Cryptocurrency: A Beginner’s Guide

Disclaimer: The material is for general information only and does not constitute investment, tax, legal or other forms of advice.

Note: If you are interested in technological innovation and the financial market, you are welcome to contact me through email: runbang@connect.hku.hk. Exchanging ideas can always deepen our understanding of the world.

The recent surge of Bitcoin price attracted people’s attention. Some may say: ‘The surge is of no difference compared to that in 2017’. Surely, it is legitimate to cast doubts on new things, especially assets like cryptocurrency which were usually related to crime and fraud. However, the profit is always symmetric to the risk: Cryptocurrency might be a bubble, but it could also probably be the bridge to a decentralized future. No matter what it turns out to be, understanding cryptocurrency is beneficial to everyone who has the enthusiasm to catch up with the fast-changing world.

As a beginner’s guide, this article will introduce the general ‘architecture’ of the cryptocurrency ‘industry’ along with the attributes of each ‘module’, but not any technical details. I will do my best to ensure it is short and concise.

Blockchain 1.0

Founded around 10 years ago by a mysterious guy Satoshi Nakamoto who had never shown up in public, Bitcoin has become the representative of Blockchain 1.0. As a relatively secure decentralized cryptocurrency, Bitcoin has a mechanism called PoW to record every transaction on the general ledger (aka. Blockchain) which is completely public to everyone, and assure it be genuine by an encryption process called ‘mining’. The transactions happen between ‘wallets’, which are in nature arbitrarily created databases each with an unique address built on a kind of specifically designed software created to store individuals’ bitcoins.

To summarize, the general concept of Bitcoin indicates a large system, which contains a public ledger, infinite wallets, and a consensus mechanism to ensure safe transactions.

You can go to Bitcoin Exchanges to trade bitcoins; However, the Exchanges only offer you ‘hot wallets’, which means your cryptocurrencies are stored on their website and they can theoretically (not legally) take all these away. To gain complete control over your Bitcoin and its likes (aka. other cryptocurrencies), you can send the coins in hot wallets to “cold wallets”, which means the wallets are non-custodian, offline, stored on your hardwares. Although cold wallets are more secure, it makes trading more difficult since it is hard to find your counterparts without a CENTRALIZED Exchange.

Blockchain 2.0.A

Although Bitcoin is a great pioneer of blockchain technology, it has some intrinsic flaws. The representative of Blockchain 2.0.A, Ethereum (ICO 2014, open-source), was mainly designed to solve one of them: the lack of financial flexibility.

Blockchain 2.0.A is my self-made terminology to help readers understand the framework of Blockchain development, which represents a series of technological innovations of blockchain mainly focused on the financial aspect. Ethereum improved the Blockchain 1.0 mainly by allowing smart contracts. It has thus enabled an ecosystem of DeFi (Decentralized Finance) including UniSwap, AAVE, etc. Through this ecosystem, people can do things more than just simply transecting, such as lending loans, trading with decentralized Exchange, etc.

Blockchain 2.0.B

Although Ethereum has refined Bitcoin by improving its financial ability, it still relies on the PoW consensus mechanism used in Bitcoin. This mechanism is dull and costly, because ‘mining’ requires many computers to ‘burn the electricity to solve dull mathematical problems’, which means it can waste a huge amount of energy. Therefore, Blockchains represented by Cardano (with cryptocurrency named ADA, ICO 2017, open-source) were invented.

Cardano adopts a new consensus mechanism called PoS, which can significantly reduce the cost of energy. Under the PoS framework, ‘mining’ becomes unnecessary. The technical details are omitted here.

There are some other key improvements in Cardano compared to Etheruem (and also in Ethereum compared to Bitcoin) such as scalability, but won’t be discussed here since they are rather trivial.

Blockchain 3.0

The trend of the development of Blockchain is clear: a combination of Blockchain 2.0.A and 2.0.B. As announced by the developer teams, Ethereum is seeking for Ethereum 2.0, which turns to PoS mechanism. Also, Cordano is trying to build its own DeFi ecosystem. Blockchain is still far from its complete form.

Prospect

I deem Blockchain as an instrument of the Decentralism (self-made terminology) movement. As the technology develops, ordinary people are suffering more and more from the control of ‘centre’. We are using centralized network services such as Google and Facebook, thus surveilled; we are using centralized finance, thus subject to the policies made by institutions without any right to object; we are being sent to centralized schools, which teach us centralized, uniform, homogenized knowledge. All these, are severely harming the spiritual and material independence of individuals. Therefore, decentralists are now trying to develop instruments for a decentralized society, and Blockchain is one of the representatives. As the distrust of the Centre continues to grow, Blockchain will surely thrive.

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