My first 7 days down the Cryptocurrency Rabbit Hole

If you’re like me, you’ve been hovering around the world of cryptocurrencies for years with a bit of curiosity, confusion, skepticism and FOMO.
“So there is this online currency that people have decided has value ?
”It’s a currency, but no one is using it to buy stuff. How does that make sense ?”
To be honest, if it wasn’t for the recent bull run that Bitcoin is on, I would’ve been fine with leaving the topic alone.
However, as the Cryptocurrency kept hitting all time highs, I finally gave in and opened the topic up with my “Crypto friend”.

You know the one. The friend who, in 2017, wouldn’t shut up about how great cryptocurrencies are and that the dollar was going to collapse.
The one who would excitedly show you a graph about how his favorite cryptocurrencies “broke through resistance”. You would smile, nod and maybe say “ah nice.”
Also the one whose investments plummeted in 2018 when the bubble burst and you felt sorry for.

This time, the person in front of me was a lot less dogmatic and their answer was my “AHA moment”.

“Listen, I see value in cryptocurrencies as a store of value like gold and a currency like the dollar, that’s what it’s been used for so far. But I also see a lot of value in what can be built on top of the Blockchain protocols. Blockchain can enable more efficient global cooperation in a completely decentralized way. It’s like you’re monetizing a piece of the internet. It’s infrastructure”.
Like any Aha moment, this one was part something making a lot of sense to me (You can build apps on top of Blockchain? That’s interesting) and part hitting an emotional soft spot.
You see, I’ve been working in Tech since 2015. I love it. But part of me wishes I was a part of the early days of the internet. The trailblazing, frontier days when it was a yet to be proven concept.

“What if this was it ? The next revolutionary technology ?”

I spent the next 7 days ramping up on the topic. I personally used “Blockgeeks” but there are plenty of other similar websites out there (paid and free). Like any new topic, the amount of information is overwhelming.

My advice would be (and I apply this to any topic I am learning about):
-Come to terms with the fact that you won’t retain everything
-Focus on a handful of key concepts to really digest. They are key because they enable you to understand the top level, broad picture.
-Try to define them in your own words and run them by someone more knowledgeable on the topic. If you don’t have someone like that, try to do it yourself by matching your definition to the official one.

What were my Key concepts and what are my basic definitions for them ?

1-Blockchain: This is the method with which a record of all transactions for a given cryptocurrency is kept. It’s set up to be decentralized, distributed and very difficult to modify retroactively.

2-Difficult to to modify retroactively:
“So if it’s a digital currency, what’s keeping someone from tricking the system or using the same coin twice or more?” (The double spend problem). Basically, the way the Blockchain is set up is as follows:
Block 1 has a list of transactions that have been verified (we’ll get to how that’s done in a second). Block 2 has a hashed version of Block 1 + new verified transactions. Block 3 has a hashed version of Block 2 + new verified transactions and so forth. So if I were to go back and alter a transaction in Block 1, this would cause a discrepancy with the rest of the Blocks that come after it. You would have to modify every other block after it and have it verified for your one modification to actually become “canon”. The system is designed to make it very very very costly and infeasible to do so.

3-Consensus:
“So who verifies these transactions and how do we know they aren’t going to cheat the system ?”. This is actually one of the most interesting things I learned.
For each Block to be verified, a majority of the members of the network (Nodes) has to agree that it is indeed valid. The network is made up of Nodes who are vying for the right to validate Blocks. Once they win that right, they validate the block and put it out for the rest of the network to verify.
If 51% of the network says “yea looks good”, the initial Node gets rewarded with a *Drumroll* certain number of Coins (ex: Bitcoin) and the block is added to the chain. If it doesn’t reach consensus, then the initial verifier gets nothing.
NB: Obviously verification isn’t a manual process or else it would take forever.

4-Proof of work/Proof of stake:
”OK so you need consensus but what’s keeping someone from flooding the network with inaccurate Blocks in hopes that one gets through ?”
Remember how we said that the Nodes are vying for the right to validate transactions ? They do this through different mechanisms.
“Proof of work” for example is used by Bitcoin. To earn the right to validate transactions, the Bitcoin network puts out a challenge (A complex problem that requires your computer to expend a lot of computational power to solve. You probably won’t be able to do it on your laptop…). The winning node gets the right to validate the specific block. There is a block that needs validation every 10 or so minutes in Bitcoin’s case. If someone’s strategy is to flood the network with faulty blocks or get 51% of the computational power to trick the system, they would need billions and billions of dollars worth of computational power which is not really feasible.

“Proof of Stake”, on the other hand, is used by Ethereum. To earn the right to validate transactions, you have to stake a certain amount of coins. Then, a node is chosen to validate. If you put out an inaccurate Block, you lose your staked currency. In order to trick this system, you would need 51% of the coins out there. In the case of Ethereum, this is 51% of $175 Billion (as of March 2021).

Phew! Now that we’ve lightly covered some of the key concepts (They go much much deeper obviously but this is as far as I’ve gotten !), what were some key takeaways and what will I be learning about next ?

Key Takeaways:

1-It’s a decentralized system where individuals acting in their own self-interest actually benefit the system as a whole.

2-It’s built around reaching a fast consensus… between millions of people.

3-For the most part, it’s pretty volatile and yet to be proven. If you’re thinking of investing, ask yourself “Can I tolerate 70% swings down ? Do I believe in this long term ?” It’s not all up after all.

4-It goes beyond Bitcoin and Ethereum. There’s A LOT of cryptocurrencies out there.

5-Blockchain is fascinating and is seemingly a natural fit for many real life use cases

What I’ll be focusing on next:

1-How do you decide what’s a good cryptocurrency ?

2-What are some real world use cases ? (Particularly Decentralized Finance)