Crypto Flashcards
What is a blockchain
A blockchain is simply a database, with one key difference. The data is distributed across a network of computers, rather than kept on one central server. And here’s the important part - anyone with the required hardware can in principle run a ‘node’ and contribute to the security of the network. This is how the Bitcoin network operates. It is not controlled by any single authority or organisation, but by tens of thousands of individual nodes. Now, combine this with the fact that for any new data to be written to the blockchain, all nodes must be in agreement that the new data is valid. It must be verified against the rest of the network.
Once new data is verified and added to the blockchain, it is timestamped. This means all historical transactions/data are publicly viewable, permanently recorded, and irreversible.
Example:
* You want to send 1BTC to a friend (lucky you for owning 1 BTC!)
* When you send that transaction, it is checked by the nodes against the blockchain to make sure you have enough BTC to make the transaction
* If you do, the transaction will be processed and recorded to the blockchain
* If you don’t (let’s be honest, most of us don’t have 1BTC…), it will be rejected
There’s far more to it of course, and there are many different ways blockchains can operate. Learning in detail how the Bitcoin network works, however, gives you a solid foundation for understanding other blockchains.
what is a wallet?
Simply put, a crypto or Web3 wallet is both your gateway to the world of Web3, and the place where all your cryptocurrencies and other digital assets, like NFTs, are tracked. Think of it as one digital identity when interacting with a blockchain (you
can have as many ‘identities’ as you have wallets). Your wallet has a unique address, which can both send and receive cryptocurrencies and digital assets, as well as interact with smart contracts. This means you can interact with any Web3 dapp with one click once you’ve signed in to your wallet.
There are two huge advantages to this.
1. Once you’re logged into your wallet, you can connect to and access any dapp on the same network in one click, with no additional security or verification required.
2. Your personal details/social accounts are not needed. All any Web3 sites or dapps will see is your wallet address. In the future, you’ll likely be able to control what additional data to send, if you choose to.
Given the huge value of personal data in Web2, and the often unscrupulous methods many of the big players will use to access, exploit, and sell your data, we can start to see the massive power and potential of Web3. Wallets come in two varieties - software and hardware.
Software wallets: are often referred to as ‘hot wallets’ as they are directly connected to the internet and blockchain networks. Metamask is an example of a software wallet, and one of the most popular in the world today.
Hardware wallets: also known as ‘cold wallets’ come in the form of hardware that must be connected to a device before interacting with the blockchain.
There are advantages and disadvantages to both software and hardware wallets. You can read more about wallets in Step Three.
What is a Cryptocurrency?
Cryptocurrencies, or tokens, are digital currencies secured by cryptography and digital signatures. This makes creating counterfeit tokens or double- spending basically impossible.
Because cryptocurrencies are built on blockchains, they are not owned or controlled by any single entity, putting them out of reach of central banks, governments, and other bodies. As long as the blockchain is running, cryptocurrency transactions will continue.
This means that anyone with a wallet and some crypto, even a small amount, can access a $240 billion (and growing) network of decentralized financial applications.
You can send and receive currency without permission, to anyone with a wallet, anywhere. You don’t need to be approved by a bank, and you don’t need an arbitrary credit rating to participate.
This fact alone has driven massive adoption and interest from those traditionally locked out of similar financial products.
What are Smart Contracts and Dapps?
Smart Contracts act as the fundamental link between blockchains, wallets, and cryptocurrencies. Ethereum is currently the most popular and active smart contract platform in the world, with almost 2 million smart contracts live on the network.
Let’s suppose you want to buy a car. You can go to a car dealership where a salesman will act as a third party to the car manufacturer and set up a contract for you. Or, you can buy a car online, again using a third-party website to set up and execute the contract.
Buying a car on the blockchain would simply be a case of signing the transaction via a smart contract, using your wallet.
So, smart contracts simplify the process. They can be programmed by anyone with the right knowledge.
Smart contracts aren’t actually a new concept. In fact, you can think of a vending machine as a type of ‘smart contract’. There is no need to trust or interact with a human third party to buy your snacks. You pay the money, you receive your snacks. The rest is automated.
This concept is the same for smart contracts on the blockchain. Today, smart contracts are most commonly used to create the functionality for decentralized exchanges on the blockchain - DeFi. The potential, however, is huge when we start to think about how smart contracts could be applied to real-world and additional digital assets.
