I will preface this post by reminding you that I am more of a crypto novice than I am an expert. I say this because I want to make clear that the investment decisions that I describe below are not the result of exhaustive comparative analysis between various blockchains etc. but rather speculative bets based upon a rudimentary understanding of the technology. Nonetheless, I think the below is valuable because it is an honest documentation of a beginners experience in crypto. It will illustrate my early thought processes, which will ultimately help highlight all of the mistakes I am making, which in turn will help me iterate, and maybe eventually find some success. With that said, let’s dive in.
Blockchain:
My first two goals diving into crypto were to understand 1) exactly what blockchain was 2) how different cryptocurrencies represented different applications of this technology. I still don’t fully understand blockchain, but my basic, non-technical understanding of it is that it is a means of digitally collecting and storing data in blocks that are chained together (hence the name). Moreover, the data is validated and stored in a decentralized manner by a network of computers (nodes). As such, it is next to impossible to tamper with or amend any of the information that has already been validated and stored on the blockchain, since doing so would require greater than 50% of the total hash power (computational power being used to validate transactions) to agree to any amendment. This is valuable because data is stored more securely and does not rely on a single central party to maintain it. Okay, so that was the first piece, and if my layman description of blockchain was not enough for you, I would recommend this video.
Bitcoin:
The next piece of the puzzle that I started exploring was the difference between various blockchain applications. Bitcoin is the most famous (and largest) cryptocurrency out there, but I didn’t really understand what Bitcoin actually represented. What I came to find is that Bitcoin itself is actually a reward that is given out to computers helping support and build out the underlying blockchain. What does this mean? If you read the Bitcoin whitepaper (here) you’ll see that the ultimate goal is to create a decentralized financial system where person A can send money to person B without the intervention of a financial institution (i.e. a clearinghouse, bank, custodian, etc). In order to accomplish this goal, a network of nodes (computers) is needed to validate transactions. In order to validate transactions, the computers within the network compete with one another to solve complex math problems in order to gain the right to add the next block. If they win they get to validate the block and are rewarded for their participation with the blockchain’s native currency, in this case Bitcoin. If you want more of an explanation, I would recommend reading the Bitcoin white paper and then watching this video and then this one. For now, just understand that the Bitcoin blockchain is a public record of every transaction ever done between Bitcoin holders, that is maintained by a network of computers that receive rewards (in Bitcoin) for helping maintain and validate the blocks in the chain. It’s value add is that it allows financial transactions to occur without a middleman.
Ethereum:
Once I established this basic knowledge of Bitcoin, I was able to start building off of it and understand the differences between Bitcoin and Ethereum. Similar to Bitcoin, Ethereum is a decentralized blockchain; however, unlike Bitcoin, it has smart contract capabilities. What are smart contracts? Again, not an expert here, but I came to understand smart contracts as contracts that are enforced by the blockchain. In other words, I can write a contract on the Ethereum network that says if/when I receive 5 ETH, then send a notification to party A. Once this transaction is executed per the contract, the data is stored on the blockchain. It’s as simple as that. It’s just a normal contract, except it is being completely enforced by code and the transaction data is being stored on the blockchain. The value here is that virtually anyone can produce secure, efficient, and transparent contracts. Developers can write out contracts on the network and turn them into DApps (decentralized applications), which anyone can use. Meanwhile, users have an understanding of the rules, and know that contracts will always be enforced assuming a given set of conditions are met. IBM has a good write-up on smart contracts here that helped me grasp the basic concept. To conclude, Ethereum blockchain has a wider array of applications than Bitcoin. Bitcoin exists exclusively to help facilitate peer-to-peer financial transactions, whereas Ethereum is programmable, meaning developers can write their own contracts and then rely on the code to enforce them and the blockchain to store the transaction data.
So, what does all of this boil down to for investment purposes? Well, for me, I think that smart contracts have the potential to be incredibly valuable. Right now there are a lot of problems because the fees for transacting on the Ethereum network are actually really high, but in the long run I can see a lot of value in tech that supports decentralized enforcement of contracts between two parties. As such, I like buying ETH, the currency native to the Ethereum blockchain. Next time we can get into specific use cases, ETH 2.0, proof of work vs proof of stake, gas fees, and more. But for right now, I hope you have a basic understanding of what blockchain is and how the two main cryptocurrencies differ from one another.
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