Cryptocurrency is cryptographically protected (encrypted) information. Individual units of cryptocurrencies are called coins. Copying existing coins is meaningless, since the origin of all coins ever mined and their belonging to one of the cryptocurrency wallets are recorded in the so-called blockchain (a global decentralized database protected by a special cryptographic algorithm). Likewise, it is impossible to mine new coins bypassing the rules for their mining that exist for a given cryptocurrency. Therefore, cryptocurrencies are reliably protected both from counterfeiting and from emission that does not correspond to the rules originally set for it.
Cryptocurrency is very different from regular electronic money. The difference between cryptocurrency and electronic form of ordinary money is, first of all, that ordinary money for transfer into electronic form must be physically deposited into the account, for example, through a bank branch, payment terminal or office of an electronic payment system; at the same time, the emission of ordinary money is the prerogative of the state. For cryptocurrency, the physical form of existence cannot be basic; all cryptocurrencies, in the course of decentralized emission, are produced immediately in electronic form, stored and transmitted in it. Thus, if you answer the question of what cryptocurrencies is, briefly and simply, it is electronic money that has no physical counterpart.
Emission (issue) of cryptocurrencies is called mining (in Russian they also say that cryptocurrencies are "mined"). Since the basis of the idea of cryptocurrencies is in decentralized emission, one or another cryptocurrency can be mined by anyone, provided that it uses sufficient computer power. In the process of mining cryptocurrency, these capacities solve intricate mathematical problems (and the efficiency of their solution depends on the power of the equipment involved, and the mathematical complexity of mining itself grows as the total volume of this type of cryptocurrency, mined over the entire period of its existence, increases). The result of the calculations is the emergence of new coins, the origin and ownership of which are forever recorded in the blockchain.
Sometimes, with high complexity of calculations, miners have to unite in pools in order to mine coins together, and then divide them among all the participants in the pool (but not evenly, but in proportion to the capacities with which the participants came to the pool).
All coins ever mined are stored in special cryptocurrency wallets, information about the contents of which, thanks to the blockchain, is also protected from unauthorized changes.
In today's financial world, cryptocurrencies definitely have their place. Each of those associated with them has the opportunity to benefit. Miners mine cryptocurrencies, sell them on stock exchanges and cover the cost of electricity, purchase and maintenance of their equipment from the proceeds; the remainder of the proceeds becomes their net profit. Investors buy cryptocurrencies, and, given the correct entry point to the market, the purchased cryptocurrencies become more expensive, increasing investments much faster than when placing a deposit in a bank. Some people buy cryptocurrencies simply to transit their money (especially across borders) or to buy goods and services (especially digital ones) with them. There are other areas of application of useful properties of cryptocurrency, for example, ICO.
Each person, in addition to buying and mining cryptocurrencies, in principle, can create their own cryptocurrency (some specialized resources help those who are technically very poorly "savvy" in this matter). True, very many cryptocurrencies turned out to be unsuccessful, created without a clear understanding of what they should have been and how they should have been better than the existing ones. Obviously, in order to achieve success in this business, it is necessary for the cryptocurrency to acquire a more or less significant audience of users, for whom it should be in some way more interesting than other cryptocurrencies that have already "gotten to their feet."
BLOCKCHAINE TECHNOLOGY
Blockchain is a distributed database stored on a large number of computers in the form of many identical copies. These copies are constantly synchronized, so that any new entries in the database are instantly distributed throughout the network. All new changes are recorded in information blocks, from a single and continuous chain of which the blockchain consists.
Not a single record that got into the blockchain can subsequently be erased or changed by an unscrupulous minority, since this would have to affect all network nodes at once, and this is almost impossible. Therefore, data once recorded on the blockchain cannot be falsified or arbitrarily deleted.
Blockchain is cryptographically secure; this means that, thanks to encryption, a specific user will be able to make new changes to the blockchain based only on their own earlier actions. It will be impossible for him to enter records into the block “on behalf of someone else” due to the lack of a cryptographic key associated with another user.
The classic blockchain provides a high level of transparency - all records in it are public and publicly available. So, in the bitcoin blockchain, you can always trace all transactions associated with a specific bitcoin address or a specific amount of money. However, this situation does not suit everyone, and some developers of alternative cryptocurrencies decide to go their own way.
In order to increase the speed and efficiency of payments in some cryptocurrencies, primarily in bitcoin, some developers propose to create an "add-on" over the main blockchain. This "add-on" will consist of a separate network of nodes that will support the operation of the so-called sidechains - additional blockchains that do not have the self-sufficiency of the main blockchain, but more efficiently process bitcoin transactions.
The blockchain allows you to save not only records of transactions and transfers of funds, but in general any information that can be recorded in digital form, including executable computer code. This code can be written in such a way that it starts its work when the cryptographic keys are entered by two counterparties who have previously made a decision to cooperate under certain conditions. This technology is called “smart contracts”, and the prospects for its application in business are extremely wide.
Most people associate blockchains with Bitcoin and other cryptocurrencies, the integrity of which they support. However, ensuring the functioning of decentralized payment systems is not the only possible application of the blockchain. Blockchain can also be useful in improving the efficiency of public administration and transparency of voting, increasing the reliability of the banking system and in many other areas of economic and non-economic activity, up to verification of issued diplomas.
The effectiveness and integrity of the blockchain, however, has proven particularly well demonstrated when used in cryptocurrency payment systems. The growing interest of the masses in cryptocurrency payment instruments is due to the fact that everyone can find advantages in cryptocurrencies that are important for him - the speed and cheapness of transactions, the independence of their conduct from the authorities, banks and state borders, or the general availability of payments.
MINING CRYPTOCURRENCY
Many began to consider cryptocurrency mining as an easy and quick way to make money that does not require special skills and special knowledge. But is it that simple? We are confident that investments in cryptocurrency (for example, in mining) should be made with an understanding of the matter and knowledge of the main nuances that affect the result. In this article, we will consider the very concept of mining, as well as the main types and methods of its implementation.
Why do you need mining
At the stage of the formation of the concept of cryptocurrency (as such), a number of fundamental problems arose. One of them is the "emission problem". As you know, all cryptocurrencies are based on the idea of maximum decentralization and assume the absence of a traditional "central bank" that would have a decisive influence on the emission of new monetary units and would fully control it. At first glance, an analogue of the central bank is necessary for the issue, but its presence in the system would deprive the existence of a cryptocurrency of its original meaning and make it a simple copy of traditional money). The solution to this problem was the distribution of the emission function between the individual links of the system - the miners.
Also, an important role in the emergence of mining was played by the "verification problem", which is associated with the need to maintain the functioning of the entire network as a whole and to confirm the authenticity of each individual transaction. As you know, in the context of decentralization, there can be no single center that would process transactions (otherwise this center would receive too much power and could intervene in the system for dishonest manipulations and redistribution of cryptocurrency in favor of certain individuals). But someone has to deal with the verification of transactions. Moreover, the whole process must be decentralized. This need leads to the emergence of the second conceptual problem of the cryptocurrency system - the “verification problem”. The solution was again mining: computing resources of miners are used to verify each transaction. And the reward for mining plays the role of a motivating factor that encourages more and more people to share their computing resources.
Mining risks
The excitement around mining does not subside - more and more people who until recently had nothing to do with the world of cryptocurrencies are now becoming active miners. However, there are certain risks that not all beginner miners are fully aware of. It should be borne in mind that no one can calculate in advance the profitability or loss-making of mining, which depend on such variables as: the rate of the cryptocurrency and the computing power of all computers that are already involved in the mining of a particular cryptocurrency.
The rate of any cryptocurrency is characterized by high volatility (variability) - this means that it can change very sharply without any obvious prerequisites for that, which could be known in advance and had time to react. A beginner miner must come to terms with the risk of a sharp change in the rate, as a result of which, all equipment costs may not be recouped due to the fact that the cryptocurrency obtained during the mining process will cost significantly less than he expected. A sharp collapse of the exchange rate can be triggered by a number of reasons, including:
- identification of vulnerabilities in the program code of a cryptocurrency that can be used by hackers, which undermines confidence in a particular cryptocurrency, and, consequently, the demand for it (as you know, the lower the demand, the lower the rate);
- the distribution of most cryptocurrencies in society is highly uneven. As a result, the rate may be significantly collapsed if some “crypto-rich” suddenly decides to bring his savings to the market and sell them. This will immediately create an excess supply, and the higher the supply, the lower the rate;
- possible actions of state bodies and international organizations aimed at prohibiting or limiting the anonymous use of cryptocurrency. Such actions can lead to undermining its reputation and creating a negative image in the press, as a result of which the number of people willing to buy cryptocurrency may decrease.
Also, novice miners should take into account the fact that the size of their actual reward (received over equal periods of time with the same computing power) is not fixed, but depends on the “mining complexity”, which is inversely proportional to the total computing power of the equipment used worldwide for mining a specific cryptocurrency. The excitement around cryptocurrency mining has become so widespread that many people are ready to sell their apartments, houses, cars and invest in mining equipment, blindly believing in a guaranteed high income. However, it should be remembered: the more people are involved in the "gold rush" associated with the mining of cryptocurrency, the lower the income of each of them will become (assuming a stable exchange rate).
TYPES OF MINING
From a technical point of view, there are several types of mining, the differences of which are in the configuration of the computers included in the network:
CPU (central processing unit) mining is carried out using the central processor of a regular PC. Historically, this is the very first type of mining. Nowadays, it is considered outdated, due to the fact that it is significantly inferior in efficiency to more modern approaches. CPU mining ceased to be profitable back in 2010, when it was supplanted by more efficient GPU mining.
GPU (graphics processing unit) mining is based on calculations performed by video cards and is characterized by high performance due to the adaptability of video cards to parallel computing and the simultaneous solution of several tasks (this is a very useful property for mining). The reorientation to graphics cards was a breakthrough that far surpassed CPU mining in terms of efficiency. First of all, one video card is capable of counting several times more hashes than a processor; in addition, up to 4 video cards could be installed on one motherboard, and later - up to 6, 8, and even 10. Thus, it became possible to build relatively cheap “farms” of video cards for mining.
ASIC (Application Specific Integrated Circuit) chips are designed to perform only one task for which they were designed (they are sharpened for mining a certain cryptocurrency, as a rule, bitcoin and are not suitable for domestic purposes). However, they are much more efficient than a conventional general-purpose processor - the difference in performance of devices of similar cost can vary many times. The specialization of ASIC systems gives them not only advantages, but at the same time, significantly limits their use: ASIC miners, as a rule, are limited to the production of one cryptocurrency and cannot switch to its analogs if necessary (moreover, not all cryptocurrencies are, in principle, suitable for ASIC mining). Also, an ASIC is more difficult to sell than a video card - in the event of a collapse of the cryptocurrency for which the ASIC system is intended, no one will want to buy it (while video cards can be sold to gamers).
The mining process can be differentiated by the number of participants:
Solo mining: it should be noted that this type of mining is relevant only for working with new currencies, calculations in which (so far) do not require large capacities. The search for blocks is carried out using the equipment of only one miner. The main advantage of this type of mining is that a person does not need to share his reward with someone else. However, there is also a significant drawback - the search for a block can take quite a long time, it all depends on the complexity of the calculations that its mining system must perform and on the factor of luck, which means that its equipment will be able to solve the problem faster than competitors in mining.
Pool mining: the most common type of mining. It is a co-mining technology for cryptocurrency that brings together many independent miners. In this case, the profit from mining is distributed among all members of the pool, in direct proportion to the power provided for the calculations. Pool mining is safer than solo mining due to the guarantee that all participants in the pool will receive a reward, regardless of which of them generated the next block. At the same time, the crypto community reacts ambiguously to too large pools. There is a risk of accumulation of more than 50% of the computing power of the entire network in one pool - in this case, the pool will receive enough power for fraudulent manipulations with transaction verification, and will be able to fully control the corresponding cryptocurrency.
Cloud mining: the most controversial type of mining. On the one hand, you do not need to spend money on installing, setting up and maintaining your own "farm", as well as on electricity (which is especially important in countries with high tariffs, so most cloud mining is located in countries with cheap electricity, such as Thailand). If in solo and pool mining, the computing equipment is at the complete disposal of the miner, then in cloud mining the equipment can be located on the other end of the earth, and the miner can only trust the representatives of the selected service at their word. It is worth taking into account the fact that in reality there are no guarantees that the people offering you such a service will faithfully fulfill all their obligations and you will regularly receive rewards for the blocks found.
ADVANTAGES AND DISADVANTAGES OF CRYPTOCURRENCIES
Benefits of cryptocurrencies
1. Decentralization of the emission process allows everyone who has sufficient computing power to mine cryptocurrency (for profitable mining of many cryptocurrencies, a "farm" of several good video cards is enough).
2. The decentralized nature of cryptocurrency payment systems makes it possible not to fear cancellation of payments or freezing of funds.
3. Anonymity of the owner of cryptocurrencies, both for counterparties and for the state (some cryptocurrencies add to this the untraceable nature of transactions).
4. Most cryptocurrencies are insured against inflation (the number of coins is growing rather slowly, moreover, a decrease in mining efficiency will increasingly reduce the inflow of new coins)
5. Cryptocurrencies cannot be counterfeited.
Disadvantages of cryptocurrencies
1. Storing funds in a local wallet requires a lot of responsibility from the user. So, if he does not take care of backups, then a computer breakdown will deprive him of all the coins in his wallet; Irrecoverable loss of coins is also possible in situations where the user forgets the password or allows viruses to steal the wallet file.
2. At a number of stages in the development of cryptocurrencies, the threat of the prohibition policy on the part of the state is significant.
3. As the volume of the mined cryptocurrency grows, the mathematical complexity of mining will grow, and its profitability may decrease.
4. High volatility (varies depending on the activity of speculators and on the capitalization of a particular currency).
WHAT IS HARDFORK AND SOFTFORK
Modern cryptocurrencies, including the Bitcoin protocol, are based on decentralized data accounting technology, also known as blockchain. Each block of the general blockchain chain contains information about several completed transactions, while each subsequent block depends on the previous one and refers to it. In its most general form, a "fork" is a change in the cryptocurrency code, after which a new branch of the blockchain chain is formed. The types of forks are "hard fork" and "soft fork".
A hard fork is a radical change in the rules of a protocol that requires a software update. In fact, a new protocol emerges as a result of software upgrades and chain fork.
In the event that users support the idea of updating the software, the system starts working according to the new set rules. In the event that a group of people opposes the introduction of changes, a split of the pre-existing user community occurs. In this scenario, a bifurcation of the blockchain occurs and a new cryptocurrency appears.
A soft fork is a minor system update that optimizes individual functions of a coin. It will be able to work as before, even if some of the nodes refuse to accept the new rules.
Often a "fork" is called a cryptocurrency created by analogy with another cryptocurrency. Technically, it should be built on a different protocol. An example of a Bitcoin fork is the Litecoin protocol. Since historically Bitcoin is the first cryptocurrency, it holds the record for the number of forks.
5 CRITICAL MISTAKES OF NEWS IN CRYPTOCURRENCY
1. Wrong address
Sending cryptocurrency to an incorrect public address cannot be canceled. If you sent money - write it was lost. Some systems will not process a transaction if the address is completely wrong.
For convenience, you can read the public address from the QR code, or copy and paste it. But be careful to copy the entire public address line. When sending coins from a wallet, there is a send field where you need to insert a public address. Wallets can generate many public addresses, and you can use multiple addresses for different types of transactions. It seems that in some wallet interfaces this is not very user-friendly, or the instructions are not clear enough. The public address looks like this:
38rqC8jYZyewwxBUkU9e5MUJwssLRFVUxp (BTC address)
If you have something different, it is probably the wrong public address. Also, be careful when sending to multiple addresses. If you forget to copy the new address, the current contents of the clipboard with the old address will be used. This may result in re-sending to the previous recipient. Always check if you copied and pasted the correct public address of the recipient.
2. Forgotten passwords
In most cases, when creating a wallet, the user must create a password. A set of keywords is also created to restore access to the wallet if the password is lost or forgotten. It is important to keep this information, because if you lose it, you will not be able to recover your coins. There is no support service to help you regain access to your wallet - cryptocurrencies work differently. Since they are decentralized, you are your own bank.
Therefore, you are responsible for everything related to the safety of your coins.
It is better to store coins offline, in so-called hardware wallets. But even in this case, recovery keywords are generated. This information cannot be lost. Some newbies blithely write down information on a piece of paper and then throw it away. These wallets are also encrypted, so it's almost impossible to hack them. There are services that offer to decrypt wallets, but you need to be careful, as this is most likely a scam.
3. Insecurity of private keys
When buying cryptocurrency, be it Bitcoin or any of the 1000+ alternative cryptocurrencies, you need a digital wallet. It stores your cryptocurrency coins. It is now easier to use the major exchanges that sell the most popular cryptocurrencies. Exchanges like Coinbase provide a custodian wallet where they store your coins. However, some users buy coins that require downloading and installing software on a smartphone or computer.
In cryptocurrencies, you get a public key, or public address, and a private key. On Coinbase, the client is not given a private key. But if you downloaded your own wallet, then your private key belongs to you.
The public address is what the sender needs to tell in order to receive the coins. The problem is that sometimes people share their private key, which is a big mistake. This can mean "game over", because if someone knows your private key, they can access your wallet.
Scammers love to play this game. They often, under the guise of selling goods, ask buyers to provide them with their private key to complete the transaction. But it doesn't work that way, and some newbies have learned this the hard way. Never share your private key with anyone. Neither merchants nor senders need your private key. They only need your public address.
4. Buying because of the hype
The fear of lost profits has the strongest social impact on people who want to join the hot new cryptocurrency. This behavior leads to an active injection of money into a new cryptocurrency, which may still not even have a fully functioning system. So it is overrated with no utility whatsoever. When some investors realize this, a reversal occurs.
In addition, wealthy investors, called whales, may deliberately inject money to inflate the price. When they hit high profit margins, they are out of the game, and many people can lose money on falling prices.
There is also a hype around so-called "confidential coins" that seek to ensure the anonymity of transactions. However, some of these coins are under scrutiny by governments as they may be used in illegal activities.
So hype is not always the best reason to invest. “New coin is growing, BUY! BUY IT! BUY! " The hype also prompts some less experienced investors to buy at a high or high level. Then a downturn occurs and the investor loses some of his fiat capital. He leaves the game due to fear, insecurity, doubt and lack of patience.
5. Lack of independent analysis
Many people come to cryptocurrencies because they heard about them from a friend or watched the latest news. It is enough to hear about “100 times profit on Bitcoin” to convince a person to invest money and buy their own BTC. However, many newbies do not understand the purpose of BTC and the underlying technology platform - blockchain. What if it's a scam like a pyramid?
Any investor who wants to make a good investment must independently study what he is going to invest in. In the cryptocurrency market, there is active speculation based on the events that shape the movement of BTC to the masses. Price fluctuations are influenced by news of technology improvements or interest from large companies and financial institutions. When the CBOE and CME bitcoin futures launched, the price of BTC jumped in anticipation of more liquidity. When you invest because of the numbers, it's more like gambling. The results in this case are always disastrous.
CRYPTOCURRENCY MARKET