Cryptocurrencies has again been on mainstream media lately with its phenomenal increase in price from the start of the year. And yet I still meet people who know very little about it. Some think that Bitcoin is the only cryptocurrency there is, while others believe that cryptocurrencies are a scam.
To remedy this, I wrote this article to give a quick summary of cryptocurrencies for total beginners. Hopefully, this helps bridge the current knowledge gap on cryptocurrencies.
To understand any subject, it is important to know how it started. Therefore, I will touch on the beginnings of cryptocurrencies.
1st Generation: Decentralisation
Cryptocurrencies were born when a person called Satoshi Nakamoto created a white paper describing a digital currency that uses encryption techniques to perform transactions. His purpose is to be able to perform decentralised financial transactions that do not require a middle man. These middle men (e.g. banks, credit card companies, remittance companies etc.) will usually charge fees. Satoshi created the first cryptocurrency to bypass the middle man and called this new digital currency “Bitcoin”.
Over the years, new cryptocurrencies appeared which improved on the original concept. However, as Bitcoin was the first, it is still the most popular cryptocurrency with some people believing that Bitcoin is synonymous to cryptocurrency. The truth is, today there are more than 5000 different cryptocurrencies out there.
2nd Generation: Smart Contracts
As time passed, people decided to improve on the design of Bitcoin by creating new cryptocurrencies that can do more than just be a store of value.
One capability added to new coins is the ability to perform transactions when certain conditions are met. For example, if a delivery on an order is performed, payment on the order can automatically be processed. This capability is called Smart Contracts and was added to the next generation of cryptocurrencies like Ethereum.
3rd Generation: Proof of Stake
As cryptocurrencies gained in popularity, the number of servers processing transactions for these coins increased. This brought about a realisation that the energy consumption for validating transactions needed to improve as too much electricity was being wasted.
The method of assigning nodes to build blocks is called the consensus mechanism. The traditional consensus mechanism used by Bitcoin and Ethereum is called “Proof of Work”. This is because the fastest node that solves a complex math needs to show the proof of its computation in order to be assigned to build blocks. Since all nodes attempt to perform the computation with only one winner, a massive amount of electricity is wasted.
A new consensus mechanism called “Proof of Stake” aims to solve this waste of energy by assigning nodes that will build blocks beforehand. This means that only the node that needs to build a block is actually processing, thus saving a lot of electricity as all other nodes are mostly idle. Nodes are assigned according to how much coins are delegated to it (stake). The more stake it has, the bigger the chances for it to be assigned to mint a block.
Another advantage of Proof of Stake is you can earn rewards in terms of coins by delegating/staking your coins to a stake pool. Note that you only assign your coins’ voting power to the stake pool and you still have full control of your coins and can sell them at any time. On average, you get interest of around 4 to 5% of coins in a year. This is on top of any price movement your coin has had.
Cardano is one of these third generation cryptocurrencies. It is already fully decentralised and runs on Proof of Stake. It’s smart contract capability is currently in Testnet and is due to go live on Mainnet by September 2021.
The best place to see what other coins are available in the market is the Coinmarketcap.com website. As of this writing, there are more than 5,000 coins listed in Coinmarketcap with a lot more unregistered tokens created each day.
Note that some of these coins were created for no real purpose and a few were created to scam investors outright. Therefore, if you are just starting in cryptocurrencies, I suggest you limit your investments to the top 10 coins by market capitalisation first (or even top 5 only). You can keep to this strategy and still make a lot of income while being relatively safe. Go only into smaller coins after you have done extensive research.
Where to buy
Cryptocurrencies can be bought from exchanges such as Binance, Coinbase, Kraken and Kucoin. These are online websites where you can convert your fiat cash (e.g. USD) into cryptocurrencies.
How to store
It is not recommended to leave your coins in the Exchange where you bought them. This is because Exchanges may be hacked by both internal and external parties. Also, if you have Proof of Stake coins, you will not usually gain rewards unless you transfer your coins to your own wallet.
Follow your Exchange’s instructions on how to withdraw your cryptocurrencies to your own digital wallet. As you accumulate more coins, you may want to consider getting a hardware wallet like the ones from Ledger. These keep your crypto more secure as your private keys are not stored on your computer.
For a step by step guide to buy and store Cardano in particular, you can refer to this previous article I created.
This is just a quick overview of cryptocurrencies. There is still a lot to learn and I urge you to keep reading to expand your knowledge before diving in. Pay particular attention to topics on securing your assets so you stay safe as you explore the exciting world of cryptocurrencies.
If you like this article, we would greatly appreciate if you delegate your ADA to WISH Pool. You will be earning interest rewards while indirectly helping the lives of disadvantaged children. This is because WISH Pool pledges to give at least 10% of its own profit to educational charities so that successful students can help get their families out of poverty.