Beginner Crypto Advice:
What You Need to Know as You’re Getting Started

Blockchain, mining, and security

For beginners, the starting point is often Bitcoin, the most well-known cryptocurrency. Bitcoin serves as a fundamental introduction to digital assets and lays the groundwork for understanding other cryptocurrencies. Bitcoin is the godfather of crypto and has consistently commanded about 50% of the total market cap of all cryptos.

Cryptocurrencies like Bitcoin operate on a decentralized and secure system known as blockchain. This revolutionary technology is the backbone of the entire digital asset ecosystem, providing transparency, security, and immutability to transactions.

As Bitcoin creator Satoshi Nakamoto said:

“The main idea of the system is the generation of a hash-based proof of work to create self-evident proof of the majority consensus. Users get new coins by contributing proof of work to the chain.” (Jan 2009)

How blockchain works

At its core, a public blockchain is a distributed ledger that records transactions across a network of computers in a transparent and tamper-resistant manner. Not all blockchains are the same and Bitcoin’s value proposition is the “gold standard” for all blockchain security. The question to ask is how does the cryptographic security of Bitcoin compare to another blockchain?

Key Takeaway

Blockchains have dozens of attributes and your job is understand the differences among those blockchains to understand their value proposition. The token or coin, the asset you invest in, is a reflection of the accrued value based on the combination of all the attributes of a respective chain.

Picture it as a chain of blocks, where each block contains a list of transactions. New blocks are added to a blockchain at regular intervals depending on the blockchain. There could be sub-second blocks like Solana or 10-minute blocks like Bitcoin. Miners or validators depending on the type of blockchain consensus add new blocks based on a set of rules. The next most important question to ask is, how decentralized is a particular blockchain network? Bitcoin, for example, it very decentralized with thousands of nodes and its 10-minute blocks are rather clunky in crypto, but it offers the best security of all blockchains. 

When a transaction occurs, it is broadcasted to a network of nodes (computers) for validation. These nodes use consensus algorithms to agree on the validity of the transaction before it is added to a block. Once confirmed, the block is linked with a hash of the previous block thus chaining the blocks together. This process ensures that no single entity has control over the entire blockchain, making it resistant to fraud and censorship. Blocks are “mathematically fused” together with reference hashes which are the outputs of algorithms. The hash or string of characters can’t be reverse engineered creating the mathematical strength.

The process of mining and staking

Mining is an integral part of how transactions are verified and added to the blockchain. Miners, who are participants in the network, use powerful computers to solve complex mathematical puzzles. These puzzles serve as a proof-of-work, demonstrating that the miner has invested computational effort.

The first miner to solve the puzzle broadcasts the solution to the network for validation. Once confirmed, the new block is added to the blockchain, and the miner is rewarded with newly minted cryptocurrency (in the case of Bitcoin, this is called the block reward) and transaction fees. This process, known as mining, not only secures the network but also introduces new coins into circulation.

Mining is competitive, and as more miners join the network, the puzzles become more challenging to solve. This dynamic ensures a consistent rate of block creation and regulates the supply of cryptocurrencies, making mining a fundamental aspect of the decentralized nature of blockchain. There are numerous other proof of work blockchains like Horizen and Kadena. 

Proof of stake blockchains typically have validators who are chosen by the protocol to validate and add blocks at a rate based on their proportionate amount of stake of a particular blockchains native token. This is like the old cliche, “You’ve got to have skin in the game.” A validator puts skin in the game by staking tokens with the risk of losing some if they don’t behave properly. 

Avalanche Network states:

“When a new block is proposed, the protocol selects a validator from the available pool to verify the transaction. Selection is performed in a pseudorandom manner: The odds that a particular node will be chosen to act as a validator depends on the proportionate number of tokens it has staked. Once the new block has been successfully validated (according to established rules), the selected staking node receives a reward for its participation.”

The significance of public and private keys

Central to the security of cryptocurrencies are public and private keys from asymmetric encryption. These cryptographic keys play a crucial role in facilitating secure transactions and ensuring the integrity of digital assets.

Public key

Think of the public key as your digital address, visible to everyone on the blockchain. It's derived from complex mathematical algorithms and serves as an identifier for receiving funds. Sharing your public key is similar to providing someone with your bank account number for transactions.

Private key

On the other hand, the private key is your secret code, known only to you. It acts as a digital signature, allowing you to access and control your digital assets. Losing your private key means losing control over your funds permanently. It's essential to keep your private key secure and never share it with anyone. Guard your private key with your life.

When you initiate a transaction, your private key signs the transaction, providing mathematical proof that it originated from you. The recipient can verify this signature using your public key, ensuring the authenticity of the transaction. The user doesn't type in a private every time they send crypto because the software handles this part under the hood, rather the user typically clicks a send button.

Understanding the role of public and private keys in securing digital assets is paramount for anyone involved in the world of cryptocurrencies. It's a delicate balance between accessibility and security, emphasizing the importance of safeguarding your private key to prevent unauthorized access.

As Andreas Antonopoulos says: "Not your keys, not your coins.” 

This simple statement helps you answer whether you are using a centralized app that owns and controls your asset or whether you own and control your assets.

Key Takeaway

The importance of managing private keys or seed phrases can’t be overemphasized or repeated too many times. The essence of crypto as first demonstrated by Bitcoin puts the power and control of financial assets back in the hands of users. Nonetheless, in crypto you get to choose how to control your assets.