A Basic Guide to Bitcoin Network Economics and Security » CryptoNinjas

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Blockchain technology is the basis of the cryptocurrency movement. Without blockchain, there is no way for cryptocurrency to exist. Think of the blockchain as the infrastructure through which cryptography flows. If fiat currency has centralized banks, crypto has blockchain.

The “block” in the word blockchain refers to unique pieces of digital information. Meanwhile, the portmanteau “chain” points to the public database where the blocks are stored. Cryptography connects these blocks together.

Each block in a blockchain contains the following elements:

  • Transactional information (date, time and value)
  • Identities of the persons involved in the transaction
  • A distinctive code or hash unique to each block

Each time a transaction is made using cryptocurrency, a block is added to the chain. When verifying the exchange, a unique code is assigned to the transaction, which legitimizes its existence within the blockchain infrastructure.

Blockchain records remain transparent to stakeholders. Cryptocurrency traders can even link their computers to a specific blockchain so they can get updates on new transactions.

When talking about blockchain, it is imperative not to ignore the topic of cryptocurrency, which is the lifeline of the technology.

Why Crypto?

Cryptocurrency is an inevitable result of developments in financial technology (fintech). Given the continued rise of e-commerce, for example, it’s understandable that digital assets have become de rigueur. After all, online financial transactions have certain risks to which fiat currency is most exposed.

Therefore, alternative payment methods become the go-to option for those wary of these threats.

Another selling point of cryptocurrencies is how they offer stakeholders a certain level of anonymity.

This is not something that fiat money allows. For one, the banks know everything about your dollar stash.

Finally, cryptocurrency offers a legitimate opportunity to accumulate wealth through trading. If you buy at the right time and sell at the right time, you can easily increase the value of your digital assets exponentially.

However, it is crucial to note that cryptocurrencies differ from each other. In fact, they can be classified into seven broad categories, which are as follows:

  1. Transaction mechanism (Bitcoin, Litecoin)
  2. Distributed Computing Token (Ethereum, Tezos, EOS, Dfinity)
  3. Utility Token (Golem, Storj, Sia, FileCoin)
  4. Security token (represents bonds, stocks, derivatives and other financial products)
  5. Fungible Token (ERC-20)
  6. Non-fungible token (Decentraland, Cryptokitties)
  7. Stable Coins

Stablecoins cover four categories, including the following:

  • Collateralized with fiat currency (Examples: Candy from Mongolia, Petro from Venezuela, Fedcoin from the US Federal Reserve, Eurocoin from the European Central Bank)
  • Guaranteed by real assets (Examples: Digix Gold, TCX, Swiss Real Coin)
  • Secured Cryptocurrency (Example: DAI from MakerDao)
  • Without warranty (Example: basecoin from Basis)

Keep in mind that these categories are by no means exhaustive. Rather, they only seek to provide reference points to help you navigate through the often confusing crypto iterations. Facebook’s Libra, for example, doesn’t fit into any of the aforementioned categories, and that’s perfectly fine.

The bottom line is that cryptocurrency continues to evolve. If you are considering joining the crypto rush, it pays to keep up to date with these many changes and updates that sometimes happen simultaneously.

It also won’t hurt to start with the most popular and trusted cryptocurrency on the market. Yes, by that we mean Bitcoin.

Bitcoin Economy

Once you’re ready to get into cryptocurrency through Bitcoin, make sure you go through the process as informed as possible. Here are the points to consider regarding bitcoin economy.

To buy

You can buy Bitcoins on centralized exchanges, which charge fees for each transaction, ranging from 0.05% to 5.00%. Alternatively, you can acquire Bitcoin through OTC trading desks, which offer lower fees and better liquidity.

Less popular avenues for acquiring Bitcoin include payments for professional services and network participation. As for the latter, you need to be adept at mining and staking.

Storage

Hide your Bitcoin in a secure wallet to which only you have the key. Here you have two options for storage.

The first is through third-party services. A cryptocurrency exchange will automatically give you a digital wallet. To apply, you will need to provide personal information including your name and ID number. Also, you may need to link the credit or debit card information from which to pay for the service.

Another option is to store your Bitcoin in a self-hosted wallet. This will allow you to bypass the identity requirements imposed by third-party exchanges. This route requires computer expertise. If you are a beginner, this might not be a viable option for you.

Investment opportunities

There are different ways to invest in Bitcoin. Each is best suited to a particular type of stakeholder.

If you want to be in the middle of the action, buying Bitcoin as is might be right for you. In the meantime, if you want a roundabout way to participate in the movement, you can invest through Bitcoin trusts, Bitcoin mutual funds, or Blockchain stocks or ETFs.

Whatever route you take, make sure it is well understood.

Trading opportunities

You can do payments using bitcoin for a growing range of consumer goods. Luxury brands, for starters, welcome bitcoin payments. Think Rolex. The same goes for high-end cars like Tesla. Some insurers also allow Bitcoin transactions, such as the Swiss company AXA.

Taxation

Countries differ on how they impose taxes on digital assets. For example, in some jurisdictions, crypto conversion is taxable. This means that if you bought a type of crypto with Bitcoin or vice versa, you would pay taxes.

Even small value purchases using Bitcoin may be taxable in some states. Therefore, you need to be doubly careful about your record keeping. Bought a coffee with bitcoin? Keep an eye out for relevant information about this purchase so that when the taxman comes to you, you have documents to show.

internet security

As with any new trend in any industry, another inevitable thing is the emergence of scams that try to ruin the whole project. When it comes to cryptocurrency, the most common modus includes fake websites touting generous earnings from small investments, virtual Ponzi schemes, and fake celebrity endorsements.

These are just some of the challenges facing the crypto world. Along with these scams, there are also network security issues to deal with.

Vulnerabilities to blockchain Endpoints

Enthusiasts call blockchains virtually “impossible to hack”. However, this may not be entirely true for any digital infrastructure. There will always be vulnerable components that can compromise the entire system.

In blockchain terms, these manifest themselves in terminals, for example when acquisitions are stored in active wallets. This exchange involves the participation of third-party players and technologies, including payment processors and smart contracts, respectively. At such times, hackers might be able to break into the process and compromise its smooth running.

Regulatory issues

Since blockchain technology is still an emerging financial system, clear regulations have yet to emerge. Although the growing popularity of cryptocurrency in recent years has led governments to take a closer look at the movement, there is still a long way to go for representatives of official institutions to develop policies and protocols aimed at protect all industry stakeholders.

For now, enthusiasts are trying to learn from the mistakes made by the controls, if only to avoid committing the same potentially involving mishaps.

Scalability issues

Fluent block chain technologies are bigger than ever. And as more and more investors and stakeholders participate in the crypto movement, these digital infrastructures will only become even more massive.

While growth is the ultimate goal of any financial venture, it also comes with undeniable risks. This risk is more pronounced in this respect, because a blockchain of this magnitude has never been tested before. No one knows where the security vulnerabilities might arise. No one can be sure how long the system will be able to sustain itself growing to exponential proportions.

Insufficient testing

As of today, blockchain technology is no longer exclusive to cryptocurrency platforms. It has now penetrated organizational and corporate structures.

Businesses are exploring blockchain to streamline key processes. While this is another promising prospect for undeniably cutting-edge innovation, the lack of legitimate studies on how the system may perform in other applications outside of crypto could prove problematic. This is all the more true if we factor into the equation the presence of hackers always ready to exploit the vulnerabilities of emerging technologies and their various applications.

All of these drawbacks can be mitigated with better network security. And that’s another consideration you need to take to heart when learning the ins and outs of cryptocurrency.

Wrap

If you are considering getting into cryptocurrency as a trader, you need to understand how blockchain works. Without a good understanding of how the system works, you may not be able to manage your digital assets as well as you should.

Meanwhile, if you are interested in blockchain technology as a tech enthusiast or a professional developer, you also cannot fail to learn the basics of cryptocurrency. This knowledge will eventually inform how you navigate the various blockchain infrastructures out there.

Hope this article could provide you some basic knowledge on the topics discussed. Ideally, what you learn here will be enough to further fuel your interest in cryptocurrency and blockchain technology. Rest assured that this could be a worthwhile project to pursue, whether you plan to become a trader or a developer.

About the Author
Kimberly Maceda
Kimberly is a content writer for BSV Devcon and has written insightful content for a wide range of niches and platforms. She believes there is a fine line between good and evil, with the Oxford comma sitting comfortably in the middle.

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