Home / Cryptopedia

What is Blockchain & Cryptocurrency?

A cryptocurrency is a digital asset referred to as “coins” or “tokens” designed to work as a medium of exchange that uses cryptographic (encrypted) hash algorithms (mathematical puzzles) to secure its transactions, control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are a type of digital currency, alternative currency and virtual currency. Each unit of a cryptocurrency is linked to a private key (unique identification number) and is recorded every time the coin is used in a transaction to the public key (identification number associated with the hash algorithm). Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems.

The decentralized control of each cryptocurrency works through blockchain technology, which is a public transaction database functioning as a distributed ledger that records and validates all transactions chronologically. The blockchain consists of an ever-increasing number of linked blocks. Each block within the chain holds batches of validated transactions including the cryptographic hash (information) of the prior block thus guaranteeing the integrity of all blocks in the blockchain. New block creation is dictated by the algorithm and proof scheme each cryptocurrency utilizes. The complete blockchain data is stored on many different networked nodes (computers running the core software) across the network and anyone can create a node if they have the right pieces.

What is Bitcoin & Altcoin?

Bitcoin is the first open-source decentralized virtual currency developed in 2009 with the highest market capital that uses peer-to-peer technology to operate without a central authority or banking institution and manages transactions which issues new Bitcoin, also known as mining, using the collective network. No one person or organization has total control over the entire network. The price of Bitcoin (BTC) is determined by supply and demand. If the demand increases so does the value.

Altcoin refers to all cryptocurrencies other than Bitcoin. There are currently over 1500 altcoins in existence.

How does it work?

Depending on the specific cryptocurrency being used, the process of secure record keeping and creation of new blocks is accomplished by a Proof-of-Work (PoW) or Proof-of-Stake (PoS) scheme. Both systems serve the same purpose for the blockchain but complete the process in a different way.  

Proof-of-Work (PoW)

Proof-of-Work is a computer algorithm-based consensus method or “consensus algorithm” used by cryptocurrencies to record and validate transactions as well as create new blocks on the blockchain. Proof-of-Work is the original method created and utilized by currencies such as Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and many others. The process of “mining” refers to using computer hardware to constantly solve the extremely complex and computationally difficult mathematical equations required to add blocks to blockchain. This is a lengthy endeavor eventually producing a single piece of data that fits within the cryptocurrencies hash algorithm. Miners are rewarded with newly generated coins if their computer finds this piece of data first, also known as “finding a block”. That piece of data is the base information for the next block in the chain. Once the data is found a block is created and the race begins again to find the next block.

Proof-of-Stake (PoS)

Proof-of-Stake is an alternative consensus algorithm used to verify and reach agreement amongst all connected nodes. Proof-of-Stake blocks are not mined, they are instead “forged” or “minted”, and individuals contributing to the expansion and integrity of the blockchain are referred to as “validators” (the equivalent of “miners” in PoW algorithms). A person with a substantial quantity of the specific cryptocurrency can stake (deposit) their holdings on the network usually via a specialized transaction. The process of creating and agreeing to new blocks is then done via the consensus algorithm that all current validators are participating in via their stake. Validators are rewarded for validating a block in the form of coins that were collected from users by the network as a transaction fee. Validators are selected on a pseudo-random basis for forging blocks and adding them onto the blockchain. Factors such as the size and length of a person’s stake influences validator selection.  

How are transactions processed?

A transaction consists of the sending or receiving of cryptocurrency between two cryptocurrency wallets. Each wallet has a private key often called a “seed”, or "wallet seed”, which is used to digitally sign the transaction and provides the mathematical proof that it came from the correct owner of the wallet. A user defines where the coins will go by inputting the recipient’s wallet receive address, and the amount of cryptocurrency to be transferred. Transaction completion time varies by cryptocurrency, while some can take seconds others can take hours. Additionally, some cryptocurrencies charge transactions fees for every transaction. The transaction is complete when the network has verified and recorded the transaction within the blockchain.

What is mining?

Miners are the record-keepers that maintain the blockchain by constantly verifying and collecting newly broadcasted transactions from the network and recording them into groupings called blocks. The process uses computer processing power to continually solve the extremely complex and computationally difficult mathematical equations required to add blocks to blockchain. This is a lengthy endeavor eventually producing a single piece of data that fits within the cryptocurrencies hash algorithm. Miners are rewarded with newly generated coins if their computer finds this piece of data first, also known as “finding a block”. That piece of data is the base information for the next block in the chain. Once the data is found a block is created and the race begins again to find the next block.

How or where can I purchase a cryptocurrency?

Bitcoin, Litecoin, Ethereum and most cryptocurrencies can be purchased using your credit/debit card, wire transfer or PayPal from many exchanges available online. Most exchanges have apps that process those transactions and even downloadable apps that act as your cryptocurrency wallet. Make sure to purchase through a reputable exchange. You may also purchase cryptocurrencies from another user through a blockchain.

There are over 2000 variations of cryptocurrencies, the top 5 in order of market capitalization are:

  1.     Bitcoin
  2.     Ethereum
  3.     Ripple
  4.     Bitcoin Cash
  5.     Litecoin

What can cryptocurrencies do for me?

With cryptocurrencies like Bitcoin you can make transactions of value anonymously if you choose so, without paying your typical bank per transaction or monthly fee essentially lowering that cost for buyers and sellers and without concern for currency conversion. This makes cryptocurrencies efficient and almost instantaneous where transaction confirmations are received anywhere in the world within 10 minutes or less typically and transactions can’t be reversed once made. There are also platforms that you can use to trade, lend and invest cryptocurrencies to create daily percentage profits. Many companies are now accepting cryptocurrencies for goods, services and almost anything of value.

What is a cryptocurrency wallet?

A cryptocurrency wallet is the interface used to store, send and receive cryptocurrency. It works by storing the public and private key data linked to individual coins and wallets.  Wallets can come in several different forms such as desktop wallets (software), online wallets (websites), mobile wallets (phone apps) and more. A wallet can contain multiple public and private key pairs. The cryptocurrency itself is not in the wallet. In the case of bitcoin and cryptocurrencies derived from it, the cryptocurrency is de-centrally stored and maintained in a publicly available ledger (blockchain). Every piece of cryptocurrency has a private key. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency.

Background: The 5 Cryptocurrency Wallet Types

Before creating a wallet it is important to understand the advantages and disadvantages of each type. Cryptocurrency wallets are classified as either “hot wallets” or “cold wallets” (also referred to as “hot storage” and “cold storage”).

Hot Wallets store the wallet and private key data online and thus are always connected to the internet. While this creates convenience and accessibility, it also means the coins stored this way rely on elements outside your control. This is the most easily hack-able method of storing cryptocurrency.

Cold Wallets are cryptocurrency wallets that are never connected to the internet or can be permanently disconnected at any time. This is the safest method of storage but can be more complex to use, not always accessible and relies on the user for its safe keeping.

There are 5 different categories of cryptocurrency wallets, based on their type of storage and access capabilities.

  • Online (Web-Based) 
  • Mobile (Phone App) 
  • Desktop (Software) 
  • Hardware (Flash Drive) 
  • Paper (Paper/Plastic)

1) Online Wallet (Web-Based)

Online wallets are cryptocurrency wallets utilizing an exchange or third-party company to store wallet data online. Wallet information can be accessed at any time via a web browser and internet connection.

Advantages:
- Easily accessible from almost any device
- One of the most convenient wallet types
- Overall quickest transactional speeds
- Ideal for holding small amounts of cryptocurrency
- May be able to manage multiple cryptocurrencies
- Can be directly integrated into an exchange

Disadvantages:
- Least secure & most hacked wallet type
- Relies on elements outside your control
- Wallet and coin information is stored by a Third Party
- Long history of people losing everything in these wallets
- Hot Wallet

Popular Examples: Coinbase (https://www.coinbase.com), Binance (https://www.binance.com), Blockchain (https://blockchain.info)

2) Mobile Wallet (Phone App)

Mobile wallets are cryptocurrency wallets that are accessed via a smartphone or tablet using Android/iOS. These wallets combine traits from other wallets types including online, hardware and desktop wallets.

Advantages:
- More practical and easier to use than most other wallet types
- Convenient and fast to accept or send payments on the fly
- Additional features above and beyond online, hardware and desktop wallets

Disadvantages:
- Very insecure and susceptible to multiple forms of hacking
- Losing or having your phone stolen could result in a complete loss of coins
- Hot Wallet

Popular Examples: MyCelium (https://wallet.mycelium.com), Copay (https://copay.io),                Jaxx (https://www.jaxx.io), BreadWallet (https://breadapp.com)

3) Desktop Wallet (Software)

Desktop wallets are stored on and accessed with an individual computer. They come in the form of software or a program that is locally installed on a computer. Desktop wallets are by and large more secure than both online and mobile wallets. Depending on how your computer is configured to connect to the internet, this can function as either a hot wallet or cold wallet option.

Advantages:
- Powerful and complete capabilities
- Very secure with the proper configuration
- Wallet & Private Key data stored locally
- Cold Wallet

Disadvantages:
- Requires more advanced knowledge
- Vulnerable to hacking or loss if not properly managed
- Not as convenient as online or mobile wallets

Popular Examples: Electrum (https://electrum.org), Exodus (https://www.exodus.io),            Coinomi (https://coinomi.com), Bitcoin Core (https://bitcoin.org)

4) Hardware Wallet (USB Flash Drive)

Hardware wallets are stored on physical hardware typically in the form of a USB flash drive. They can be accessed multiple ways such as a web browser interface or program. This is a cold wallet and one of if not the most secure wallet type.

Advantages:
- The most secure long term storage option
- Private keys are never exposed
- Requires physical confirmation of transactions via the device
- Can store multiple cryptocurrencies
- Cold Wallet

Disadvantages:
- Can be cumbersome to use
- Not the most convenient or accessible
- Losing the device could result in permanent loss of coins

Popular Examples: Ledger (https://www.ledgerwallet.com), Trezor (https://www.trezor.io),            KeepKey (https://www.keepkey.com)

5) Paper Wallet (Paper or Plastic Card)

Paper wallets store wallet private key data on a piece of paper or a plastic credit card-esque document. Before hardware wallets, paper wallets were the defacto standard for cold storage of cryptocurrencies.

Advantages:
- One of the most secure long term storage option
- Not stored on a computer or electronic device
- Completely disconnected from the internet
- Cold Wallet

Disadvantages:
- Not convenient or very accessible
- Advanced technical understanding required
- Losing the document could result in permanent loss of coins

Popular Examples: Wallet Generator (https://walletgenerator.net), Bitcoin Paper Wallet (https://bitcoinpaperwallet.com) Bitaddress (https://www.bitaddress.org)

Mining Pools

Once you have determined and created a wallet that best suits your needs you can use that to join a mining pool. Each cryptocurrency will have many different pool options and each pool has their own associated reward types and fee structures. This information will be located directly on the pools site.

Mining Pool Reward Types

PPS: The Pay-per-Share (PPS) approach offers an instant, guaranteed payout for each share that is solved by a miner. Miners are paid out from the pools existing balance and can withdraw their payout immediately. This model allows for the least possible variance in payment for miners while also transferring much of the risk to the pool's operator.

PROP: The Proportional approach offers a proportional distribution of the reward when a block is found amongst all workers, based off of the number of shares they have each found.

PPLNS: The Pay Per Last N Shares (PPLN) approach is similar to the proportional method, but instead of counting the number of shares in the round, it instead looks at the last N shares, no matter the boundaries of the round.

DGM: The Double Geometric Method (DGM) is a hybrid approach that enables the operator to absorb some of the risk. The operator receives a portion of payouts during short rounds and returns it during longer rounds to normalize payments.

CPPSRB: The Capped Pay Per Share with Recent Backpay uses a Maximum Pay Per Share (MPPS) reward system that will pay miners as much as possible using the income from finding blocks, but will never go bankrupt.

Popular Examples: Slush Pool (https://slushpool.com), F2Pool (https://www.f2pool.com), Nanopool (https://nanopool.org), Nicehash (https://www.nicehash.com),                                  Antpool (https://www.antpool.com)