from sending sensitive information between you and your friend to planning military tactics.

Cryptography is in use everywhere, every day, such as with your Smart Phone, online bank account and email.

But how does it work?

Encryption algorithms work with keys to secure data that has been encrypted.

These keys give permission to users to encrypt and decrypt data.

Keys are usually very long numbers which are combined with the data one wants to hide and then encrypted.

The first type of cryptography is called symmetrical cryptography because it uses just one key.

This key can be used for both encryption and decryption.

To solve this problem you could use asymmetrical cryptography, which uses two separate keys for locking and unlocking the data.

These keys are called public and private keys.

This method can be used to solve the problem we talked about with the conventional keys, as it removes the need for sharing one key that can both open and close the lock

One other cryptographic function related to blockchain is called hashing.

Hashing is a kind of cryptography.

The information stored in the blocks is secured and stored as a big string of numbers called a hash or hash value, which can never be changed.

Multi Signature Cryptography means that instead of one public and one private key, you can have multiple sets of keys.

This creates many new opportunities in terms of security, accessibility and flexibility.

Different kinds of cryptographic functions can also be used together to produce certain results.

For example, as previously explained, you can hash the ownership document of your house and before storing it on the blockchain, you can encrypt it with your private key, authenticating that this is the hash of the correct document.

If you have been keeping track of the news surrounding blockchain and cryptocurrencies, you probably have heard about ITOs or ICOs.

These stand for Initial Token Offering (ITO) and Initial Coin Offering (ICO).

Now if these ITOs/ICOs are such win-win situations, then why are some countries banning them?

One of the tricks that scammers use with great success is called phishing,

which means that they create fake ICO websites and campaigns to trick reckless investors to send their funds to the scammers’ wallets.

If investors are not careful they can easily fall for these kinds of schemes.

Is the information about the team public and transparent, or is the team anonymous?

Does their whitepaper explain everything about their project?

Are there people talking about the project and engaging in communities?

Are you ready to lose all of your investment?

Imagine a group of strangers.

They don’t know anything about each other, and the only thing that they all have in common is that they have realized that keeping their money in one centralized place, like a bank, is perhaps not the smartest idea.

After all, banks can get hacked, as they have been many times before.

In addition, this group of strangers are tired of the high banking fees added to their transactions and they want a new, improved system.

So, they decide to create it on their own, on the blockchain!

In the case of any cryptocurrency, for instance Bitcoin, the nodes (or computers) in the network will first validate that an account has the amount that is needed to send, and if that amount is available, the transaction will be included in a block, which will be attached to the previous block of transactions.

Jimmy wants to send 2 bitcoin to Megan. This is how he does it.

By now you know that ‘blocks’ are the units of the blockchain and is the unit in which data is structured.

The computers that process the blocks are called miners.

All of the transactions that make up a block are run through an algorithm that produces encrypted codes, also known as hash values, to these transactions.

These hash values are combined with each other into a data structure called a Merkle Tree.

As stated, miners validate new transactions and record them on the blockchain, a global ledger,

and the solution found is called the Proof-Of-Work or PoW.

It does everything it has to do, but there are some drawbacks.

One of the main problems is that since mining requires a lot of computing power, and thus a lot of energy, it is not very environment-friendly.