Cryptocurrency For Beginner’s — What You Should Know Before Starting
This is a guide for anyone new-ish to cryptocurrencies but wants to learn more than just download an app and send/receive funds. Whatever motivates you, this guide walks you through some of the earliest questions (and answers!) I had to feel more comfortable managing my own funds rather than using a 3rd party (such as a bank).
While I may start off speaking about Bitcoin for historical reasons, I’ll mostly refer to the digital currency Nano ($XNO) as the case study both for context and because it is closest to what Bitcoin’s original objective was supposed to be; it’s fast (< 1 second confirmation times), feeless, eco-friendly, inflation proof, and decentralized.
WHAT IS CRYPO-CURRENCY
Cryptocurrency is the idea that actions related to money could be both digital and not require the trust of a central bank. This originally proposed ~2012 when someone with the pseudonym Satoshi Nakamoto wrote a paper about using digital currency as the new form of “money”. While they are unknown to this day, they are credited as being the inventor of Bitcoin.
Not using a central authority means creating a trust-less process. In order to accomplish this, most crypto will rely on some pretty strong math properties as well as publicly show all transactions both made and confirmed. A log of these transactions are kept regarding which account moved money where and when. In the case of Bitcoin, these are bundled into blocks. Each block is based off of the blocks before it, called a “blockchain”.
Just how a business or bank keeps records, the overall history of each transaction that makes these blocks in the logs is what is known as a ledger. Unlike your grandfather’s ledger though, each new transaction(s) also use signatures to securely lock in what came before it, building trust in the record that someone didn’t (can’t) go back and edit it.
As one ledger would still be centralized, the other ‘side of this coin’ is the use of multiple computers around the world tasked to confirm what transactions become new entries. The “how” they do this varies based on the currency used. Only when there is a consensus will that transaction be finalized. Trust in, trust out, AND anyone can review the history to verify as well. They all have a copy of this ledger and their “consensus agreement” keeps everything in line.
THE RISE OF POWER IN CRYPTO
Since 2013, coins/tokens have aimed to build off of this further adding in additional capabilities traditional central banks would offer. This includes making financial (smart) contracts, decentralized finance (DeFi) loans/APR, etc. For the purposes of these articles, I’m going to focus on Nano (https://www.nano.org) which intentionally omits these features to be an ultra lightweight digital currency.
I chose Nano because it is available to all globally, sends nearly instantly, and does so without fees. As an added bonus it further improved upon Bitcoin’s original vision by also being eco friendly. You can send well over 6 million transactions of Nano (it’s actually well over 10 million now with additional mining competition) for every 1 block of Bitcoin the network confirms.
In an essence, it has become what the original vision of digital currency was intended to be. As Bitcoin is neither fast, fee-less, nor even eco-friendly, it is impractical to use day to day and won’t be referenced again however almost everything you learn here can be applied to the thousands of coins out there.
HOW THIS BENEFITS YOU
This public, decentralized nature, creates a unique opportunity. The bank is no longer responsible for sending the funds. You are. YOU hold the keys to allow money to arrive/leave from your account(s). This is also why you might see sites saying “Not your keys, not your money.”
Even with that caveat, millions of new people are flocking to crypto each year to be a part of this new financial system. Think that could be you? A seed will be at the root of it all, so follow along to learn more.
THE POWER OF THE SEED
If you like the idea of the opportunity created having crypto currency, the good news is that doing so is far easier now than it ever has been before. In the interest of assuming this is still relatively new to you, there is one more really important term for these keys, known as a “seed”. After you’ve installed your first crypto app, you may have noticed it mentioned something about this and told you to keep it safe. Why? Well, a seed is a very powerful thing, and knowing what it does helps you understand why we care so much about this seed:
- It creates the account(s) for you to use on the network
- It creates the ability for you to approve of sending/receiving funds from the account(s)
If you want something to visualize, compare a seed to a physical wallet. This is because it is very private (you don’t go handing out your wallet!) and whoever has it can move funds from the accounts (credit card purchases, receive cash to it, etc). This also helps explain why you’ll hear seed and wallet referred to interchangeably.
DEBIT CARD BUT GREATER CONTROL
Digital currencies are like debit cards in that you don’t store your money with you — and that’s what makes crypto a little weird for people since it’s easy to forget that something digital isn’t something you hold in your hand like you would with cash. Remember that the ledger knows which balance belongs to which account already; it is the record of where all the money is coming from, going to, and in some currencies, additional supply being created.
Therefore by design you aren’t actually “guarding” imaginary tokens, just the authorization to move them. Unlike debit cards though, the seed that derives this authorization for your accounts is much longer making it impossible to guess. Debit card numbers are given out with every transaction (risky!) but traditionally for crypto, you’re only using your seed when you are setting up a new wallet to send/receive money on your behalf so its length isn’t really an inconvenience.
Your “seed”/“wallet” is your ultimate key, but for purposes of visualizing this is in a way your instructions to make a all other keys needed to either approve the receiving or sending of funds elsewhere. Failure to protect your seed means money can change hands without the account holders awareness.
LEAVE THE BANK BEHIND
With cryptocurrencies, you no longer rely on the bank to do this; multiple copies of the ledger are publicly confirmed and you edit the records when you see fit simply by sending/receiving money. This does mean that while losing your seed means you’ll still be able to see that your funds are associated with your account, it also means you’ll lose the ability to move them elsewhere as if they weren’t even yours. It’s as if I can see a bunch of bank accounts, one of which belongs to Bill Gates. However, only the ledger has no record of which is actually his, nor do I have any power to move funds out of his account even if I found it.
With that in mind look out for my next article on How Seeds Build Your Wallet.
Matt, Community Manager to the Nano Foundation
