Introduction: The Crypto Basics
Here we will dissect the foundations of cryptocurrencies. This will include exploring what blockchain technology is and how it functions to giving sources explaining what a cryptocurrency is.
Blockchain
A Blockchain can be thought of as the internet, but with a built in accounting system that enables secure payments and keeps track of all ownership. On top of this “internet”, it is then possible to build companies that use the novel features of this accounting tool.
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For a simple, visual explanation here is a video. Note that this primarily is about Proof of Work based block chains.
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Here are two articles that explain blockchain and what makes it special.
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Investopedia - What is a Blockchain
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Euromoney Learning - What is a Blockchain
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Although blockchain is a unique, incredible innovation, there is a major challenge which developers face. This is the Blockchain Trilemma which refers to blockchains being prevented them from achieving security, scalability and decentralisation due to tradeoffs they face. As a result a significant proportion of innovation within the digital assets space focuses on addressing this problem (e.g. layer 2 solutions, rollups, etc.). We can use Ethereum as an example. Here decentralisation and security was prioritised which has led to major scalability problems for Ethereum as transaction fees have skyrocketed with increased adoption. As a result developers have begun developing layer 2 protocols and rollups to allow for greater scalability. This will be covered below. Here is a great article for learning more on the blockchain trilemma.
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Currently there are two primary forms of consensus mechanisms for blockchains; Proof-of-Work and Proof-of-Stake. Here is an article and a video explaining both and their differences.
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Article - What is Proof of Work or Proof of Stake
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Cryptocurrency
A Cryptocurrency is a form of digital assets based on a network that is distributed across a large number of computers (a blockchain). This network can perform a number of tasks and roles outside of its original function of being a digital currency. Thus, here is an article and a video about what a cryptocurrency and its various applications/types.
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Investopedia - What is a Cryptocurrency
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CoinBureau - Explain Crytpo to Beginners
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In the more technical side, it is important to understand the cryptocurrencies are essentially layered protocols which perform certain functions. To understand this, check out the section below.
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As you may have seen by now, there is an ecosystem of various types of cryptocurrencies with different functions and use cases. To understand this and more to a deeper extent, here is an article about the different types of cryptocurrencies, the various terminologies related to this and some technical aspects as well.
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Ultimately, one can view most cryptocurrencies as companies which you can invest in and receive dividends from.
The Applications and Potential of Crypto
Now that you've gained a general understanding of cryptocurrencies and blockchain technology, it is very interesting to delve into the various use-cases of these concepts both theoretically and practically.
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The application of Blockchain technology itself can be highly disruptive in the real-world. From businesses to governments, this technology has the potential to benefit society significantly. Here is an article that about 34 Blockchain Applications and Real-World Use Cases Disrupt the Status Quo.
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At the moment the most promising area where cryptocurrencies can revolutionise is in the finance sector. Namely through Decentralised Finace (DeFi). Here is an article which explains DeFi, its potential and benefits.
Protocols and Layers
Protocols and Layers are essential concepts for understanding the technical side of crypto assets. They are essentially the underlying technology which allows for blockchain and its potential applications to become reality.
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A Protocol is a set of rules which allow for the exchanging and processing of data between computers. Think of it as a language between humans; without a shared language (e.g. English) they would be able to engage and communicate. Blockchain protocols facilitate data sharing and dictate processes such as transaction validation, system security, the interaction between participating nodes, etc.. Ultimately, protocols are what facilitated the decentralization inherent within crypto by defining how information and data is distributed without the need for a centralized entity.
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Layers specify the set of protocols used in certain components of the blockchain architecture. Think of it as different layers to a cake with each layer serving a unique purpose. The layered architecture of blockchain technology can be split into six categories which then are grouped as seen in this image.
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The Hardware/Infrastructure Layer, also known as Layer 0, can be seen as the baking sheet which makes the cake possible. It involves all components which allow for blockchain networks to function and be a reality, this includes the internet, hardware and connections.
The Implementation Layer, also known as Layer 1 protocols, is the system associated with the base architecture of a blockchain network. These protocols set the rules and parameters for the entire network such as the consensus processes, transaction throughput, dispute resolution, etc.. Bitcoin and the Ethereum Network are all layer 1 protocols. Meaning when you purchase these tokens you are investing into a layer 1 token.
Layer 2 protocols, also known as Layer 2 (L2) Solutions, are the protocols and overlapping networks which sit on top of the base layers and provide scalability. This is primarily to provide interoperability features and scalability by carrying some load. The primary difference from layer 1 protocols is that layer 2 is a third-party integration used in conjunction with layer one to enhance system efficiency and the number of nodes whilst layer 1 is the blockchain of the decentralized ecosystem. Thus layer two crypto are tokens and systems which are built on top layer 1 networks. An example is Polygon (Matic) which is a cryptocurrency built on top of the Ethereum network to address ETH’s scalability problems when facing mass adoption.
The application layer, also known as Layer 3 protocols, consists of protocols which all applications run on the blockchain. The applications are known as Decentralized Application (Dapps). Layer 3 is ultimately what gives blockchain real-world applications by allowing for the implementation and execution of use-cases.
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Tokenomics
Coming Soon!
Roll-ups
Now that you've gained a general understanding of cryptocurrencies and blockchain technology, it is very interesting to delve into the various use-cases of these concepts both theoretically and practically.
​
The application of Blockchain technology itself can be highly disruptive in the real-world. From businesses to governments, this technology has the potential to benefit society significantly. Here is an article that about 34 Blockchain Applications and Real-World Use Cases Disrupt the Status Quo.
​
At the moment the most promising area where cryptocurrencies can revolutionise is in the finance sector. Namely through Decentralised Finace (DeFi). Here is an article which explains DeFi, its potential and benefits.