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Welcome!

Crypto Curious Course
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Walk in Curious, walk out competent!

  • Welcome everybody
  • A little bit of background info about the course
  • The course duration is about two hours long
  • designed to be as interactive as possible

This course is more than two years in the making. That is to say, the earliest information gathered to make this course was sourced over two years ago, so it's really exciting to finally share it with you all.

Course Goals

  • Learn how to store cryptocurrency securely
  • Examine the mechanics behind a cryptocurrency transaction
  • Know where to look when something goes wrong
  • Explain how cryptocurrency is different than cash
  • Understand how blockchain technology may impact YOU!
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No notes for this slide.

Why Bitcoin

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Bitcoin was created for a to address lack of financial autonomy.

To start, ask a simple question. Why even bother learning about Bitcoin, blockchains, and cryptocurrencies?

The answer to this question lies in the origin of the Bitcoin network, the first blockchain.

What problem was Bitcoin looking to solve that makes it unique? Why do you need Bitcoin to achieve this goal?

In order to answer that question, you have to ask another question. Do you really have control over our own money? Do you have the ability to transact with those you want without any chance of censorship from banks, payment processors, or government entities?

Financial Freedom

Bitcoin, Ethereum and Litecoin tokens
Bitcoin can't be bailed out.
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Bitcoin allows users to have true control over their finances.

Narrative: Bitcoin is about financial freedom

Do you have financial freedom, in other words, do you have control over your own money?

That money is in a bank, right? And what if you want to do something a bank deems not ok? This isn't just some hypothetical situation. It is happening today.

Examples

Cannabis industry:

The growth of the cannabis industry in parts of the United States has come with some legal complications. While many states have made the move to legalize the recreational use of marijuana, it is still considered illegal on the federal level. This variance between the state and federal level greatly affects the ability of the cannabis industry to conduct basic business activities. Since banks fall under federal jurisdiction, they refuse to allow any cannabis-related industry to conduct any banking activity, as this would violate the federal laws they are forced to follow. The result is a very cash-heavy industry, which creates problems with security and cash flow.

Crypto purchases (2017):

2017 was a huge year for cryptocurrencies, as the price of these assets rapidly increased. Many people rushed to buy cryptocurrency, but some buyers found out that purchasing these cryptocurrencies could result in your bank account being shut down. Many purchases were just simply rejected. Buying cryptocurrency was perfectly legal, but banks treated that activity as forbidden. This wasn't simply because of legal liability, but rather a form of protectionism by the industry that cryptocurrency aimed to disrupt.

Satoshi Nakamoto

Satoshi Nakamoto
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Satoshi Nakamoto had specific motivations which led to the creation of Bitcoin.

Who is Satoshi?

Satoshi Nakamoto was the pseudonym that was used by the creator, or creators, of the Bitcoin network. A pseudonym is a false name that allows its user to remain anonymous. While no one knows Satoshi Nakamoto's true identity, there is some information that allows us some insight into his motivations in creating the Bitcoin network, the first instance of blockchain technology.

Satoshi routinely wrote on Bitcoin-focused forums, where he laid out his desire for peer-to-peer digital cash. These beliefs were summarized in the Bitcoin whitepaper, the document that introduced both Bitcoin and the concept of a blockchain.

Since we have these posts and writings from Satoshi, we can infer a few things about his beliefs and motivations that led to him creating what would become cryptocurrency.

2008-2009 Global Financial Crisis

Front page of The Times newspaper
Front Page of (The Times)
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The Global Financial Crisis heavily motivated the creation of Bitcoin.

One of Satoshi's most famous messages was one that he embedded in the very first part of the Bitcoin blockchain. Known as the Genesis Block, this message was added permanently to the network:

“Chancellor on brink of second bailout for banks”

The Times

What can we tell from this message? Well, it isn't a stretch to think that the response to the global financial crisis had something to do with Bitcoin's birth.

The Problem Bitcoin Solves

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This section explores the historical events that led to the creation of Bitcoin.

Bitcoin was a response to the 2008 global financial crisis, but in order to understand the reason bitcoin was created, you will have to dive into some relevant history.

Investment Bank Collapse

Breaking News CNN Lehman Brothers Bankrupt
Breaking News from (CNN)
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Explore the starting events of the Global Financial Crisis.

These co-mingling activities led to a tenuous economic situation which would lead to the global financial crisis just eight years later. Investment banks started going under, starting with Lehmann Brothers. Many other investment banks followed suit, collapsing the economy in terrible fashion.

Subprime Mortgage Crisis

Shock Market
Front Page of (The Wall Street Journal) and (Daily News)
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The United States housing and mortgage crisis that led to global economic turmoil was a catalyst that led to the creation of Bitcoin.

What caused these banks to collapse? A large factor was a massively inflated housing market. The middle class had bought into the dream of homeownership, the result of a fairly consistent increase in housing values. For this reason, property was considered one of the best investments to make.

This eventually created an unnatural demand, which resulted in cheap credit being offered to unqualified recipients. Traditionally, it was suggested that you place a down payment of 20% of the home's value when making that purchase. Instead of requiring this 20% down payment from borrowers, banks offered an additional loan to cover part of this down payment obligation. Instead of a 20% down payment, they only had to put up 5% to secure that extra 15%, simply for the down payment. Basically, they were getting an additional mortgage on the down payment, a practice that quickly proved unsustainable.

These bad housing investments were placed into securities, which grouped different types of investments with these unsustainable ones. The problem was that if part of the security went bad, like housing investments, the rest of the investments within the security goes bad.

This creates a domino effect of securities grouping together unrelated investments which made sure the house came tumbling down at the first sign of trouble. Investment banks began to fail, the stock market acted accordingly. Savings disappeared causing widespread panic.

Banks Declared “Too Big to Fail”

Citizens protesting bailing out of banks
Shannon Stapleton / Reuters via The Atlantic
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The United States responded by bailing out the bankers, while the average citizen saw little relief.

When it came to addressing the failures of major investors, there were two options: Let the banks go under, or bail them out. Our tax dollars ultimately went to rescuing the banks. However, the average citizen did not see much in terms of economic relief. People were treated as commodities. Adding insult to injury, many CEOs of these financial institutions actually received bonuses from the bailout funds. People wanted fairness and justice. The policies that followed the Global Financial Crisis did not deliver that. Additionally, the concept of moral hazard applies; that is, nothing changes if a mistake does not cause damage. If there are no negative consequences for the irresponsible risks made by the banks because a bailout is around the corner, will these practices really change?

Digital Uniqueness without Banks

  • Blockchain are ledgers that track transactions in a decentralized way
    • Anyone can make a database that maintains uniqueness
    • Digital uniqueness is easy for one computer to enforce
    • Maintaining transactional state across a network is much harder
  • Transactions can reprepresent the transmission of money, goods, or data
    • Retail purchase
    • Credentials
  • All transactions are time stamped, ordered, and cannot be altered (immutable)
    • Avoids repeat entries
    • Creates a digital fingerprint
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Digital uniqueness was enabled by the creation of Bitcoin. Its creation addressed if a financial system can exist without centralized action and authority.

A blockchain is a record of transactions, like a traditional ledger. These transactions can be any movement of money, goods or secure data—a purchase at a supermarket, for example, or the assignment of any government issued ID number.

Blockchain provides a cryptographically secured ordering of transactions, and uses a practice known as “triple-entry accounting”. Traditionally, both the creditor and debtor each keep their own ledger of their business transactions. Blockchain transactions come with an additional public receipt that reflects this transfer of funds. Essentially, a transparent receipt with verified details is provided to the entire network.

The History of Cryptocurrency

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This section explores the origins of cryptocurrency.

Time to go back to the 1980s for a mini history lesson about the formation of the world wide web, the base protocols of our internet.

The Web and Digital Currency

WeTeachBlockchain.org's 404 Error Page
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Examine a common error in order to introduce World Wide Web protocols.

So we're going to go back in time, way back to the 1980s. Back then, we were forming the basic layer of our internet protocols. Ever heard of “Error 404”? It's a message you get when you visit a URL that doesn't exist, but it isn't the only error that is part of these protocols.

Cash for the Internet

Error 402 payment required
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Error 402 shows that the creators of the World Wide Web protocols had considered the concept of a digital currency.

Has anyone ever heard of “error 402”? It's a more obscure protocol that has to do with insufficient payment submitted via the world wide web. What can we infer from this? Well, when these protocols were being written, their authors had an idea for an internet-based payment so they included an error for “insufficient payment”. This might have actually been the first time that anybody had ever approached the topic of a payment mechanism via the world wide web.

This idea of a digital currency was explored in coming decades, which would ultimately lead to the creation of Bitcoin.

Digital Currency Experiments

Early digital currency projects
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There were several mostly centralized digital currency projects that lent their innovations to Bitcoin.

There were several digital currency projects that preceded the creation of Bitcoin. These projects ultimately failed, but several technical parts were adopted by Satoshi Nakamoto in order to make up the Bitcoin network.

In 1989, David Chaum created a form of centralized “electronic money” that utilized the same kinds of cryptographic protocols (like public/private key cryptography) that support modern cryptocurrency networks, like Bitcoin.

All of these projects were released in the 20 years that preceded Bitcoin's creation, and all had innovative components that would ultimately be included in the Bitcoin protocol.

The problem with these early digital currency projects was that they could not sufficiently put all of these innovations together, it was Bitcoin that did that. Many of these organizations also had another thing in common. They had a level of centrality where the government could shut them down.

1998: PayPal Launched

PayPal
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PayPal became the digital payment processing service of choice.

And the last thing that these projects had in common?

They got beat by PayPal, a centralized application that became a top way to digitally transfer money without directly using banks.

The Central Server

Centralized network
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Centralized servers compromise users' personal data security. Decentralized networks are made up of egalitarian members that distribute data accross the network.

The problem with many of these projects was that they were vulnerable to attacks. Every single transaction went through a central server. This client-server model extends to how we interact with each other today. If you're sending a Facebook message to your friend, you're not sending that message directly to your friend. No, that message has to be facilitated and transmitted by facebook's servers.

The problem with this model is that the information we send that goes through that server doesn't stay private. These servers often log your personal data for their own profit driven purposes. These servers that are really there to facilitate transactions of data also have the side effect of being central repositories for your data. Data people are willing to spend money to obtain. This can include your credit card and social security numbers.

This isn't just a theory. It's already happening. There are too many hacks to mention all of them, but the Equifax hack alone exposed the data of 143 million Americans. Including social security numbers. That's something like 40% of Americans that now have to worry about identity theft. That percentage becomes even higher when you consider that most people under 18 don't have credit profiles.

So these projects that had central servers that act as data repositories are bad news for your personal data. So is there a way to bypass this central server? For you to directly send data to another user on the network? This centralized system is what bitcoin was built to replace.

Introducing Decentralized Networks

The architecture and purpose of decentralized networks are completely different than their centralized counterparts. The network construction is similar to those of popular peer-to-peer file sharing software that was used to download music in the ‘90s to the early part of the next decade. One of the first was Napster, however, Napster had some centralized aspects to it, mainly on the front-end in its search function. This is one of the reasons that Napster was shut down.

The next iterations of Napsters, like Kazaa and Limewire, were fully peer to peer networks that were not governed by a central server. As a result, this network had a lot more staying power because there wasn't a central server to shut down.

If computers are directly sending data between them (in this case sharing music files), there is no use for a central server to process (and collect) information. The processing duties that were filled by the central server are shared among the users of the network. Essentially, an egalitarian network of computers helps with governing the network. We'll get into that process in our next section.

The Decentralized Network

Decentralized network
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Decentralized networks reach consensus through a process known as mining mining.

So if no Bitcoin CEO is calling the shots, and no central server is making decisions, how does a decentralized network make decisions?

Here's a diagram of a decentralized network, and notice the difference in structure compared to that hub and spoke centralized model.

Every single node on the network is either directly or indirectly connected, creating an egalitarian web of decentralized nodes. Egalitarian is a great word to use when describing a blockchain, since no one entity is calling the shots, and all have access to the network.

Look at what happens during a transaction in a decentralized network. One individual is sending out a bitcoin transaction, not specifically to any one of these nodes. When he does send his transaction out, it is broadcast to the rest of the network. At this point, the network has to come into agreement about that transaction. The process of the network coming to a decision in order to validate transactions is what's known as reaching consensus. Another way to explain consensus would be nodes coming into agreement on a constantly updating public ledger.

Nodes on the network known as mining nodes are the users that are compiling valid data onto the blockchain. This process is also known as mining, and miners have an important decision making role in the ecosystem.

Miners decide who has what when by compiling transactions into a data holding “vehicle” known as a block. Simply put, blocks are the things that hold batches of transactions. These miners are racing to form a block by solving a really tough math problem (one that takes these powerful computers an average of 10 minutes to solve) in order to get the right to compile transactions into a block. Why are they racing for the right to compile the next block? The winner of this mathematical race that puts forward a block full of valid transactions that gets added to the chain is compensated with what's known as a block reward, and today that reward is 6.25 bitcoin per block.

Defining Bitcoin

  • Cryptocurrency
    • Digital currency that is created and secured through a “mining process” that uses cryptograph. “Small b” bitcoin is the unit of account for the Bitcoin network
  • Blockchain
    • Technological backbone that allows cryptocurrencies to function. The “Big B” Bitcoin network is an example of blockchain technology in action
  • “b”itcoin vs “B”itcoin
    • “b”itcoin, the cryptocurrency token changes ownership on the “B”itcoin network—which uses blockchain technology
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Define and compare Bitcoin, cryptocurrency, and blockchain.

You learned about the formation of the Bitcoin network, and why it is useful. Time to explore the more technical definitions of Bitcoin.

Bitcoin is both the name of a cryptocurrency and its network. It was both the first cryptocurrency and blockchain.

Now there is a small issue with this definition. By defining Bitcoin two new terms have been introduced and need to be defined.

The first term that gets introduced in the definition of bitcoin is cryptocurrency, which is defined as digital currency that is created through a secure process that uses advanced math known as cryptography. Bitcoin is an example of a cryptocurrency.

The second new term that was introduced in the definition of bitcoin is the term blockchain.

A blockchain is the technological backbone that allows cryptocurrencies to function. The Bitcoin network is an example of blockchain technology in action.

To summarize, bitcoin is a cryptocurrency transmitted on the Bitcoin network, utilizing blockchain technology.

The Values Behind Blockchain

  • Anti-censorship
    • Resilient to infrastructure problems, intentional or accidental
    • Transactions cannot easily be stopped from reaching the network
  • Transparency
    • Triple-entry accounting means proving a cryptographic receipt
    • Malicious server administrator can't make changes
  • Trusting Trustless Transactions
    • Transactions can be made even in the absence of trust
    • You want trust, but can't always be with each other in person
    • Internet transactions lack trust that you are used to when dealing in person, instead relying on consumer protection laws to mitigate risk
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Satoshi Nakamoto's motivation behind the creation of Bitcoin can be deduced from his forum posts.

From Satoshi's writings and the design of the bitcoin network, we can deduce that certain values motivated Satoshi's innovation. The first is anti-censorship. The immutable nature of a blockchain lets users add whatever valid data they want to the chain without the possibility of their transaction being censored by a third party. Basically, Bitcoin offers freedom to transact data without the need of a third party.

The information is transmitted to the public, creating both transparency and accountability. Everyone has an updated ledger of who has what, the idea being that it is much harder to commit fraudulent activities when everything is in the light of day and can be easily verified by other members of the network. Since there is an immutable chain of blocks being stacked one after another, the data within the blockchain cannot be changed, it can only be appended through another transaction.

Satoshi eliminated trusting another when you're transacting with them. No trust has to be placed in unpredictable people that you don't know and are likely looking to make a buck off of you. Only the self governing, transparent software has to be trusted.

Bitcoin As Money

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This section examines if cryptocurrency is money.

Bitcoin was formed, how was it used?

Most Money is Already Digital

Only 13% of all US currency is physical
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Most currencies are not entirely physical and are already represented digitally.

Only 13% of All US Currency is physical

So since our money is no longer backed by a physical asset, is it really different than digital currency?

We've already been using digital currency. Only 13 percent of all USD are represented with a physical note, the rest is just represented digitally in centralized ledgers controlled by banks. This is not endemic to the United States. Many fiat currencies are not backed by physical assets. The value has no physical representation, they are just numbers on a ledger….Sound familiar?

The Functions of Money

  • Store of Value
  • Medium of Exchange
  • Unit of Accounts
3D Printed Bitcoin
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The characteristics of money apply to cryptocurrency.

First, it has to be a reliable store of value. Money has to have consistent value and purchasing power so faith can be put in that currency, otherwise, no one is going to accept it. If a unit of currency varies from 1.50 one day and .50 another, no one is going to accept that currency.

Money also has to be used as a medium of exchange. People have to be willing to spend and accept that asset for it to be a medium of exchange. Lastly, money has to act as a unit of account, to be able to tell who has what at any given time.

So a logical question would be to use these standards to assess if cryptocurrency is considered money. While cryptocurrency hasn't been the most stable of assets, the most popular cryptocurrencies have shown some degree of stability, especially after accounting for lifetime growth. While most of the business world isn't quite ready to accept bitcoin, there are several that are offering that option. This shows that at least some are willing to accept cryptocurrency. Bitcoin and other cryptocurrencies employ public ledgers, which act as a great way to track who has what assets. It's not a far stretch to say that cryptocurrency satisfies several of the characteristics of money.

Bitcoin Pizza Day

Bitcoin and pizza
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This section discusses early Bitcoin use.

A pivotal moment in Bitcoin's history was when the first recorded good was paid for using cryptocurrency. And as you might have guessed, it was a pizza. Two pizzas to be exact.

Early Bitcoin Use

Bitcoin Pizza Day

  • May 22, 2010 by Laszlo Hanycz
  • 10,000 BTC for 2 pizzas
  • First recorded use of bitcoin to purchase a good
Bitcoin price chart showing when the pizza transaction took place
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Bitcoin Pizza Day commemorates the first documented purchase of a physical good using bitcoin.

On May 22, 2010, now known as Bitcoin Pizza Day, Laszlo Hanyecz agreed to pay 10,000 Bitcoins for two delivered Papa John's pizzas. Organized on bitcointalk forum, the Florida man reached out for help. "I'll pay 10,000 bitcoins for a couple of pizzas.. like maybe 2 large ones so I have some left over for the next day," Hanyecz wrote.

A London based member of the forum took Laszlo up on the offer, which was a fairly savvy move even at the time, considering that 10k Bitcoin amounted to 41$ dollars and the pizza purchase cost just 25$, instantly turning this user a modest profit.

So some might criticize Laszlo for making a purchase that probably doesn't look so hot in hindsight, considering the amount of Bitcoin he paid for two pizzas totaling 25$ is now worth $80,000,000. But Laszlo himself doesn't regret the purchase: He stated "It wasn't like Bitcoins had any value back then, so the idea of trading them for a pizza was incredibly cool," Hanyecz told the NY Times.

So many bitcoin enthusiasts get together to celebrate bitcoin pizza day by doing two of the things they love, eating pizza, and talking bitcoin.

The Transaction Process

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This section prvides an overview of the blockchain transaction process.

In order to understand what is happening with the transaction, you need to examine five different steps:

  1. Data signing
  2. Validation
  3. Broadcasting
  4. Mempool
  5. Block

But before diving into this process, let's better understand the Bitcoin network and what makes it unique.

It's All Virtual

Bitcoin is open-source software
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There is no central administrator in the Bitcoin network, the governance is administered by the community

Let's start with an important thing to remember about Bitcoin, it's just software. It's what is known as open-source software, where all code is public and can therefore be audited. That's where trusting the system comes into play. Anyone can look at the code, download it, and run the Bitcoin protocol on their computer. Computers that are running the software and are part of the network are referred to as nodes. These nodes make up a decentralized network.

It's also important to know that there is no central Bitcoin company and there is no Bitcoin CEO. The software is open source and can be downloaded by anyone. Changes to the code in the Bitcoin software can be made by users and adopted by the network. This is what makes Bitcoin bailout-proof. Even if you wanted to “bailout” the network, it would be impossible. That's the nature of a decentralized project.

Transaction Flow

Transaction Flow as mail example
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Explaining the blockchain transaction process, like any other abstract concept, can be difficult to do. For this reason, we've created a real-world analogy using the process of sending mail to better understand how blockchains work.

The steps to a blockchain transaction can be broken down into the following stages:

  1. Compose transaction
  2. Sign transaction
  3. Broadcast transaction to the network
  4. Validate transaction based on network rules
  5. Wait in the mempool (waiting room) for transaction to be mined
  6. Include in a block
  7. Confirmation

Each of these steps have a corresponding step when it comes to sending a letter through the postal services.

Composing a transaction includes entering in the necessary information before the transaction process can be started. Just like putting the address on a letter, basic details are required to initiate this process. These details usually include a recipient and amount to be transferred.

After the cryptocurrency transaction details are provided, it is time to “seal the envelope”. This is done using a private password that ensures that you were the one to actually write the letter, just like a wax seal that makes sure an envelope has not been tampered with nor had its contents changed.

Once these two steps have been completed, a crypto transaction or a letter has to be sent off. Traditionally, this is done using a stamp, which costs a small fee. With a cryptocurrency transaction, a fee is also needed to broadcast the transaction. This is used as a spam control mechanism. If there were no fees imposed by blockchains or the postal service, there would be incentive for some to send as many transactions as possible, slowing down the transaction process. This applies both digitally and to the traditional postal systems.

The next step is for the transmitters to validate the transaction to make sure all of the neworks rules are being followed. This is comparable to the postal service checking to make sure that the stamp has been paid for and the package or letter being transmitted follows certain legal requirements. There are certain packages that cannot be accepted by the postal service, just like there are certain transactions that cannot be transmitted based on network rules.

Once it is confirmed that a letter can be transmitted, it waits in the post office until it is sorted and taken for delivery. After a blockchain transaction is validated according to the rules of the network, it waits in a place known as the mempool. This is where validated transactions that have not been sent wait until they go through a process known as mining.

When a letter is ready to be sent, it is loaded onto a vehicle and delivered. The same thing happens for a cryptocurrency, but instead of the postal service a miner competes for the right to include a transaction into the block they are creating.

Once all of these steps are completed, a cryptocurrency transaction is received and confirmed on the network. The real world comparison for this action is for the recipient to open our letter.

Data Signing

Data signing
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In order to initiate a transaction, it must be signed by use of a private password.

The first step in a transaction is initiating it. Through a secure process known as data signing, a user can prove ownership of funds, then send those funds to a desired recipient.

The transferer utilizes their cryptographic password in order to sign-off on the transaction, sending it to a specified member of the network. The transaction cannot start without this process. Since a cryptographically derived password, or private key, is signing the message, you can be assured that the true holder of the cryptocurrency is actually sending the transaction.

Broadcasting the Transaction

Broadcasting the transaction
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Once a transaction is securely signed, it is broadcast to other nodes on the network.

Once the transaction is initiated, it is broadcast to the nodes on the network. At this point the miners race to put transactions into a block, but blocks have data size limits and can only hold so much transaction data. A large amount of transactions congesting the network might mean that your transaction doesn't get included in this first block that is created but will eventually be included in a subsequent block. So what happens in this waiting period between broadcasting and mining?

Validation

Validation
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Once a transaction is broadcast, it is checked by other members of the network for validity.

Before the transaction can be added to a block, it must be checked for validity (i.e. having the necessary funds to conduct the transaction). When your transaction is being broadcast, it and the other transactions are constantly being cross-checked by other nodes on the network. If the block's transactions are validated and that miner wins the race, that block (and therefore our transaction) is added to the chain.

Mempool: Before Mining

Bitcoin mining
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The mempool is where valid, but unconfirmed transactions are stored before they are mined.

The “place” that holds pending transactions that have been initiated but not included into a block is called the mempool.

Essentially the mempool is a waiting room. Transactions have not yet been validated, nor has it been invalidated. These transactions just wait for their turn to be included into a block.

Inclusion in a Block

Transaction added to a block
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Once a transaction is mined, it is added to a block. Each subsequent block further solidifies the position all previous blocks.

Validated transactions compiled by miners are included in a block, the block is added to the chain. This counts as one confirmation, as the block has already been validated. Every subsequent block added counts as an additional confirmation. The more blocks added, the higher the chance of the transaction remaining part of the permanent chain.

Do you need to be online?

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Each node has a copy of the blockchain, and offline users can get a copy of the most updated ledger once they log back on.

You don't have to be online to receive your funds. Remember, each node has a copy of the blockchain, the ledger with the complete transaction history. If you're not online, your ledger won't get updated, but everyone else's ledger will. When your node logs back online, it uses the other nodes to synchronize the transactions that occurred while your node was offline.

Mining Mechanics

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In this section we will be exploring the mining process.

It's one thing to know why bitcoin and decentralization are important, but it's a completely different thing to know what's going on under the hood. When you have a central server calling the shots, processing data is a lot easier. Simply send a request to a server and that server will execute a corresponding action. Of course, these central servers come with that data collection tradeoff. So how does a blockchain function, or come to decisions, if there isn't a central server calling all the shots? How do the computers on the network stay in agreement, how do they maintain a public ledger?

Inside a Mini-Miner

Deconstructed mini-miner
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Mining devices are hardware that any user can purchase in order to contribute to the network.

Miners are computers with strong processing units that race to solve equations that allow the node to compile blocks and receive the corresponding block reward. Miners have several components, but the most important is the cooling units. Mining is very energy intensive and generates a fair amount of heat, so fans are used to keep the miner from overheating.

Mining projects have arisen in cold climates, like northern Europe, where open-air facilities that allow the natural cold temperatures to regulate the heat generated by the miners.

All of these parts can be purchased by anyone who wants to build one. Nothing is special or privileged, and everything is entirely accessible and open source. The price tag of a machine like this is quite low, so anyone who wants to participate can buy their own machine and flash it with whatever mining software they want (which can be downloaded for free online).

How the Network Makes a Decision

Decentralized network consensus
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This section explores how decentralized networks make decisions.

Time to take you through the mining process and show you how the network deals with the problem of determining who has what when. This is done through a process where the goal of the network is to have every computer reach consensus (to come into agreement about) and have a copy of the public ledger.

Who determines what transactions get included in a block? It's actually the miners who facilitate this process. Here's how the network makes a decision about what gets included inside of the next block.

Hands-On Activity

"Understanding Mining"

The purpose of this activity is to show how decentralized networks made up of competing miners reach network consensus.

Description

In this scenario, we are going to slow down the mining race between two miners. Each miner has a copy of Charlie’s transaction for the block they are going to compile. Whichever miner that wins the race has included Charlie’s transaction in the block they are creating. No matter which miner wins, Charlie’s transaction gets included in the blockchain. The transactions compiled by non-winning miners are sent back to the mempool until they are added into a block by another miner.

Discussion Points

  • Who determines which transactions get added to the block?
  • What happens if my transaction does not get mined?
  • What happens to Charlie's transaction if it is not immediately included in a block?

Which Transactions are Included?

Mining mechanics
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In-depth explanation of mining mechanics and hashing power.

The transactions that are included in a block are determined by the miner that wins the race. Competing miners may pick different valid transactions from the mempool. For example, let's say that the race has come down to two miners, one of which will win and write the next block. The transactions that the winning miner chooses from the mempool are added to the blockchain, while the losing miners transactions are sent back to the mempool to be picked by another miner. These transactions will most likely be mined eventually, even though they were not included in the first winner's block. The process repeats and miners try to compile a valid block while winning the mathematical race.

Mining power is measured in a unit known as hashing power, and it comes from the processing units used by miners. Not every miner has the same amount of hashing power. Some entities have spent lots of money on miners in the hopes of generating an even greater return via block rewards. It is important to note that the miner with the highest hashing power does not always win the mathematical race. Think of it as a normal math problem presented to a classroom full of students. The ability of each student to solve this problem differs and the students that are better at solving math problems have a greater chance of solving a proposed problem. However, the student that is best at math isn't always going to be the first one to solve every problem. The students that are less good at math, or have less processing power, still have a chance to beat the best problem solver in the class.

The effort to gain as much processing power as possible has made it difficult for the average person to compete against these miners with significant hashing power. This has led to the formation of mining pools, where individuals pool their hashing power together in the hopes of winning more block rewards and competing with larger mining operations. The reward distribution usually corresponds with the amount of hashing power provided to the pool.

The Block Joins the Chain

Block added to the chain
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Define immutability and learn the structure of blockchains. Temporary forks occur when multiple blocks are found near the same time.

Once the miner wins the race and compiles a valid block, the block joins the end of the chain! Permanently. The construction of a blockchain is what makes it unique. Blocks are added in chronological order. Since data cannot be changed on the blockchain, a property known as immutability, it provides a great historical record of public transactions.

Once the block is added to the chain, it is considered to have one confirmation, since nodes have validated all transactions in a block. Each successive block counts as another confirmation since it solidifies the block's position into the chain. Blockchains are immutable, so it is impossible to remove a block. Each successive block would have to be undone, one at a time, in order to get to a block solidified in the middle of a chain.

The more blocks that are stacked on top of our specific block, the more you can be assured that this transaction will become part of the permanent blockchain. Each block counts as an additional confirmation, and these confirmations have practical uses.

If you're selling a cup of coffee, you might be alright with waiting for just one confirmation, when that block is added to the chain. If you're selling a house or something more valuable, you might want to wait for 6 confirmations.

Why wait for confirmations if the block has already been added to the chain? Well there's the slight possibility of the blockchain temporarily forking, trying to add two blocks at once. Eventually during the next few blocks, one chain will be built upon and the other will be sent back to a "waiting room" along with the transactions in the block formed by the miner who does not win the race. This is a rare occurrence, but definitely shows it's a good idea to wait for 6 confirmations when transacting with large values. Once a transaction has 6 confirmations, or 5 blocks after it, there's an astronomically high chance that the block is part of the correct chain.

Mining Profitability

  • Probably not
  • Consider cost of maintanance and management
  • More cost effective to buy Bitcoin directly than converting electricity
Mining profitability
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Mining is often not profitable, depending on the cost of energy and the price of the cryptocurrency mined.

Is mining profitable? The simple answer is sometimes. Mining comes down to two main variables that determine profit: energy consumption and cryptocurrency price. The cost of the energy used by miners is weighed against the amount expected to be received as a block reward. If the cost of the energy consumed in the mining process is less than the price that the received cryptocurrency can be sold for, it is profitable. However, if the amount needed or the cost of energy increases, or the price of cryptocurrency drops, mining might become not profitable. There are some handy sources, like www.coinwarz.com that can estimate the profitability of mining. Remember, energy cost varies depending on location.

Transaction Fees

Transaction fees
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Fees are used to prevent against malicious transactions from spamming the Bitcoin network.

Another crucial part of Bitcoin transactions are the fees.

Fees usually are annoying and generally viewed as bad things, however, fees on the bitcoin network have a purpose. The network can only process so many transactions per second. Now if there are no fees, the network can just get spammed. If someone wanted to they could send a bunch of transactions back and forth between themselves, stalling the system. Fees make this malicious action cost something. If someone wants to clog the network with spam transactions

Fees are a spam prevention mechanism. In times of high network traffic, a higher fee will most likely be required in order to get your transaction mined. Think of this as an Uber surcharge, the more demand, the more price goes up.

Eventually, all of the bitcoin will be minted. After block production rewards end, fees will cover the costs of running the network.

Where Do Fees Go?

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Fees are collected by miners. The transactions with the highest fees are most likely to be added to the next block.

So where do fees end up?

Remember when we told you that miners race to compile transactions in a block in order to receive a block reward? How do these miners pick which valid transactions to include in a block?

The answer has to do with fees. Winning miners receive all the transaction fees generated in the block they compile. They receive these fees in addition to the block reward. There is a monetary incentive for miners to include transactions with the highest fees in the block they are compiling. The higher the fee, the more likely your transaction is to be included in the next block. Despite this competition, fees are usually very low on the Bitcoin network.

A good real-world comparison is a theme park “fast pass” or a tollway, where those willing to pay provide incentive for quicker service.

Token Creation Cycle

Token creation cycle
(1) Create Block (2) Generate Cryptocurrency (3) Exchange for Resources (4) Collect Transaction Fees
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Tokens are introduced into the ecosystem through a unique feedback relationship.

One of the most popular questions about mining concerns how tokens are introduced into the Bitcoin ecosystem. Tokens are created every time a block is mined, and rewarded to whichever miner wins the right to the next block. The maximum of bitcoin that will ever be mined is set at 21 million coins. The very first block, known as the genesis block, was mined by Satoshi Nakamoto, as were several successive blocks. The first block rewards were 50 bitcoin.

This starts a unique repeating cycle that can be broken into four steps.

Create Block

Valid blocks are added to the chain
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Miners find a valid block that is added to the chain.

Miners are racing to find the solution to an extremely tough equation, and the winner will write the next block, receiving compensation in the form of cryptocurrency.

Generate Cryptocurrency

Miners are rewarded for adding valid blocks
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The miner that found the valid block that is permanently added to the chain receives a block reward in the form of cryptocurrency.

Once a miner creates a valid block, and there is no temporary fork, they receive newly minted Bitcoin. This is distinct from the previous step. The block reward is not immediately given to the miner, as there could be a temporary fork in the network, and two blocks cannot receive block rewards. Therefore, the block reward is locked for six confirmations, avoiding this problem.

Exchange Tokens for Resources

Miners sell block rewards to cover costs
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Miners often sell off part of their block reward in order to recover electricity costs.

At this point, some coins are held for future spending or speculations. These coins leave this feedback cycle. However, many miners look to sell their rewarded cryptocurrency in order to offset their energy costs, or even to make a profit. These miners put their cryptocurrency on the market, generating more transactions.

Transaction Fees Generated

Miners selling generates more fees
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Miners selling off bitcoin results in more transactions being initiated. The cycle repeats.

The transactions generated by miners create more opportunities for more transactions to be mined and more fees to be had. A new block is created and the cycle repeats.

Once the maximum allotment of bitcoin is reached, Satoshi anticipated that transaction fees would pay for miner work after there are no more block rewards introducing new crypto into the ecosystem.

Bitcoin Issuance Schedule

  • Difficulty Adjustment
    • Maintains block production around 10 minutes
    • Adjusts every 2048 blocks (approximately 2 weeks)
  • Reward Halving
    • Original rewards was 50 BTC
    • Has halved three times
    • Current reward is 6.25 BTC
    • Reward is reduced every 210,000 blocks (approximately 4 years)
Bitcoin feedback cycle
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Mining difficulty is adjustmented to maintain consistent block production. Block reward halving is used to control inflation by slowly issuing bitcoin.

There are a couple of variables in the protocol that are adjusted to keep the network running as designed. These are ingrained into the rules of the Bitcoin software. The first is what is known as a difficulty adjustment, and this refers to how hard miners have to work in order to solve that equation for the right to win a block reward.

The network aims for new blocks to be created every ten minutes, however, it is not a set rule that blocks are created every ten minutes. Since blocks are created when miners solve for a variable, the aim is for these equations to be solved every ten minutes, on average. If blocks are being found at a rate under ten minutes, these equations are made harder so it will take miners closer to ten minutes to solve a block. If blocks aren't being found fast enough, the difficulty of the equation is reduced. The mining difficulty is adjusted every 2048 blocks, or roughly every two weeks.

The second protocol change that is coded into the Bitcoin software is the adjustment to the block reward. Every 210,000 blocks, or roughly four years, the block reward halves. The original block reward was 50 BTC, and has since halved twice, currently sitting at 6.25 BTC. This reward is set to halve again later this year. Reducing the block reward over time helps to control inflation.

Programmable Money

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This section compares and contrasts cryptocurrency with other currencies.

Specifically compare how cryptocurrencies are different from other, traditional currencies.

Blockchains Beyond Bitcoin

  • Easy things to change
    • Supply
    • Confirmation time
  • Hard things to change
    • Operations
    • Data structures
    • Community culture
  • Other notable networks
    • Litecoin
    • Namecoin
    • Mastercoin
    • Ethereum
Other blockchains including Ethereum, Mastercoin, Litecoin and Namecoin
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There were further blockchain innovations after the introduction of Bitcoin, resulting in new blockchains.

While Bitcoin was the first use of blockchain technology, it certainly was not the last. Many projects iterated on the path that Bitcoin paved. One of the most popular is Litecoin, which is heavily influenced by the Bitcoin protocol. They did make a couple of related changes. Litecoin had a block time close to 2.5 minutes, one-fourth of bitcoins. The project also had a total supply of 84 million coins, four times that of Bitcoin.

Namecoin introduced the storage of DNS data to blockchain technology and Mastercoin enabled extra functionality on Bitcoin by putting extra metadata at the end of the transaction code. This led to the creation of Ethereum, which allows executable applications on the blockchain.

Litecoin Changed the original parameters of Bitcoin to be 4 times faster. Namecoin Attempted to use Bitcoin-like network to name services (similar to DNS). Mastercoin Added emergent use cases as supported transaction types. Ethereum was a Clean-sheet design to support general purpose computation

More Than Money

Ethereum
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Ethereum aims to create a decentralized computing platform.

The Ethereum blockchain is developer-friendly and is being used to build an ecosystem. Bitcoin set out to be a peer to peer digital cash system, and it has been able to serve that purpose. It gives the ability to send money around the world instantly.

The stated goal of Ethereum was to become a “decentralized world computer powered by nodes instead of central servers”. The blockchain-based network uses innovative programming and network structure in order to allow developers to build on the blockchain.

Ethereum has some significant differences compared to Bitcoin. The first is the block time. While Bitcoin confirms blocks on an average of every ten minutes, Ethereum has reduced their block time to about 12 seconds. This is much more conducive to a blockchain that depends on data transfer as opposed to simple monetary transfer. The network is largely built using innovative tools known as smart contracts.

Smart Contracts

  • What is a Smart Contract?
  • First Smart contracts were on Bitcoin
    • Form of crowdfunding
    • Advanced multi-signature transactions
  • Decentralized Finance (DeFi)
    • Stablecoins
    • Loan & savings
    • Decentralized exchanges
Earning savings with Dai stablecoin
Dai Savings Rate (oasis.app)
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Smart contracts are on-chain programs that can execute transactions autonomously based on programmed conditions.

Smart contracts are protocols that allow action autonomously without the need for third parties. These programs reside on-chain and are able to process data in a decentralized manner. A series of smart contracts can be utilized to create a decentralized application or dApp for short. Instead of a server processing requests, dApps use decentralized consensus in order to process data transfers.

There are some core components of a contract, but others can be added to the code as well:

  • Time or duration
  • Amount to be transferred
  • Set of specific conditions or a triggering mechanism

Smart contracts are an abstract process, but their best real world analogy is a vending machine. A vending machine has assets it controls. All the user has to do is input money and set directions. The vending machine responds accordingly. The same is true for a smart contract. By sending a contract funds and a set of directions, a corresponding action is executed by the smart contract.

Transaction Time

  • What is block time?
  • Bitcoin introduced 10 minute block times, a huge improvement from 3 day bank transfers
  • Blockchain innovation has pushed block times down to seconds
Hashrate and difficulty compared
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Other blockchains achieved lower transaction times by confirming more blocks.

We already talked about how miners race to finish solving an equation in a certain amount of time. For the Bitcoin network, it usually takes about 10 minutes to solve this equation and write the next block. The period of time it takes to create one block is known as the chain's “block time”. The block time isn't necessarily a set duration, but rather the average amount of time it takes to solve that really tough math problem. The goal when creating this math problem is to have it ideally take as close to ten minutes as possible to solve. If this is not occuring, the difficulty of these math problems go up or down, depending on if the problem is being solved faster or slower than ten minutes on average.

Bitcoin's block time is ten minutes, so a new batch of transactions is compiled by miners into a block every 10 minutes. This ten minute figure is particularly interesting considering a normal wire transfer takes at least 3 days to complete, often more depending on how fast the respective banks process the transaction. So bitcoin cut money transmission from a 3-5 day waiting period to a 10 minute waiting period.

Bitcoin introduced this 10 minute block time, but other blockchains have innovated in order to cut down block times to under a minute.

Why Blockchains Aren't Free

  • Limited-use resource that costs money to transact
  • This reduces spam, otherwise blockchains would become overrun like email
  • Freedom of speech
Ethereum gas prices
Ethereum Gas Prices (ethgasstation.info)
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Fees are used to prevent network resources ffrom being wasted. They are calculated by the amount of data, or network resources, needed to execute a transaction.

Interestingly enough, fees are not determined on the value of the transaction, but rather the amount of data that's being transacted.

Transferring a large amount of cryptocurrency would not require much more data to be transferred than sending a smaller amount. Therefore, both of these transactions would have comparable fees. More complex operations that require a lot of data to be transferred garner higher fees.

Credit Cards vs. Cryptocurrency

  • Outdated technology
  • Chargeback/finality
  • “Push” versus “Pull”
    • Data storage security
  • Middleman fees
Credit cards
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Credit cards are an outdated technology rife with problems such as fraud. Cryptocurrency can offer solutions.

Everyone relies heavily on credit cards, but the technology behind them is outdated and prone to fraud. When making a purchase, online or in-person, you are essentially handing over access to all of your funds every time you provide your credit card information. There is nothing preventing someone from fraudulently charging more than an agreed amount once they have the information you provided.

When paying with cryptocurrency, you are not handing over access to all of your funds. Rather, you're specifically providing the required information and amount needed to execute the transaction. Companies that accept credit cards online might not act maliciously, but once you provide our data to them, they are responsible for keeping that data private. As mentioned earlier, these data repositories are goldmines for hackers. This problem does not exist with cryptocurrency, as no sensitive information has to be stored.

Merchants also suffer from credit card's technology and processes. Consistent cash flow might not be a problem for large corporations, but it certainly is for small and medium sized businesses. You provide your goods and services, only for the real owner of the credit card to report fraud. The money is then taken from you and given back to the real owner of the card. Even though you as a merchant did nothing wrong.

Keeping Crypto Secure

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This section explores the best ways to store your cryptocurrency securely.

One thing that you need to know before buying some cryptocurrency is how do you keep it safe once you do make the purchase.

One thing there seems to be a lot of confusion about is the level of privacy a blockchain can provide. This confusion is pretty understandable since certain parts of a blockchain technology lend themselves to transparency and some to privacy.

Transparency or Privacy?

  • Details are often public (i.e. to prevent double-spending)
    • Amount
    • From
    • To
  • Addresses are pseudo-anonymous
    • Possible to make lots of addresses cheaply
    • No gatekeeper or tangible cost to do so
  • Privacy Techniques
    • Projects exploring different methods of obfuscation
Privacy
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Some details on the blockchain are public while some information is obscured.

Does anyone know of some information you wouldn't want stored on the blockchain?

I wouldn't want my medical records stored on a public database.

Remember, the data transacted is all public. This is fine for some purchases, but not all of your private data. There are specific blockchains that are hyperfocused on privacy, and those don't publicly display all of the details of a transaction the way bitcoin does.

The privacy aspect of bitcoin has to do with the addresses that every crypto holder has.

Every single person sending transactions via a blockchain has an address that is public to the entire network. This is the address someone would use if they wanted to send you cryptocurrency.

Addresses are like a mailbox. Anyone can drop something in, only one person can take it out.

Pseudonymous basically means partially anonymous. These addresses are long, jumbled strings of text, it has nothing to do with your name or identity. However, this doesn't make the network anonymous. Since everything is public, blockchain forensic experts have been able to trace bitcoin from address to address, ultimately identifying the group or individuals behind those addresses. It's not easy, but it certainly is not impossible.

Address Reuse and Privacy

Different address for each transaction
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Reusing addresses limits the ability to remain private.

So how can you get as close to anonymous as possible, even though you can't fully get to that standard?

You never reuse an address. Each transaction comes from a different address.

This might be a cumbersome annoying task, or more accurately it used to be. Individuals interested in maintaining more privacy when using bitcoin can use something called HD (hierarchical deterministic) wallets. This allows you to use a new address for every conducted transaction, all controlled by the same password.

What Are Cryptocurrency Wallets?

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Cryptocurrency wallets can store cryptocurrency, and can also send and receive transactions.

One of the most important aspects of holding cryptocurrency is keeping it secure. So where do you keep your cryptocurrency? In a wallet, of course. Not a physical wallet, but a digital one. Cryptocurrency wallets are designed to securely “hold” cryptocurrency. Cryptocurrency does not exist in wallets, but rather only on-chain. While the cryptocurrency is not technically stored in these wallets, they utilize a set of keys in order to allow you to securely manage your cryptocurrency.

  • Interface to the blockchain
  • Doesn't actually hold your tokens
  • It manages your keys, which authorizes coin movement with cryptographic signature
  • Many allow for direct broadcasting and listening to the network
  • Many can cryptographically sign and verify digital messages

Public and Private Keys

Public and private keys
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Public and private keys are linked, allowing anybody to send you a transaction. The user with the private key controls the associated cryptocurrency.

When downloading a cryptocurrency wallet, every single user is provided with a pair of keys that are cryptographically linked. Your public key can be shared with anybody. It functions as a public address that can be on the receiving end of transactions. You are also assigned a private key which is the master password to your cryptocurrency. Unlike the appropriately named public key, the private key is not ever meant to be shared. The person who controls the private key controls the associated public key's cryptocurrency.

Example:

The best real world analogy is that of a locked mailbox. Everyone has access to your address, just like with a public key. Anybody can drop a message or funds in your mailbox, but only you have access to the key that opens the mailbox. This key is analogous to a private key.

Seed Phrases

Seed phrase card
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Seed phrases are a series of words that act as a simplified private key.

This is a seed phrase. A seed phrase has the same exact function as a private key. In fact, it's just an easier to read representation of your private key. That's why if you're using a seed phrase it's important to take the same security precautions as you would with your private key.

One reason that seed phrases are represented as a set of 12 or 24 simple words as opposed to a long string of text is that it is just easier to handle. When you download an application to hold your cryptocurrency, it will most likely provide you with a seed phrase, and you'll be instructed to write it down. Many wallet apps will then ask you to do a task to prove you have written it down. For example, after displaying your seed phrase the app may ask you to tell it which word was in what position.

It is extremely important to keep your seed phrase safe, as it can be used to back-up and restore your cryptocurrency.

Custodial vs. Non-custodial Wallets

Not Your Keys, Not Your Crypto
Credit: Youtube.com
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If you do not have sole control over your private key, you are at risk of losing your cryptocurrency.

When it comes to managing private keys, there are two types of wallets. Custodial wallets manage your private keys for you, while non-custodial wallets provide you with this information. The person who controls your private keys controls your cryptocurrency, so we recommend that you use a non-custodial wallet and manage your own private keys. This comes with a trade-off. Since this gives you sole control of your cryptocurrency, there is no way to undo a mistaken transaction, or to restore a wallet if the keys are lost.

Restoring Your Wallet

Restore your cryptocurrency wallet with your seed phrase
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Unlike a physical wallet, your funds can be restored if there is a problem with your cryptocurrency wallet.

One of the best features of cryptocurrency wallets compared to their physical counterparts is that if you lose your wallet in the real world, your funds are completely lost. This is not true for cryptocurrency. Remember, your crypto is not actually stored in your wallet, rather the wallet acts as a reference to the blockchain that allows you to manage your crypto using your keys. This means that losing a cryptocurrency wallet is not a big deal as long as you have your private key or seed phrase. Simply get a new wallet, use your private key or seed phrase, and you have restored your cryptocurrency into your new wallet.

Cryptocurrency Wallets

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This section explores the different types of cryptocurrency wallets.

Cryptocurrency wallets come in many shapes and sizes--both digital and anonlog.

Types of Cryptocurrency Wallets

  • Different wallets support different tokens
  • Different wallets function differently
    • Hot Wallet (“spending”)
    • Cold Wallet (“savings”)
Examples of physical cryptocurrency wallets
Notes icon

TThere are many different cryptocurrency wallet options that offer different levels of security and useability.

There are many different options when it comes to cryptocurrency wallets. Some are specific to certain tokens, but many have multi-token support, allowing you to keep many different cryptocurrencies in one place.

There's a couple general classifications when it comes to crypto wallets. The first is what does the user intend to be the primary function of their wallet, and for different people there are going to be different answers.

Some people want their cryptocurrency wallets to be part of their everyday spending. While these people obviously want their funds to be secure, they also don't want to have to jump through hoops every time they are conducting a crypto transaction. These individuals prefer hot wallets, which prioritize transactability, or the ease of conducting a transaction. Others simply want to use their wallet as secure storage for their crypto. These individuals tend to use cold wallets, where the main goal is to keep funds as secure as possible, even if it makes sending and receiving crypto slightly more difficult.

Hardware Wallets

A hardware wallet
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Hardware wallets are pysical devices that provide a secure option for storing cryptocurrency.

Hardware wallets are physical devices that are designed to keep your private keys from ever being exposed via the internet. They usually are fairly small, mainly handheld, but come in different shapes and sizes. Hardware wallets are an example of cold storage, as they are designed for maximum security, even if that means sacrificing some transactability.

Hardware wallets are physical devices that are designed to keep your private keys from ever being exposed via the internet. They usually are fairly small, mainly handheld, but come in different shapes and sizes. Hardware wallets are an example of cold storage, as they are designed for maximum security, even if that means sacrificing some transactability.

Software Wallets

Bitcoin and Ethereum in a traditional wallet
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Software wallets are downloadable programs that allows you to manage your cryptocurrency.

Software wallets are free, downloadable software that you can use as your cryptocurrency wallet. You are provided a key-pair upon download. These hot wallets are great for transactability and everyday spending. You're even able to download a cryptocurrency wallet to your mobile phone!

Web Wallets

Use the correct URL to avoid getting phished
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Some wallets can be accessed via the internet, but users should be aware of phishing attempts.

Web wallets are cryptocurrency wallets that use the internet and have a web interface, allowing management of cryptocurrency via a browser. Web wallets provide a lot of convenience, but they do come with a security trade-off. When using a web wallet, it is very important to make sure you are using the correct URL. Through a process known as phishing, hackers buy up similar domains and make clones of the site that people are trying to reach. Users put their real log-in information on the cloned site, and then it is in the hands of hackers, now able to access your real account. Double checking URLs can help to avoid phishing, and there are even some browser extensions that will alert you if you're on a likely phishing site.

Paper Wallets

A Paper Wallet
Notes icon

Introduce and explain advantages of paper wallets.

Paper wallets are a piece of paper containing a public and private key, and often a QR code for each key. The public key acts as a means to deposit, while the private key is needed to spend, or withdraw, the funds. Paper wallets are the ultimate example of a cold wallet, as the funds are essentially taken off-line. The only way to access these funds is to restore them onto another wallet.

This is the most secure way to store cryptocurrency. No one can get access to your cryptocurrency unless your private keys have been compromised. However, if you lose your paper wallet, those funds are lost as well, as the private key cannot be recovered.

Inspecting a Transaction

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This section examines transaction receipts.

So you know the process but do you know what is really going on with your transaction?

You're not completely in the dark. There are these handy tools called block explorers which act as references to the blockchain, allowing you to see all of the goings-on of the public ledger that is the blockchain. Block explorers are a searchable interface that can reference the blockchain. By searching your address or transaction ID, you're able to find a digital receipt of your transaction. This can give you more details about your transaction, like its current status.

What Happened to My Transaction?

  • Stuck in mempool?
  • Insufficient fee or gas?
  • Check for your transaction ID on a public block explorer
Look up a transaction ID on a block explorer
Screenshot from TradeBlock
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Transaction receipts can help diagnose frequently encountered problems.

Not all transactions are immediately mined, miners choose the transactions with the highest fees attached. If your transaction hasn't gone through after a while, it is likely stuck in the mempool because of insufficient fees.

The good part, many wallets will let you set a fee or a range that allows you to select the type of fee you are willing to pay. The higher the fee, the quicker the transaction will be picked up by a miner and put into a block.

How can you tell where your transaction is? Checking the block explorer allows you to view the status of your transaction in real time.

How Blockchains May Differ

Block Time
The amount of time it takes for miners to solve that math problem and compile valid transactions into a block. Different blockchains have different block times.
Privacy
Certain cryptocurrencies limit the amount of data that is publicly visible in order to ensure the maximum possible level of privacy.
Community
Each community is different, and are motivated by different values.
Algorithms
Blockchains require lots of computation, so a variety of consensus algorithms, state tracking, and hashing algorithms may be used.
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Compare and contrast the common characteristics of other blockchains.

There can be several differences between blockchains.

How Blockchains Are Secured

Notes icon

This section explores the security aspects of blockchain technology.

Why is this system reliable? What prevents people from doing bad things on a blockchain?

Incentive Engineering

Protocol incentives users and discourages bad behavior
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Certain rules in the software's protocol's incentivize users to follow the rules and discourage bad behavior.

There are certain incentives ingrained in the blockchain protocols in order to help ensure that nodes do not act maliciously. The most obvious example is the block reward, which incentivizes miners to work to secure the network by offering up a block reward to the winner. Another incentive mechanism is the cost that it takes to attack the network in hopes of taking it over. A lot of computing power is required. It is likely more advantageous to play by the rules and use that computing power for mining, reaping the block rewards as opposed to completely undermining the cryptocurrency's economy.

51% Attack: Controlling A Network

  • Possible to buy computing power (AWS, Azure, etc.)
  • Controlling majority hash power could allow re-writing of historical chain data
  • Important to ensure diversity of network participants while maintaining incentive alignment
Mining power can be bought
Mining Facility (bitcoinwiki.org)
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51% attacks are malicious attempts to hijack the network by temporarily maintaining a majority of the network's hashing power.

As previously mentioned, it is possible to buy or rent processing power in the hopes of taking over the majority of the network. Controlling a majority of this hashing power could allow rewriting of historic chain data. These attacks are expensive and difficult to sustain.

It is important to ensure diversity of network participants while maintaining incentive alignment. There have been some mining pools that have approached controlling 51% of the network's hashing power. In response they have reduced mining as to preserve the long term health of the network, most likely so they can continue to reap block rewards in a healthy ecosystem.

Decentralized Security

Centralized servers are vulnerable targets
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The design of decentralized networks can be more difficult to attack than centralized servers.

Take a look at how decentralized networks maintain security, and follow along with this example to understand how.

Envision two neighborhoods. Why? Because you are planning a heist and you need to figure out which one to hit to make it worth your while. You need to grab at least half of the wealth from a neighborhood in order for it to be worth the risk.

Neighborhood A has about 100 houses, but interestingly enough, there's one very wealthy house that happens to have 51% of the wealth. Just in that one house. Think huge safes, Picassos, the ark of the covenant, whatever.

Neighborhood B has 100 houses, but each house has about the same amount of wealth.

Which neighborhood do you target?

Neighborhood A, since you have to hit one house to get the majority of control. Neighborhood B you would have to rob 51 of those hundred houses.

How does this apply to blockchain?

Well, Decentralized networks look a lot like neighborhood B, while centralized networks look like neighborhood A. That really wealthy house? That's the central server that makes all of the decisions. Grab control of that and you have control of the network. To grab control of a decentralized network, you're going to have to hijack a majority of nodes.

What You Can Do With Cryptocurrency

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This section identifies the different options to spend your cryptocurrency.

E-commerce

Add to Cart
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Many websites already accept cryptocurrency.

So if you're making an online purchase, how are you going to do so? Probably a credit card. We already talked about why credit cards are such bad technology, remember it's like handing over your entire wallet and telling someone to take a few bucks out.

If you use a credit card, that info has to get passed through a server, and it is often logged in a server. Credit cards are really bad tools when we're talking about the security of your funds.

Crypto isn't like that. When you buy something with crypto online, you can send unencrypted information in a totally public manner and no one will have access to your funds.

A great example of a cryptocurrency that is suited for the way content is consumed is BAT, or basic attention token. Instead of watching boring mandatory ads, you are rewarded for your attention by participating in interactive ads. The really cool part about BAT is it's already being used to tip independent creators that are beholden to platform restrictions. This also allows for all of the proceeds to go directly to the creator instead of a third party.

Companies Accepting Crypto

  • Wikipedia (Donations)
  • Overstock (General merchandise)
  • Expedia (Hotel bookings)
  • Microsoft (Microsoft Store credit)
  • Virgin Galactic (Space flight)
  • CheapAir (Airline bookings)
  • NewEgg (Technology equipment)
Purchase a flight with bitcoin
Buy Flights with Cryptocurrency (cheapair.com)
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Certain businesses accept or have accepted cryptocurrency.

There are several small businesses that accept cryptocurrency and several more larger companies that have previously or are currently accepting cryptocurrency. Whether it be travel, online buying of goods, or payment for services, cryptocurrency is increasingly being employed as a payment option.

Money Without Borders

Cryptocurrency does not care about borders
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Cryptocurrency is accepted on a global scale. It is a currency that transcends borders.

One of the most annoying parts of traveling out of the country is having to exchange currency when arriving at your destination. Airport currency exchanges use their convenient placement to charge exorbitant fees.

Bitcoin is a borderless global currency, so no conversion is needed when traveling. There are many examples of content creators using only cryptocurrency to travel internationally. Surprisingly, most are able to easily accomplish this by finding a few merchants willing to accept bitcoin and other cryptocurrency.

Trading

Volatile cryptocurrency market
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Cryptocurrency markets can be utilized the same way traditional markets are. However, these markets can be more volatile.

Crypto markets are constructed like traditional markets. As traditional stocks can be traded in attempts to gain a profit, so can cryptocurrencies. Cryptocurrency exchanges work similar to stock trading platforms. Some day traders have even shifted towards cryptocurrency markets. We are currently seeing an institutionalization of cryptocurrency, with traditional financial entities adopting or accepting cryptocurrency. Major banks and investors have invested in cryptocurrency. There are also alternate markets that have arisen that have analogous counterparts in the stock market, such as a futures market. Bitcoin futures were first offered by CME and CBOE.

HODLing

HODLing bitcoin
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HODLing is the practice of holding or amassing coins.

Many cryptocurrency users look to save their crypto in the hopes that it will increase in value or functionality. HODLling, pronounced as “holding”, is the practice of amassing some coins.

This ecosystem is still developing, so there are many users who choose to simply hold their cryptocurrency. Hodling is partly investing, but speculating on the long term future utility instead of trading cryptocurrency.

The misspelling of the term first caught steam on a Bitcoin related forum. At the time of the post, Bitcoin's price had gone down significantly for that relative time period. One user went on an epic rant, using the term “hodl” attached to the sentiment of weathering the hard times. The post went viral within the community, and soon embedded itself in the cryptocurrency lexicon. It became a rallying cry when crypto was having more downs than ups. It is still a popular meme used today.

Future Vision and Blockchain Use Cases

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This section examines how blockchain technology can potentially impact several businesses and industries.

While Bitcoin specialized in cryptocurrency transmission, blockchain technology has proven to have many applications beyond this. While blockchains have proven to transfer money, it is done in the form of data exchanges. We've talked about monetary exchanges, but there's additional data that can be transferred, allowing many industries to be able to utilize blockchain technology.

Blockchain and Business

Smart contracts have the possibility to revolutionize how business is done over the internet

May lead to innovation in a variety of industries:

  • Supply Chain
  • Education
  • Accounting
  • Governments
  • Non-profits
Conducting business
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Introduce the industries that will potentially be impacted by the introduction of blockchain technology.

Blockchains are great tools for sharing immutable data, as each transaction produces a digitally unique receipt outlining transaction details. The three main characteristics of digital uniqueness are covered by the use of a blockchain. Each transaction is timestamped, immutable, and proves the integrity and validity of that transaction. This opens up several industries that could be impacted by blockchain technology.

Provenance/Supply Tracking

Supply Chain
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Blockchain technology can improve supply chain coordination by allowing different parties to work together as equal participants.

When it comes to getting the products you buy on the shelves of your local market, there are many different people that have to work together. The supply chain describes how food or other goods get from their point of origin to their point of sale.

Many different parties working together pose a problem. Who gets to be in charge? Who oversees the entire process? A central server is a possibility, but that would require all of the parties giving up control, and money, to an additional third-party that would make sure the entire process is executed before paying the individuals or businesses involved. Disputes, which are bound to happen, have no resolution. When a problem occurs, it is difficult to pinpoint the part of the supply chain that messed up. There is no dispute resolution mechanism in these contracts, and these issues often have to be resolved in a courtroom, incurring massive costs for everyone involved.

When many parties are trying to do business with each other, decentralized technology provides a possible solution. Instead of one administrator having control of the process, each party has access to only the data they need to execute their part of the transaction. Use cases have included printing QR codes on eggs, where each time the product changes hands the codes are rescanned to make sure no damage has occured. A blockchain can provide digital uniqueness, complete with an immutable digital receipt, without the use of a central server.

This technology has the potential to impact the supply chain, whether it be fighting food fraud, or enforcing fair trade policies. Immutable digital receipts can be used to settle many disputes.

Certifications and Credentials

Blockchain records of professional certifications
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Blockchains can limit academic fraud by keeping records of professional certifications.

Credentialing limits academic fraud. People lie about who they are to their own benefit, and that can have dangerous results.

Currently, credentials are issued or monitored by private organizations. The problem with this is that this information is not easily accessible to patients, academics, or other people trying to verify the credentials of the professionals they need to interact with.

Some of these organizations are looking to decentralized technologies to make credentials more transparent to assure public trust. The public has a right to know that their doctor isn't a 16 year old kid that hasn't graduated medical school. By adding the elements of a doctor's CV to a blockchain, a digitally unique history can established for service providers

The solution is to make this information, these credentials, available to several nodes on a decentralized network, and allowing other nodes to verify and reference that information.

Using a blockchain, immutable certificates and degrees can be compiled in a chronological order. License revoked? An additional entry could be added to the blockchain noting this occurrence.

References can be logged, creating a digitally unique profile of each author's works.

Accounting

Accounting spreadsheet
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Blockchain technology provides a public reciept that can improve upon current accounting and assurance practices.

Accounting is all about, well, accountability. Everyone has heard of the term “paper trail”. When we're talking about accounting, that paper trail is receipts that show income and spending. Organizations and individuals have to compile a bunch of physical receipts and they digitize them or have accountants to the same thing. This is all done relying on a central server, a single source of truth. And that truth can be lost or compromised via malfunctions and hacks, respectively.

Transparency expedites assurance. All federal income taxes are self-reporting, meaning that you have to figure out how much you owe or are owed. It's a backwards system where the government kind of knows how much you owe, makes you figure out that amount, and then makes sure you're correct. A set of ordered digital records on a decentralized network could add transparency to taxation that could essentially upend how you pay taxes. If digitally unique records are constantly updated, as opposed to reported once a year, tax settlement could occur more often, making triple-entry accounting a possible solution to expediting the taxation process.

Banking

Stacks of cash
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Decentralized digital uniqueness is already impacting operations in the financial technology sector.

Decentralized digital uniqueness brings about two things that can impact banking. The first is that it can provide the ability to know which account has what amount of money at any given time (unit of account). This ability leads us to the next thing that decentralized digital uniqueness then provides, complete control over your own money.

Think about it, we've relied on banks to be the centralized holder and processor of many payments, and this has led to certain barriers when it comes to using our own money. These banks sometimes act as gatekeepers, keeping you from your own funds.

The bottom line is that you had to rely on banks in order to store and transfer our own money. A decentralized network made up of digitally unique participants completely undermines the status quo of centralized banks. A network that can come to a consensus has proven to be a viable means of transaction, Bitcoin proved that. There is no reason these principles can't extend to the banking and financial services industry as a whole.

This is already happening with the onset of something called Decentralized Finance. Instead of ignoring this technology, banks are asking how they can adapt blockchain technology to fit their needs. We already talked about how long it takes to conduct a simple wire transfer compared to a cryptocurrency transaction. Banks have noticed and asked how they can use the technology for interbank settlement. It's currently relatively quick to make a transaction using bitcoin compared to a wire transfer, now banks are using blockchain technology in order to address this issue.

Non-profit

Transparency for non-profit resources
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The transparency provided by blockchain technology can give donors more assurance that their funds will go to worthy projects.

We've examined how digital uniqueness comes into play for different use cases. Digitally unique records can include records of receiving and spending. The purpose of donating to these non-profit entities is to send money to a worthy cause in order to address a problem, but many non-profits end up spending varying amounts of that money on overhead as opposed to directly impacting the desired cause.

If you donate to an organization, often you don't know how funds are spent. Blockchains create a digital record of where that money is donated, and where it is ultimately moved and spent. Charities can provide transparency by selectively moving their funds to designated wallets that can be “earmarked” for specific products. Since public blockchains are transparent, the wallets spending would be open to scrutiny. The transparency of a decentralized network can greatly limit fraud and misuse of funds.

Self-Sovereign Identity

Control over your personal data
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A self-sovereign identity backed by blockchain technolgy can give us greater control over our personal data .

Identity theft is a horrible thing to go through. Why does it seem to happen so much?

You give your personal data over to organizations that aren't good at preserving privacy. This is the exact opposite of what a self-sovereign identity can achieve. A self-sovereign identity gives you control over your personal data and who is allowed to view that data. Data transmission on an as needed basis

Example

When you try to buy alcohol, you need to hand over your entire ID and have it scanned in order to make that purchase. You have to hand over your driver's license number, address, donor status when the only thing that has to be confirmed is your age. You're pushing all that information into the hands of a third party where it can later be compromised. With decentralized identity management solutions, only the information needed to transact is sent to be confirmed. Instead of handing over a document with all of your personal information, you're simply using the necessary parts of your established, encrypted identity in order to hand over just the information that is required. The less that your important personal data is used in a transaction, the less likely you are to have your identity become compromised. This is a big step to ensuring our digital privacy and gives us greater ownership of our identities.

Blockchains are not Perfect

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This section addresses the problems currently holding back the advancement of blockchain technology.

So if blockchains have all these great practical uses, what's holding them back?

Privacy

  • Blockchain require transparency
    • Some information must be shared
    • But what?
  • Different types of Privacy
    • Data itself
    • Amounts
    • Metadata
  • Potential Solutions
    • Coin Join
    • Zero-Knowledge Proofs
    • Homomorphic Encryption
Blockchain and privacy
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A blockchain's transparent nature means it is not practical for certain applications considering all data transacted is transparent.

Why this is problematic?

You wouldn't want to put your certain personal data, like medical records, on a public blockchain for anyone to see. Even if this data is encrypted now, there is no guarantee that the encryption won't be broken in the future.

Another issue is that data is only needed for a certain amount of time. Data resides on the blockchain forever, but some data becomes irrelevant after a certain amount of time.

Scaling for Global Usage

  • Expensive due to inefficiency
  • Network bandwidth & disk space are finite resources
  • Current technology cannot support global population of 8 billion
  • Transaction backlogs and high fees would result
  • Possible solutions
    • Second Layer
    • Sharding
Scaling dilemma
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The scaling dilemma refers to the blockchain's limitations concerning transaction throughput.

One of the biggest problems facing blockchains is their ability to process transactions fast enough so a backlog doesn't occur. Since they rely on decentralized technology and not a central server, blockchains can only process a few transactions per second. Currently, Visa processes about 1600 transactions per second. When increased demand is put on the network, fees and backlogs occur. Scaling describes the process of trying to get blockchains processed transactions per second closer to that of Visa, as to avoid these “traffic jams” of transactions that cause high user fees.

Decentralized networks come with a tradeoff, it requires multiple nodes processing information as opposed to one central server. Since every node validates every transaction, it takes work and time to update everyone's ledger. A centralized process requires fewer people to know about the transaction, and can therefore process these transactions at a faster rate.

Fortunately, there are many projects using a variety of strategies in order to solve this problem.

One of these is the introduction of second layer solutions. Second layer solutions work in concert with blockchains. They process data locally, communicating with the blockchain every so often in order to update the master ledger. Since every transaction doesn't have to happen on chain, these networks reduce fees and backlogs. Not every node needs to know about these transactions, so it is done off chain on the “second layer”. There are many different second layer solutions that have been and are being explored.

Another possible solution to the scaling problem is known as “sharding”. Basically, you are segmenting the blockchain into “neighborhoods” or sections, and users can only interact within their own segment of the blockchain. This helps with scaling but introduces a new set of problems. This segmentation of the blockchain makes it difficult to interact with someone outside of your “neighborhood”, as you need to lock your funds in your section of the blockchain.

There are more solutions being explored than using second layers or sharding, and more strategies are constantly being explored.

Unanswered Questions

  • Governance
    • What do you do when things go wrong?
  • Incrementalism
    • Are you too dependent on the technology?
  • Appropriateness
    • Is this data useful/needed forever?
Dilbert blockchain comic
Blockchain Comic (dilbert.com)
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There are certain questions about blockchain technology that are yet to be answered.

There are some questions involving blockchain technology that are yet to be resolved. Managing and making decisions about the governance of a decentralized network is much harder compared to a centralized system. Blockchains are not a perfect technology. There is the possibility that something can go wrong. So what decisions are made and who makes them?

Blockchain technology offers many potential solutions, but at which rate should it be adopted?

Historical data is part of the blockchain's digital architecture, but at what point does certain data become irrelevant? You don't need to know about the production of a certain food once it has been safely consumed; the data is simply bloating the chain, slowing things down. How do you manage historical data that might not be that important?

Not User-Friendly Enough

Blockchain related tools can be difficult to use
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The usability of blockchain technology has improved greatly, but still has to continued to improve.

When it comes to the tools needed to properly utilize blockchain technology, they aren't quite user friendly enough. They are a vast improvement upon the ecosystem that existed just a few years ago, but many still find cryptocurrency management difficult. It is only logical to assume that this trend is going to continue. There are many projects looking to make using cryptocurrency and blockchain technology easier to use. With the improvement concerning ease of use over the past few years, there will no doubt be significant advancements towards a tool that is so easy to use, most of the world has the access and ability to properly utilize it.

But Still Worth Using!

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This section addresses the reasons that blockchain technology still has relevant applications.

Despite these issues, there are still many situations that can be addressed with blockchain technology.

Modern Challenges

Personal data is being harvested
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There are several current problems that blockchains can help solve.

  • PayPal, Venmo, Visa, etc, refuse to do business with certain segments of society
  • We're being spied upon by various government agencies
  • Our data is being harvested by various corporate entities
  • Maligned actors attack our core communication infrastructure
  • The internet demands a native unit of account

Technological Tools

  • Resiliency against fragile internet infrastructure
  • Defend our freedoms to transact value directly
  • Cryptography as digital armor
Decentralized Index Aggregator
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Blockchains can provide technological tools and resources that can address current problems.

Being armed with technological tools to fight against abuses of our personal freedom, or to potentially mitigate disaster.

Web3

Bringing Decentralized Technology to our internet

  • Removing intermediaries means you can transact more directly
  • Gives creators more options on how to generate revenue

Microtransactions

  • Decentralizing the web could lead to better capacity allocation
  • The introduction of digital uniqueness may give rise to control over our personal data
  • Re-assert the internet as a playground for everyone
    • Not only large corporations
    • Protect from state attacks
A server
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Web3 can allow us greater control of our personal data.

The goal of web3 is to bring decentralized technology to our internet. This allows us to remove intermediaries and means you can transact more directly. This can give creators more options on how to generate revenue, including microtransactions. Introducing digital uniqueness may give you better control over your personal data, allowing the internet as a playground for everyone and not only large corporations.

While there is a long way to go before there is a complete functional decentralized web, blockchain technology has allowed us to have a goal to strive towards.

Summary

  • Storing Cryptocurrency Securely
  • Hands-on Crypto Experience
  • Understand how a blockchain transaction works
  • Define cryptocurrency and how it's different than traditional money
  • How blockchain may impact the world
Course Goals
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Review course goals.

Congratulations! You have completed the Crypto Curious Course! Here's a recap of what was covered:

  • What are blockchains, cryptocurrency, and decentralization
  • The purpose of these innovations
  • How blockchains work
  • Best practices for storing cryptocurrency
  • The potential impact that blockchain technology can have on various industries
  • Where the blockchain revolution is headed

Want to expand your blockchain knowledge? Go to WeTeachBlockchain.org/courses/

Q&A

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