How to explain the blockchain, cryptocurrencies, and ICO to a newbie?
Ten years ago, nobody heard of blockchain, and now it is everywhere. It has become a whole new parallel world with its own currencies, transactions, and identities, and it keeps growing.
There are people who have already become blockchain and cryptocurrency experts and those who prefer not to cross this line between the usual and the crypto. However, it seems that blockchain has come to stay. Therefore, it will be wise to, at least, understand what is going on in that universe that Satoshi Nakamoto created.
In this article, we will try to explain the very basic concepts of blockchain and cryptocurrencies. No matter whether you are thinking of giving it a try or are still skeptical about it, blockchain is penetrating all areas of our life, so it may be a good idea to know what it is about.
What is blockchain?
That’s the main question because blockchain is the foundation of the crypto-space, the concept from which everything else sprang. For many, it is very vague and unclear, because it is greatly different from everything we have seen so far.
If we take the word apart, blockchain is “a chain of blocks”. A block is a new record representing a set of transactions that were approved within a certain interval of time. In the context of blockchain, a transaction is a modification of data. Each new block is added to the chain of other blocks, hence, the blockchain.
Doesn’t make much sense yet, does it? Don’t worry, it’s going to get easier when we see how the blockchain technology actually works.
How does blockchain work?
Blockchain exists as a network of computers, or nodes, that maintain its decentralized database. Pay attention to the word “decentralized” here, as this is the key point. There is neither a single place to store the data in a blockchain, nor a central entity to control it. The entire database is shared between all nodes in the network and synchronized with every update. Thus, all full nodes in the network contain the same information and can monitor all changes and modifications.
Each transaction is a record in a blockchain that is included in the corresponding block. Each block has the so-called hash. Hash is a 256-bit string generated by the hashing algorithm applied to all data in the block. Each new block includes the hash of the previous one. Whenever a single bit of any transaction in a block is modified, this generates a totally new hash that no longer matches the subsequent one.
This way, the blockchain data is protected from retrospective modification. When a new transaction is added to the block, the special algorithm calculates the hash of this block and verifies that it matches that of the previous one, and so on. Thus, anyone can easily trace and verify the entire sequence of transactions. Moreover, in most blockchain-based solutions, such as Bitcoin or Ethereum, all transactions are visible to all users across the blockchain which increases the transparency.
This decentralized structure of blockchain networks creates the following main advantages of the blockchain technology:
- Any transaction can be traced back to its origin
- All data already existing in the blockchain cannot be modified, only new blocks can be added
- There is no single entity to validate the transactions, the users themselves validate them by consensus
- The system has no single entry point, therefore, it is extremely difficult to tamper with
Blockchain use cases
What’s the practical purpose of such data organization? People tend to think that blockchain is mostly about cryptocurrencies and their operations. True, cryptocurrency transactions form a large share of blockchain applications, however, there are other use cases, too.
For example, blockchain is a perfect means of establishing the authenticity of items. Imagine the following chain of events:
- An item is legally produced and recorded in a blockchain. The block in which the item data is stored has its hash calculated for all data contained within.
- The item is legally sold or otherwise transferred to another person. A new block appears in the chain with the hash referring to the previous one.
- The chain goes on with all transactions with the item recorded in different blocks. No data that has been recorded in the blockchain cannot be modified.
- As soon as the item is stolen or duplicated, the chain breaks, and the hash of the block no longer matches the ones before it. Voilà, nobody can use or resell illegal items anymore.
Some companies already use this authenticity verification technology to trace the origins of valuables, such as diamonds or electronics. The same concept also works to identify counterfeit medicines.
So, you can imagine the enormous possibilities a blockchain can give. There is one catch, though – to perform properly, the blockchain has to be developed by professionals. If you need a quality blockchain app development for your business or startup, check our blockchain development experience and contact us for a free consultation. Tell us what you want to achieve, and we will find the best way to do it.
What is cryptocurrency?
OK, let’s talk about why blockchain was ever invented. According to the crypto lore, Satoshi Nakamoto, whoever he is, created his first blockchain to manage the first ever crypto money, Bitcoin. By running financial transactions on a blockchain, he achieved unprecedented transparency and trust, as well as resolved the problem of double spending – simply speaking, on a blockchain the same money cannot be spent twice.
Each cryptocurrency transaction is checked with a special algorithm verifying that its amount has not yet been used elsewhere. When the algorithm confirms that the transaction is valid, it processes it modifying the sender’s and the recipient’s data accordingly.
Generally speaking, cryptocurrency is a medium of exchange that exists on a blockchain or other distributed network technology. Its units are entries in the unmodifiable decentralized database.
The cryptocurrency history began with Bitcoin. Bitcoin was the first cryptocurrency, however, in the decade that elapsed since its invention, lots of other blockchain coins have been created. At the beginning of 2018, there were over 1300 cryptocurrencies, and the number is growing.
One of the most notable is Ether, the currency of the Ethereum platform. Although it is also a cryptocurrency, Ether has certain differences as compared to Bitcoin.
While Bitcoin is more of a blockchain-based payment system, Etherium represents a certain computer power on a blockchain network. This computer power can execute applications, therefore, the Ethereum blockchain is, rather, a network of distributed computing.
Other cryptocurrencies are created on the basis of the Ethereum network by using its resources to run custom code.
How does cryptocurrency work?
Each cryptocurrency is based on an extremely complex mathematical algorithm. When this algorithm runs, its result shows the owner of each unit of the cryptocurrency. This is how cryptocurrency transactions are verified.
If a user transfers a certain amount of cryptocurrency to another user, the transaction first gets to a common pool and then to the so-called “miners” who are to validate it. The miners run algorithms for each transaction, and if the algorithm verifies the cryptocurrency owner and finds no double spending, they approve the transfer. Upon the approval, the records both on the sender side and the recipient side are modified accordingly, and the transaction closes.
The beauty of cryptocurrencies is, first, in the absence of central entity monitoring and approving the transactions and, second, in the transparency of the entire blockchain to all users.
What is ICO?
This is another concept that you come across very often nowadays. ICO meaning Initial Coin Offering is a blockchain-based technology of fundraising. In an ICO, the company raises the initial capital through the crowdsale of the company’s own cryptocurrency called tokens.
The advantage of the ICO as compared to traditional fundraising methods, like approaching investors or venture capitalists, is in its fast and much less bureaucratic procedure. Besides, if we compare ICOs with initial public offerings, or IPOs, we will see that a startup has much better chances of raising capital through an ICO than an IPO.
An IPO requires the company to have a finished product and to be backed by reputed underwriters. Thus, a startup with just an idea and a team willing to implement it can hardly fulfil the IPO requirements. On the contrary, with an ICO, a startup can gather the required amount within days or, sometimes, hours or minutes. We took part in the development of an ICO that closed seventeen minutes after launch by reaching the hard cap. If interested, you can find the complete story of this ICO here.
From the technological perspective, ICO works as follows:
- The company publishes a white paper explaining why it needs funding and announces the ICO for it.
- While preparing for the ICO, the company develops a blockchain and, on its basis, creates the so-called smart contract that validates the transactions. Smart contracts are based on the transaction conditions and the time when the condition must be fulfilled. If at the specified time the condition is met, the smart contract executes the transaction. Otherwise, it rejects it.
- For the ICO, the company issues its own cryptocurrency, or tokens, which it is going to sell to its investors. During the token sale, the investors pay with Bitcoin, Ether or fiat (traditional) currencies and get tokens in exchange.
- The ICO usually has two limits it plans to achieve – the “soft cap” which is the amount sufficient for the startup to begin. And the “hard cap” which is the amount the company ever hopes to raise. Upon reaching the hard cap, the ICO closes, and the company may open the champagne. The hard cap defines the maximum number of tokens that are going to be issued, although in some ICOs no hard cap is set.
- If the ICO does not reach its soft cap, it fails, and, in most cases, all investors get their money back. The refund is processed according to the smart contract.
- After a successful ICO, the token holders who invested into the startup wait for the token to be listed at the exchange and hope that its value increases bringing profit for them. The token holders can trade them at cryptocurrency exchanges, such as Bittrex, thus making profit from them, or, if the tokens were issued as utility tokens, their holders get access to the product developed as the result of the project.
By the way, this is how new cryptocurrencies appear – they are tokens issued during successful ICOs. This is why the list of cryptocurrencies grows constantly.
Did anybody actually raise enough money through an ICO?
You would not believe it. ICOs are becoming as popular as traditional fundraising. There are dozens of ICOs running every day, and many have already closed with a success.
By the way, Ethereum exchange also started through an ICO and raised $18 million within 42 days. Since then, Ether has grown into the second most valuable cryptocurrency after Bitcoin.
Another stunning success story is the ICO of EOS, that, according to the rumors, is snipping at the heels of Ethereum. The company has not launched its production yet, however, in 2017 it managed to raise $700 million through crowdsales of its tokens. Their project is rather ambitions – making a blockchain system with an incredible operation speed – millions of transactions per second. From the investor support, we can see that the idea is rather viable and will be greatly appreciated by the users.
Celebrities do not want to stay aside, either. If you browse the mass media, you can find stories about famous people who invested into this or that ICO. For example, in 2017, Floyd Mayweather Jr., a boxing star, invested into an ICO that later became a success.
The most successful ICO in which Adoriasoft had a chance to participate was the ICO for which we created the investor cabinet and took up the smart contract development as well as other tasks. The company, Digitex, was raising money for a commission-free cryptocurrency exchange, Digitex Futures. The ICO lasted 17 minutes and closed upon reaching the hard cap. You can find the detailed case study of the Digitex ICO on our website.
How can you benefit from these new technologies?
Naturally, all new and innovational things are, first of all, for the benefit of the people. And the crypto technologies are no different. If you think that this stuff is for techno geeks only, think again. Anyone can profit from blockchain and the related technologies, and we will show you how.
Blockchain as such is more a technology for companies than individuals. We have already mentioned its possibilities beyond cryptocurrency – authenticity and identity verification. However, blockchain applications are much wider:
- Quality assurance. Since all transactions can be traced back to their origin, it is very easy to identify exactly where the error occurred and fix it. With blockchain preventing any retroactive modification of data, QA processes become much more effective.
- Accounting. A system of unmodifiable records that can be checked and tracked to any point in time – isn’t it every accountant’s dream?
- Peer-to-peer transactions. Blockchain ensures transparent, secure and reliable trade and exchange between any two individuals.
These are just a few examples of how the blockchain innovation can be used. Moreover, dozens of projects and hundreds of enthusiasts work on improving and enhancing the blockchain technology every day, so new possibilities may appear at any time.
Investing in cryptocurrency
This is no different from investing in fiat money, however, you can expect greater and faster profits due to the high volatility of cryptocurrencies. If you trace back the history of Bitcoin, you will see that in the beginning it traded at about $0.30. Nobody knew what to make out of it and people did not know whether it was worth their time and effort. However, those who risked even a hundred dollar worth back then could count themselves truly lucky on December 17, 2017, when Bitcoin hit its historical maximum of $19,783.
How can you trade in cryptocurrencies? To begin, you need two main things:
- A cryptocurrency wallet from which you will do your trading and where you will store your cryptocoins (you can create one at Metamask)
- A cryptocurrency exchange, such as Coinbase or Bittrex that we mentioned before.
That’s it, you can start trading cryptocurrencies and profit from their fluctuations.
Investing in ICO
By becoming one of the ICO investors, you can expect profit from the rise of its token rate. Usually, a company issues a limited number of tokens that it sells during the ICO. Upon completion, in most cases all unsold tokens are destroyed and no new ones are issued, however, the exact terms are specified in the smart contract. The company then lists its tokens on the exchange and, depending on the company project success, the token price will go up or down. If you sell your tokens at a high point, you will make profit. Easy as that.
At the same time, you may choose investing into the so-called utility tokens that represent access to the product that the team is developing. Such tokens are not traded at exchanges, however, with the project success, it will rise in value. Besides, by investing in a utility token you are supporting the project that you consider viable and promising.
ICOs usually have a convenient investor infrastructure including cabinets and wallet creation functionality. To begin investing, just set up your cabinet and wallet, buy some cryptocurrency and transfer it to your wallet. Some ICOs accept investments in fiat (traditional) currency, as well. Once you have set up your wallet and filled it with currency, you are ready to buy tokens.
Is it really worth it?
This is what many people think when they come across references to cryptocurrencies and blockchain. Many of us are afraid to try something new, especially when it is something you can neither see nor touch. However, this technology has been around for ten years already, and at this stage of evolution, ten years is a lot. During its history, it has proved to be convenient, fast, secure, adaptable, and profitable.
As we mentioned, blockchain is expanding into new industry sectors. With the speed it is developing, we may see it in new unexpected places tomorrow. A business or a startup may profit from bitcoin implementation even though it does not know it yet.
Whether you are already working with blockchain or just planning to plunge in, we are ready to share our blockchain development expertise with you. Describe your project or idea to us, and we will find the way to use blockchain to make it easier, more secure and effective. Contact us today to get a free consultation!