Crypto FAQ

What is Proof of Work vs Proof of Stake (POS) simple and savvy?

Simple way to explain this:

  1. Proof of Work (PoW): Think of this like a big, complicated puzzle. In the world of cryptocurrencies, computers compete to solve this puzzle. The first one to solve it gets a reward in the form of cryptocurrency, like Bitcoin. It’s like a race where the fastest and strongest computer wins. But, just like running a lot can make you tired, solving these puzzles uses a lot of energy, which can be bad for our planet.
  2. Proof of Stake (PoS): Now, imagine a game where instead of racing to solve a puzzle, you get chosen to add new information to the cryptocurrency’s ledger (like a big, digital book of who owns what). The more of the cryptocurrency you hold and are willing to “lock up” as a security, the more chances you have to be chosen. It’s like being picked to be the leader in a game because you have the most toys, but you promise to be fair. This method doesn’t need all that energy-consuming puzzle solving, so it’s nicer to our planet.

So, PoW is like a fast, energy-using race to solve puzzles, while PoS is more like a raffle where having more coins gives you a better chance to be chosen to lead, and it’s much gentler on the environment.

Savvy: A more technical explanation:

  1. Proof of Work (PoW): This is a consensus mechanism used by cryptocurrencies such as Bitcoin. It requires participants (miners) to solve complex mathematical problems in order to validate transactions and add new blocks to the blockchain. The process is computationally intensive and requires significant electrical power. The first miner to solve the problem gets to add the block and is rewarded with cryptocurrency. The primary advantages of PoW are its security and decentralization; however, it’s criticized for its environmental impact due to high energy consumption.
  2. Proof of Stake (PoS): This is an alternative mechanism used by cryptocurrencies like Ethereum (in its newer versions). In PoS, the process of validating transactions and adding them to the blockchain is handled by validators, who are chosen based on the number of coins they hold and are willing to “stake” as collateral. Validators are selected algorithmically, with higher chances for those who stake more coins. PoS is much less energy-intensive compared to PoW because it doesn’t require extensive computational work. However, it raises concerns over centralization, as those with more coins have greater influence.

In summary, while PoW provides robust security through intense computational work, leading to high energy consumption, PoS offers a more energy-efficient approach but with potential risks related to wealth concentration and network control. Both mechanisms aim to maintain the integrity and security of the blockchain, but they approach these goals differently.

What Is Tokenomics?

Tokenomics is a term that captures a token’s economics. It describes the factors that impact a token’s use and value, including but not limited to the token’s creation and distribution, supply and demand, incentive mechanisms, and token burn schedules.

Source: https://academy.binance.com/en/articles/what-is-tokenomics-and-why-does-it-matter

Crypto tokenomics, a combination of “token” and “economics,” is a term for all the factors that go into the value of a cryptocurrency. As you can imagine, this includes a wide variety of factors, including the maximum token supply, how new tokens are added to or removed from circulation, incentives for token holders, and the project’s utility.

Tokenomics is a simple way to refer to the overall economics of a specific crypto token. When you analyze tokenomics, you’re essentially looking at what gives value to a crypto and whether it’s likely that the value rises or falls going forward.

Source: https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/what-is-tokenomics/

What Is a Decentralized Market?

In a decentralized market, technology enables investors to deal directly with each other instead of operating from within a centralized exchange. Virtual markets that use decentralized currency, or cryptocurrencies, are examples of decentralized markets.

Source: https://www.investopedia.com/terms/d/decentralizedmarket.asp

What are smart contracts on blockchain?

Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met.

Source: https://www.ibm.com/topics/smart-contracts

Why is Cryptocurrency decentralized?

A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities

Source: https://www.investopedia.com/terms/c/cryptocurrency.asp

What Is Proof-of-Stake (PoS)?

Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. In the case of cryptocurrency, the database is called a blockchain—so the consensus mechanism secures the blockchain.

Learn more about proof-of-stake and how it is different from proof-of-work. Additionally, find out the issues proof-of-stake attempts to address within the cryptocurrency industry.

Source: https://www.investopedia.com/terms/p/proof-stake-pos.asp

What is a Hard Fork in Crypto?

A hard fork (or hardfork), as it relates to blockchain technology, is a radical change to a network’s protocol that makes previously invalid blocks and transactions valid, or vice-versa. A hard fork requires all nodes or users to upgrade to the latest version of the protocol software.

Source: https://www.investopedia.com/terms/h/hard-fork.asp

What is a Rug Pull?

A rug pull is a malicious maneuver in the cryptocurrency industry where crypto developers abandon a project and run away with investors’ funds. Rug pulls usually happen in the decentralized finance (DeFi) ecosystem, especially on decentralized exchanges (DEXs), where malicious individuals create a token and list it on a DEX, then pair it with a leading cryptocurrency like Ethereum.

Once a significant amount of unsuspecting investors swap their ETH for the listed token, the creators then withdraw everything from the liquidity pool, driving the coin’s price to zero. The coin’s creators may even create a temporary hype around Telegram, Twitter, and other social media platforms and initially inject a substantial amount of liquidity into their pool to cultivate investor confidence.

Rug pulls thrive on DEXs because these types of exchanges allow users to list tokens for free and without audit, unlike in centralized cryptocurrency exchanges. Furthermore, creating tokens on open source blockchain protocols like Ethereum is easy and free. Malicious actors use these two factors to their advantage.

Note that decentralized exchanges such as Uniswap algorithmically determine the prices of tokens in a pool depending on the available balances. To ensure you don’t fall victim to a rug pull, check the liquidity in a pool. However, this is only the first step. You must also check if there is a lock on the token’s pool. Most reputable projects lock pooled liquidity for a certain period.

Another major characteristic of a possible rug pull is a coin skyrocketing in price within hours. For example, a rug pull coin can move from 0 to 50X within 24 hours. This trick is meant to drive FOMO that leads more people to invest in the token.

Source: https://coinmarketcap.com/alexandria/glossary/rug-pull

YOLO

YOLO – acronym meaning you only live once, used to express the view that one should make the most of the present moment without worrying about the future.

 

What Is FUD?

An acronym that stands for “Fear, Uncertainty and Doubt.” It is a strategy to influence perception of certain cryptocurrencies or the cryptocurrency market in general by spreading negative, misleading or false information. *see FUDster.

Source: https://coinmarketcap.com/alexandria/glossary/fud

DYOR – Do Your Own Research

DYOR is short for “Do Your Own Research”, and is defined as the process of doing research before making an investment. There are many manipulating people who urge others to buy a cryptocurrency so the price will rise and they can sell it for a profit.

Source: https://decryptionary.com/dictionary/dyor/

What is Crypto?

A cryptocurrency, crypto-currency, or crypto is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems. When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.

What is Blockchain and how it works?

Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

Source: https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain

What is blockchain in cryptocurrency?

Blockchain forms the bedrock for cryptocurrencies like Bitcoin. … By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates many of the processing and transaction fees.

Source: https://www.investopedia.com/terms/b/blockchain.asp

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