Cryptolingo
The Big Picture
Before we dive into details, let's have a look at the big picture.
Why Crypto?
1) You may be interested on an investment to protect your wealth from inflation.
2) You want to invest in something that rises in value over time.
3) You want to actively trade digital assets on world wide markets.
4) You are interested on Web III applications. Where the Internet meets Block-Chain technology.
5) You want to be up to date in state of the art computer technology.
What is Crypto?
A Cryptocurrency has three inseparable elements:
- A Digital Asset whose property can be transferred from one person to another.
- A public record of all transactions of the digital asset, called block-chain.
- A peer to peer, decentralized computer network which validates and process transactions.
- The price of the cryptocurrency is related to the size of the network, how secure it is, how widespread is around the world,
how easy is to buy and sell it, etc.
- When you buy a cryptocurrency you are investing on this computer network. You never have cryptocurrencies on your possession.
All you have are the private keys to transfer the property of the digital assets you own.
- The cryptos live on the blockchain and never leave. And there are copies of the blockchain on all the network nodes.
- The network nodes are continuously checking the integrity of the block chain database.This costs energy, equipment and maintenance.
- The network nodes are rewarded with crypto for this task. And this is the way cryptocurrency appears in the world. First the network nodes receive it
for their work securing the database and processing transactions, and then they sell it to the public.
- The only fraud you can do in cryptocurrency is to double spend the crypto. This means a user will pay with crypto, and before the payment is processed by
the network the user will spend the same crypto again.
- The network agrees to take as the valid blockchain the one that the majority of the nodes agree upon. Nodes agree by adding new blocks to the chain.
- When an error, or a fraudulent transaction is included in one of the blockchains of the network, the nodes keep a copy of it, in case it becomes the longest chain.
And they will reject it if another chain becomes longer.
- If somebody wants to make fraud, they have to be in control of the majority of network nodes. And have more computing power than the rest of the network combined.
Therefore it is unprofitable to make fraud. If anybody has the majority of the nodes of the network, they can make more money by keeping the network safe.
How to use it?
Normal users, not network nodes, will interact with the decentralized network using a software called "wallet". It keeps the private keys used to transfer the property of the cryptos.
All you ever have is your private keys, these are typically a set of 12 words that are used to generate all the crypto addresses to handle the cryptocurrency. With your 12 words you can recover all your cryptos in any place or device. Just install a wallet software, input the 12 words and the wallet recovers from the network all the associated cryptocurrencies.
Notice that you don´t “have” the cryptos in your wallet, only the private keys used to transfer them from one address to another.
You create a public address, and people can send crypto to it. Or you can transfer the crypto in one of your wallet addresses to another person, without the intervention of any third party. All transactions are final. Nobody knows that you did them.You can't complain or undo a transaction.
And: If you loose your Private Keys you loose everything. There is no way to recover it.
Where do you get them?
Unless you know somebody to send you cryptos, you will have to purchase them from a Centralized Exchange (CEX). Typically you have to register with the exchange, providing some personal information to prevent money laundering and other suspicious activities.And once you are registered and have an account with the exchange, you can buy and sell in the exchange, there are thousands of cryptocurrencies in exchanges, but they fall in two main categories exemplified by Bitcoin and Ethereum.
You can fund your account by transferring money from your bank to the exchange, and when you sell cryptocurrencies you transfer the money from the exchange to your bank account.
Some of these exchanges are world wide markets where billions of dollars change hands every day. It is a great opportunity, and a great danger as well. For this reason it is important to have a basic understanding of how cryptocurrency works, and what determines its price.
What to do with Crypto?
Some cryptos like Bitcoin are based on solid economic principles and they are digital assets in the category of commodities, like gold or silver. You can use them as a store of value, and trade them in markets.
Others like Ethereum are not meant to be money, but they are the economic incentive for the network nodes supporting a Decentralized Virtual Computer, where programs can be executed independently of third parties, in a completely trust less way. This opens the possibilities of creating many decentralized applications and gave rise to the Decentralized Finance (DeFi). Cryptos like Ethereum and many others open the way for a completely decentralized environment where users can manage their digital assets world wide, and without need of any third party involved, such as a bank or authority.
With Ethereum, you enter a whole ecosystem with thousands of cryptocurrencies, you can buy and sell these on DECENTRALIZED EXCHANGES (DEX).
The Ethereum network allows the construction of many web applications that use blockchain technology.
The integration of cryptocurrency technology and the Internet is called the Web III
When to buy?
You will often hear: Buy when the price is low, sell when the price is high. However there is no clear way to know when the price is high or low.
The best approach so far is to adopt a long term plan based on Bitcoin price cycles, which are dominated by the Bitcoin mining supply. Basically every four years the mining supply is cut in half, and this creates upward pressure on the price. The price rises to all time highs and then falls abruptly and continues falling sometimes even for over a year.
Bitcoin drags with it the other cryptocurrency markets, which rise and fall with bitcoin.
Another successful strategy is called DCA, Dollar Cost Average, where you buy at given intervals regardless of price, because you never know if the price is high or low.
Seasonal Tokens has introduced another way of handling the markets by creating a cryptocurrency ecosystem where you can keep increasing the number of tokens you have regardless of external market conditions. In this way you can wait for an opportunity to present when the markets are favorable.
Cryptolingo
There are thousands of cryptocurrencies in the market, and tons of information everywhere. That is why we have prepared this introduction. We will get you there as soon as possible, with hands on experiences. We will write in CAPITAL letters the key concepts in the field so you can learn the crypto-lingo on the way.
Cryptocurrency Vs Digital Money. Similarities and differences.
Before we start let’s make clear that most of the money used nowadays is digital money. Only about 8 to 10 percent of the total supply of money exists in physical form.
The normal money used by countries is called FIAT, this is the Latin for: “let it be done”. And it is called this way because this money is backed up by laws and regulations only.
Fiat can be created at will by central banks, and this is the cause of INFLATION. Bitcoin on the other hand has a limited supply of 21 Million BTC, and it requires energy and computing power to create it.So it has a real cost of production.
Fiat is the money we “have” in banks and gets transferred from one account to another using credit or debit cards, or via bank transfers.
We mention there are thousands of cryptos, but they fall in two basic types: Bitcoin-like and Ethereum-like.
- Bitcoin was designed to be like money (digital cash).
- Ethereum was designed as a decentralized virtual computer.
The Ethereum network can run programs called "smart contracts" that execute when somebody pays the fee to run them, and the conditions established in the code are fulfilled. Ether is the cryptocurrency used as economic incentive for network nodes to process, validate transactions, and run smart contracts.
There are other cryptocurrencies that can be created out of thin air like fiat, but we are not going to talk about those in these series of talks. And strongly advise you to stay away from them.
Therefore, to simplify more when we say cryptocurrency, think Bitcoin as the fundamental example.
Digital Cash:
CRYPTOCURRENCY is more like cash than the digital money used in banks.
With cash you give it directly to another person, no need of verification or approval from a central authority. The bills and coins have all the necessary proofs that they are legitimate.
Off course still can be counterfeit, but let’s leave this aside for now. On the other hand, cryptocurrency can’t be counterfeited.
Cryptocurrency behaves like digital cash. You transfer from one person to another privately and anonymously, and there is no need of a trusted third party to approve or verify the transaction.
The main feature of the Cryptocurrency technology is to eliminate the need of trusting a third party to make the transaction.
This is an unprecedented technical achievement, this is what makes cryptocurrency one of the most important technological advancements in history.
One important consequence of this is that you are the only one responsible for your cryptos, if you lose them, there is no way to recover them. Nobody knows that you had them in the first place so you can’t complain or ask for help. This is the most important thing to keep in mind, we will get back to this later on.
Crypto-Currency:
Cryptocurrency is a DIGITAL ASSET that can be used like money. The fundamental element of this technology is CRYPTOGRAPHY, and hence the name Crypto-Currency. Being a digital asset means it is something you can own.
Transactions:
From the practical point of view, a cryptocurrency, and digital money transaction look very similar. In order to see the similarities and differences, let’s imagine that Alice will send money to Bob, using digital money and using cryptocurrency.
If you don’t know Alice and Bob, means you are really new into crypto! We will talk more about them when we have a look at CRYPTOGRAPHY. Don’t be scared, you use that everyday even if you don’t know it.
Digital Money Transaction
In this transaction Alice has to log into her bank account and transfer the money to Bob’s account. Bob has provided her in advance of his bank account number.
The banking system is in charge of verifying that Alice has the required funds, and that Bob’s account exists, and updating the account balances after the transaction takes place.
This type of transaction is CENTRALIZED because the bank system has to process the transactions. Validate, approve and execute them.
The Bank acts like a TRUSTED THIRD PARTY in the transaction.
Cryptocurrency Transaction
To make this transaction Alice logs into her wallet and send the crypto to Bob. Bob has provided in advance his PUBLIC ADDRESS. This is similar to his bank account number.
So far the two transactions look very similar. However, in the digital money case the transaction was handled by the banking system. In cryptocurrency, transactions are handled by a DECENTRALIZED computer network.
A decentralized computer network is the essence of cryptocurrency, so let’s take a minute to understand the basic differences with the banking system.
PEER TO PEER NETWORK
The cryptocurrency decentralized network is a group of computers (called nodes) that talk to each other trough a special communication protocol.This is like a technical language computers use to communicate.
All nodes in the network stand on equal footing that is why it is called PEER TO PEER. Nodes can join or leave at will and this does not affect the performance of the network.
It is DECENTRALIZED because there are no nodes with special privileges, all nodes are equivalent.
Anybody around the world with the necessary equipment can be part of the network. There is no need of permissions to do that either.
The network keeps the record of all transactions in a special database called THE BLOCKCHAIN because of the way it stores the transactions in a time-stamped sequence of blocks containing many transactions.
Because any node can join or leave the network, the blockchain is a public database, any node can see all the network transactions.
Privacy is maintained because everybody can see the PUBLIC ADDRESSES but nobody knows who owns them.
If you have somebody´s public address you can use a blockchain explorer and view all transactions made by that address.
Security in a decentralized network.
In a cryptocurrency decentralized network, all nodes keep a copy of the block chain, they are updating the blockchain all the time with new transactions.
If some malicious actor wants to cheat the system introducing a different blockchain, it could do it only in some of the network nodes. As long as the majority of the nodes have the valid blockchain, any efforts to introduce a false blockchain will be discarded by the network.
You may hear at some point the term 51% ATTACK. This refers to the situation where some malicious actors have more than 50% of the nodes of the network and they can, in principle introduce another version of the blockchain.
This is very different from the banking system, where the security of the database relies on the physical security of the computers operating the system. And privacy is kept only to some extent because the bank employees know everything about your transactions.
No 51% attack has never being recorded in 15 years of Bitcoin history, and nowadays the amount of energy and resources needed to do so make it virtually impossible to do due to the way that Bitcoin has implemented the Block Chain and the Peer to Peer network.
On top of that, it is also economically unfeasible, because the only thing that a malicious node can do is to DOUBLE SPEND, meaning that you could send the same bitcoin to two different recipients.
Therefore, if somebody had enough computing power to control more than 50% of the nodes, this person would get more money by being honest than by trying to cheat the system. We will see this more closely on the Bitcoin section XYZ.
In particular, a malicious actor can´t “hack” into another person account. The Bitcoin blockchain is one of the most secure databases in the world. To understand why requires some knowledge of mathematics, but let us outline the reason why:
How secure is Bitcoin?
The security of the cryptocurrency is based on a mathematical impossibility, it is not possible to find the solution to the equations that relate the public addresses to the “master password” called PRIVATE KEY.
Some things are hard because there is not enough time, money or intelligence to do them, but in mathematics there are things that can be proven to be impossible. That is the kind of impossible we are talking about in cryptocurrency.
The weak point in any cryptocurrency technology is the human factor. The two most dangerous things in crypto are:
1) Losing your Private Keys. If this happens you loose everything.
2) Somebody steals your Private Key, if this happens this person is in control of your cryptos.
Decentralization and Cryptocurrency Mining:
For the system to be decentralized, it has to be autonomous and self sustainable, otherwise whoever pays for the system would have control over it.
The nodes join the decentralized network because it is profitable to do so.
The Bitcoin system rewards the network nodes with Bitcoin. The nodes keep updating the blockchain, and processing new transactions. But once every ten minutes on average one of the nodes receives a MINT TRANSACTION, a special type of transaction where new Bitcoins are added to the system.
This happens at random, and the network nodes keep working on adding transactions and updating the database to increase the chances of receiving a mint transaction and be rewarded with Bitcoin.
The process of updating the blockchain is called MINING, and the network nodes that work verifying transactions and adding new blocks to the database are referred to as MINERS. The constant process of verification is also referred to as PROOF OF WORK as it requires energy and computing power to do it.
Proof of work uses a lot of energy and computing power, and it gives a real cost of production to Bitcoin. In this way Bitcoin is a digital asset that behaves like a commodity.
Cryptocurrency Mining Solves Three Important Problems:
1) It is a fair way to distribute the cryptocurrency among market participants. In this way there is no need of a trusted mint, or central bank issuing the currency.
2) It rewards the nodes contributing to the functioning of the network.
3) By using energy in the process it creates a physical barrier for attackers who might want to orchestrate a 51% attack on the network.
Proof of work effectively converts energy into currency. If the system relies on human laws, good will, altruism, or any other form of agreement, it would be less secure.
Bitcoin Halving
We mentioned that there will only be 21 Million Bitcoin. This is hard coded into the source code of the Bitcoin software, and it is the main reason for Bitcoin price to rise. The absolute scarcity of Bitcoin makes is the ideal store of value.
At the same time Bitcoin comes to existence every time a miner gets a MINT TRANSACTION.
To have a finite number of Bitcoin the mining reward of Bitcoin is halved every four years on average.
So it is becoming more scarce over time, and this pushed the price further up.
The network nodes also receive tips to give priority to include transactions on a block chain.
Eventually the mining rewards will be very small and the network will live out of tips or transaction fees.
Summary of Differences between Fiat and Crypto:
- A fiat transaction is processed by the banking system.
- A cryptocurrency transaction is handled by a decentralized peer to peer network.
- Cryptocurrency is like digital cash. A Fiat digital transaction requires verification and authentication by the banking system.
- Cryptocurrency is private. Fiat is handled by the bank.
- Fiat can be created at will by the central banks causing inflation.
- Cryptocurrency like bitcoin has a limited supply.
- Cryptocurrency is international.
- Fiat transactions are tied to the banks.
General Background:
There are two crucial ingredients in Cryptocurrency that we use everyday in computer networks: Cryptography, and Proof of Work. Let’s take our time to review these very important ingredients of cryptocurrency technology.
Cryptography
Crypto currency is a technology based on cryptography. It will be very useful to know a few basic concepts to understand the language used in crypto.
The oldest use of cryptography is to send messages from one person to another but written in such a way that only the sender and the receiver can understand the message.
For this system to work, the sender and the receiver have to agree on a “key” to substitute the letters of the message for other set of symbols that only they know.
The sender takes the original message and applies the rules given by the “key” to convert the original message into an uninteligible message. The sender “encrypts” the message with the key.
This message can be delivered to the other person and it does not matter if others can read it, because without the “key” they can’t decipher the message.
When the receiver gets the message, he can convert it back to the original form using the same “key” that is known only for the sender and the receiver.
This is widely used in telecomunications to make sure that the information remains private even if it is being broadcaster trough a public network.
This type of cryptography requires that the sender and receiver have to agree and share the key before sending messages.
Cryptocurrency uses a different kind of cryptography that does not require the sender and the recierver to agree before sending messages.
Public and Private Key Cryptography.
Public Key cryptography involves a pair of keys:
A) A Private Key, which is supposed to be secret.
B) a Public Key, which can be shared openly.
- Information encrypted with the Public Key can only be decrypted with the corresponding Private Key.
- Information encrypted with the Private Key can only be decrypted with the corresponding Public Key.
This is very useful for creating digital signatures.
For example:
- Alice signs a document with Alice’s Private Key.
- Anybody with Alice’s Public Key can be sure that the document was signed by Alice. (Assuming she is the only person who can use Alice’s Private Key)
And secure communications:
For example:
- Bob wants to receive a secret message from Alice,
- Bob send’s Alice his Bob’s Public Key.
- Alice will use Bob’s Public Key to encrypt the message.
- The message can be sent trough a public channel and be visible to all, but only Bob can decrypt it using Bob’s Private Key.
Bob can reply to Alice as well: If Alice can decrypt the message with Bob’s Public Key, then she knows the message was created by somebody who has Bob’s Private key.
That is why it has to be really private: To make sure the message is from Bob if it was decrypted with Bob's Public key.
This method has the advantage that two unknown persons can send encrypted messages to each other by sharing their Public Keys. Public and Private Pairs of keys are the heart of cryptocurrency technology, they match each other like lock and key. Let’s illustrate how it works in Bitcoin.
Relation to Bitcoin:
Roughly speaking, in Bitcoin, your Private Key will be associated with your "wallet", The Private Key can create many associated Public Keys that will be associated with your "Bitcoin Addresses". When a new address is created it is empty, and then anybody with the address can send Bitcoin to it.
Every Bitcoin address contains either zero or some Bitcoin. Only the person who owns the private key that created the address can transfer the bitcoin in the address.
Bitcoin Transaction:
Let's suppose that Alice transfers 1 BTC to Bob.
Alice is the owner of 1 BTC in Alice’s Address 1.
Alice’s Address 1 was created with Alice’s Private Key. And only Alice can transfer the 1 BTC at that address.
Bob owns Bob’s Address 1 that was created with Bob’s Private key.
In a (oversimplified) way, a bitcoin transaction is like a document or receipt where:
1) Alice transfers the ownership of 1 BTC at Alice’s Address 1 to Bob’s Address 1.
2) Alice signs the transaction with Alice’s Private Key, authorizing the transfer from Alice’s Address 1 to Bob’s Address 1.
The fact that the transaction is signed with Alice’s Private Key proves that Alice’s agrees to transfer the property of 1 BTC to Bob.
Double Spending:
The problem with this oversimplified analogy is that Alice can transfer the property of 1 BTC at Alice’s Address 1 to more than one person.
After sending the transference to Bob, she could send another transaction to Carl (for example).
This is the problem known as DOUBLE SPENDING.
Both Bob and Carl have the proof that Alice owns 1 BTC at Alice’s Adress 1. And has agreed to transfer the property, because the transaction is signed with Alice’s Private Key.
The way to prevent this situation is to have the record of all transactions time stamped, and the first transaction that arrives is final. When a second transaction arrives spending the same Bitcoin, the transaction fails making sure that the first transaction to arrive is the valid one.
Proof of Work:
Proof of work is widely used in computer networks to avoid spam.
For example with E-Mail, every email sent requires the sender to solve a computing task that consumes energy and time. This is the Proof of Work.
For a simple message this is not a burden to the sender. But if you want to send thousands of messages, the amount of energy and time required to send them would be an obstacle. In this way Proof of Work reduces spam by making it very expensive and time consuming.
In Bitcoin:
All nodes in the Bitcoin network are validating the block-chain. Each validation consumes energy and computing time.
If, at some stage more than one version of the block-chain appear, the network allways takes the block chain with more validations as the true block chain.
In other words: The block chain that represents more energy and time is taken as the valid chain.
If a malicious actor wants to double spend some BTC, he has to create another version of the block chain, and get more validations than the “honest” block chain.
When more than one block chain appears, the network keeps track of all versions until one of them becomes the one with more validations.
Most of the network is working on the honest chain, a malicious actor has to employ more energy and computing power than the rest of the network in order for his block chain to have more validations than the honest chain.
Spending all that energy and computing resources is economically unviable.
If somebody has that much energy and computing power, he can make more money supporting the honest chain than trying to double spend and destroy the system that is creating so much profits.
Ethereum Virtual Machine
Ethereum expands beyond Bitcoin primary function as a digital currency, offering a platform for developing decentralized applications.
The Ethereum Virtual Machine runs “smart contracts”, which are programs which interact with the blockchain and execute automatically when certain conditions are met. Without third party interference, downtime, fraud, or control. Which has led to its widespread use in areas like finance, real estate, non profit organizations, and gaming.
One necessary condition for a smart contract to run is that somebody has to pay for the “gas” to run it.
The gas is a fee that the user has to pay to run a smart contract. The gas fees are related to the number of computations involved in the execution of the smart contract.
These gas fees are an economic incentive for network nodes, and also prevent a smart contract to get stuck on an infinite loop.
Ether (ETH) is the native cryptocurrency of the Ethereum platform, to reward the network nodes performing computations and validating transactions.
Coin Market Cap
This concept captures how much money is invested on a cryptocurrency.
It is the product of how many cryptos are in circulation times their price.
Hash Functions
Another piece of language so we can understand all the technical jargon in crypto.
https://xorbin.com/tools/sha256-hash-calculator
Using the Seasonal Tokens Web3 Ecosystem as a playground to learn about cryptocurrency technology, token economics, smart contracts, and cyclical trading.