Blockchain

In a few words, a blockchain is a digital ever-growing list of data records. Such a list is comprised of many blocks of data, which are organized in chronological order and are linked and secured by cryptographic proofs.

The first prototype of a blockchain is dated back to the early 1990s when computer scientist Stuart Haber and physicist W. Scott Stornetta applied cryptographic techniques in a chain of blocks as a way to secure digital documents from data tampering. The work of Haber and Stornetta certainly inspired the work of Dave Bayer, Hal Finney, and many other computer scientists and cryptography enthusiasts – which eventually lead to the creation of Bitcoin, as the first decentralized electronic cash system (or simply the first cryptocurrency). The Bitcoin whitepaper was published in 2008 under the pseudonym Satoshi Nakamoto.

Although the blockchain technology is older than Bitcoin, it is a core underlying component of most cryptocurrency networks, acting as a decentralized, distributed, and public digital ledger that is responsible for keeping a permanent record (chain of blocks) of all previously confirmed transactions.

Blockchain transactions occur within a peer-to-peer network of globally distributed computers (nodes). Each node maintains a copy of the blockchain and contributes to the functioning and security of the network. This is what makes Bitcoin a decentralized digital currency that is borderless, censorship-resistant, and that does not require third-party intermediation.

As a distributed ledger technology (DLT) the blockchain is intentionally designed to be highly resistant to modification and frauds (such as double-spending). This is true because the Bitcoin blockchain, as a database of records, cannot be altered, nor can it be tampered without an impractical amount of electricity and computational power – which means the network can enforce the concept of “original” digital documents, making each Bitcoin a very unique and un-copyable form of digital currency.

The so-called Proof of Work consensus algorithm is what made it possible for Bitcoin to be built as a Byzantine fault tolerance (BFT) system, meaning that its blockchain is able to operate continuously as a distributed network, even if some of the participants (nodes) present dishonest behavior or inefficient functionality. The Proof of Work consensus algorithm is an essential element of the Bitcoin mining process.

The technology of blockchain may also be adapted and implemented in other activities, such as healthcare, insurance, supply chain, IOT, and so on. Although it was designed to operate as a distributed ledger (on decentralized systems), it may also be deployed on centralized systems as a way to assure data integrity or to reduce operational costs.

Algorithm

In short, an algorithm is a set of steps that defines a sequence of actions. It may also be described as a set of commands designed to achieve a specific goal or solve a particular problem. Algorithms are mainly used and studied in the fields of mathematics and computer sciences, but they may also be related to other contexts, such as biological neural networks and electronic devices.

In computer science, an algorithm consists of a sequence of unambiguous instructions that conduct computer programs to perform a variety of tasks. They can be designed to execute a simple action like subtracting two numbers, or more complex operations, like finding the best route between two or more geographic locations. As such, computer algorithms are extremely useful for performing all sorts of tasks, from calculations, data processing, and even decision-making. 

Every algorithm is made of a fixed beginning and ending point, producing outputs according to the inputs and to the predefined steps. Multiple algorithms can be combined to perform more elaborate tasks, but higher complexity also requires more computational resources. 

Algorithms can be measured by their correctness and efficiency. Correctness refers to the algorithm’s accuracy and whether or not it can solve a certain problem. Efficiency is related to the amount of resources, and time an algorithm needs to perform a particular task. Many computer scientists use a mathematical analysis technique known as asymptotics to compare different algorithms, regardless of the programming language or hardware they are running on.

In the context of blockchain, the Bitcoin’s Proof of Work algorithm is an essential component of the process of mining – which verifies and validates transactions, while securing the network and assuring itis functioning as intended.

Bitcoin

In short, Bitcoin is a digital form of money that runs on a distributed network of computers (nodes). In a broader sense, though, many people often use the word Bitcoin to refer to a few different things: a digital currency, a decentralized public ledger, a protocol, or simply the big ecosystem that encompasses all of these. However, there are some fundamental differences between these functionalities.

First, Bitcoin is the name of a peer-to-peer (P2P) digital currency, which is sometimes referred to as bitcoin (with lower “b”) or simply BTC. Bitcoin is a cryptocurrency, which means it is a digital currency that is protected by cryptographic techniques. It was the first cryptocurrency that came into existence, and the first Bitcoin block – known as the genesis block (or block 0) – was mined on the 3rd of January 2009.

Second, the Bitcoin decentralized public ledger is what we call blockchain. Despite being closely related, Bitcoin and blockchain are different concepts. The blockchain technology is what maintains the whole structure that allows Bitcoin transactions to be broadcasted and recorded in a trustless and secure way. Note that, in this context, trustless means that the blockchain system does not rely on any kind of trust to function as it is backed by computer code and mathematical algorithms. Thus, the Bitcoin blockchain works as a decentralized digital ledger that publicly lists all confirmed BTC transactions. 

Lastly, the term Bitcoin was also used to refer to the protocol that is being continually developed as an open source software. In 2014, however, the original Bitcoin client software was officially rebranded to Bitcoin Core to avoid further misunderstanding. As an open source software, Bitcoin Core counts with numerous contributors worldwide.

Bitcoin was conceptualized by a person (or group) under the pseudonym Satoshi Nakamoto. The idea was to create a unique digital payment system that would permit borderless financial transactions to occur without the need for mediators like banks or governments. The distributed architecture provided by blockchain technology, along with the cryptographic techniques, makes Bitcoin very resistant to attacks and fraud.

Cryptocurrency

A digital currency that is secured by cryptography and is, typically, used as a medium of exchange within a peer-to-peer (P2P) digital economic system. The use of cryptographic techniques is what ensures that these systems are completely immune to fraud and counterfeiting.

The first cryptocurrency to be ever created was Bitcoin, introduced by pseudonymous developer Satoshi Nakamoto, in 2009. Nakamoto’s goal was to create a novel electronic payment system that would allow digital financial transactions to occur between users without the need for intermediaries, such as banks or governmental institutions.

Most cryptocurrency systems work through a decentralized framework that is collectively maintained by a distributed network of computers. Each computer (or device) that joins the network is referred to as a node. In simple terms, a node is any physical device that is connected to a network and that is able to send, receive and forward information. Each node is categorized according to the functions it performs within the system. For instance, the Bitcoin network is made of, at least, seven different types of nodes, and the nodes that perform all available functions are known as full nodes.

Cryptocurrency systems are considered decentralized because they don’t rely on a centralized point of authority. The network nodes are widely distributed around the world and the issuance and management of cryptocurrency units are based on pre-programmed algorithms and mathematical proofs. However, each cryptocurrency works in a particular way, which results in varying degrees of decentralization. In other words, some cryptocurrencies may be considered more decentralized than others, depending on the network structure and on how the nodes are distributed.

Most cryptocurrency systems rely on a public distributed ledger known as a blockchain, which is basically an ever-growing list of records that are highly resistant to modification. As the name suggests, a blockchain is made of a linear chain of blocks and, in the context of cryptocurrencies, it is responsible for keeping a permanent record of all confirmed transactions (and related data) – all secured by cryptography. Generally speaking, every cryptocurrency works on top of a blockchain that works according to a predefined set of rules (i.e. an underlying protocol). The protocol is what defines how the blockchain and the cryptocurrency system should operate.

Yield Farming

Yield farming is a high-risk practice in decentralized finance (DeFi), where users lock up their cryptocurrencies in return for interest or rewards. It’s a way to generate passive income by leveraging various DeFi protocols. 

In yield farming, users typically move their assets around to various DeFi platforms to maximize their return on investment. These platforms might include decentralized exchanges, lending services, or other financial tools built on blockchain technology.

The platforms incentivize participation by offering rewards to users who provide liquidity, lend, or stake assets. This creates an ecosystem where users can earn passive interest or rewards while holding crypto assets.

Yield farming can have its benefits, such as earning passive income, potential for high returns, and token rewards. However, it’s very important to take into account that yield farming can be a very risky practice. Here are some potential risks associated with yield farming:

• Rug pulls: schemes where developers abandon a project and run away with investors’ funds, often causing the value of the project’s token to plummet.
• Smart contract issues: security issues such as bugs, hacks, or other vulnerabilities can occur and cause users to lose funds.
• Volatility: significant price swings can drastically affect the value of both the staked assets and the rewards received, potentially leading to substantial losses or impermanent loss.
• Regulatory risk: changes in the regulatory landscape can impact the legality, operation, or value of yield farming practices, potentially causing financial loss or legal complications for participants.

Yield farming can promote financial inclusion and offer an alternative to traditional financial systems. Nevertheless, it’s crucial to understand the risks associated with this type of investment strategy before participating in such practices. 

Altcoin

Altcoin is the term given to describe alternative digital assets, such as a coin or token that is not Bitcoin. This nomenclature comes from the idea that Bitcoin is the original cryptocurrency and that all others are then considered “alternate” or “alternative” coins.

The term “altcoin” is also used quite broadly to refer to digital assets that would also technically be referred to as “tokens” rather than coins. The best-known examples are the ERC-20 tokens that exist on top of the Ethereum blockchain.

Since the creation of Bitcoin in 2008, more than 2,000 alternative cryptocurrencies were deployed. In fact, many of these altcoins were created as modified copies of Bitcoin, through a process known as Hard Fork. Despite sharing some similarities, each altcoin has its own functionalities. 

The altcoins that were forked from Bitcoin often present a similar mining process, which relies on the Proof of Work consensus algorithm. However, there are several other cryptocurrencies experimenting with alternative methods of reaching consensus within distributed blockchain networks. The Proof of Stake consensus algorithm is the most common alternative to Proof of Work, but other notable examples include the Delegated Proof of Stake, Proof of Burn, Proof of Authority, and Delayed Proof of Work consensus algorithms.

While some users deem the term “altcoin” to be derogatory or deprecating, it is broadly held to be neutral in its usage. The term is not supposed to convey any positive or negative sentiment about the asset that is being referred to. On the other hand, the term “shitcoin”, for example, brings a negative sentiment and is usually deemed as pejorative.

Algorithm

In short, an algorithm is a set of steps that defines a sequence of actions. It may also be described as a set of commands designed to achieve a specific goal or solve a particular problem. Algorithms are mainly used and studied in the fields of mathematics and computer sciences, but they may also be related to other contexts, such as biological neural networks and electronic devices.

In computer science, an algorithm consists of a sequence of unambiguous instructions that conduct computer programs to perform a variety of tasks. They can be designed to execute a simple action like subtracting two numbers, or more complex operations, like finding the best route between two or more geographic locations. As such, computer algorithms are extremely useful for performing all sorts of tasks, from calculations, data processing, and even decision-making. 

Every algorithm is made of a fixed beginning and ending point, producing outputs according to the inputs and to the predefined steps. Multiple algorithms can be combined to perform more elaborate tasks, but higher complexity also requires more computational resources. 

Algorithms can be measured by their correctness and efficiency. Correctness refers to the algorithm’s accuracy and whether or not it can solve a certain problem. Efficiency is related to the amount of resources, and time an algorithm needs to perform a particular task. Many computer scientists use a mathematical analysis technique known as asymptotics to compare different algorithms, regardless of the programming language or hardware they are running on.

In the context of blockchain, the Bitcoin’s Proof of Work algorithm is an essential component of the process of mining – which verifies and validates transactions, while securing the network and assuring itis functioning as intended.

Cryptography

Advances in computer technology have made data more accessible, and although this may offer a huge advantage, it has a downside as well. Online data is exposed to many threats, including theft and corruption. Cryptography (or cryptology) is one solution that has made it possible to protect information from some of the risks associated with data storage and distribution. It is not to say that the concept of encrypting data is new. Even before the digital era, people have been masking messages to prevent unintended audiences from reading them. But the increased use of computing devices brought the science of encryption to a whole new level.

What is Cryptography?

In a few words, cryptography is the science of hiding information. More specifically, modern cryptography makes use of mathematical theories and computation to encrypt and decrypt data or to guarantee the integrity and authenticity of the information.

In a basic process of text encryption, a plaintext (data that can be clearly understood) undergoes an encryption process that turns it into ciphertext (which is unreadable). By doing this, one can guarantee that the information sent can only be read by a person in possession of a specific decryption key.

By using specific cryptographic techniques, one is able to send sensitive data even over unsecured networks. The level of encryption will depend on the degree of protection that the data requires. For instance, the type of security used on regular personal files (like contacts) is not the same as the one used on cryptocurrency networks.

Learning how cryptography works is critical to understanding its importance within cryptocurrency systems. Most blockchain systems, such as the one of Bitcoin, make use of a particular set of cryptographic techniques that allow them to function as a decentralized and public ledger, through which digital transactions can take place in a very secure way.

How Does Cryptography Work?

The modern cryptography consists of various areas of study, but some of the most relevant are the ones that deal with symmetric encryption, asymmetric encryption, hash functions, and digital signatures.

The Bitcoin protocol makes use of cryptographic proofs in order to secure the network and to ensure the validity of each transaction. Digital signatures guarantee that each user is only able to spend the funds of his own wallet and that these funds can’t be spent more than once. For instance, if Alice sends 2 bitcoins to Bob, she creates a transaction that is, essentially, a message that confirms the addition of 2 bitcoins to Bob’s wallet, while removing the coins from Alice’s wallet. However, she is only able to do so by providing a digital signature. 

Another important element of the Bitcoin Protocol is the Hashcash function, which defines the Proof of Work consensus mechanism and the mining process (responsible for securing the network, validating transactions and generating new coins). Hashcash makes use of a cryptographic function called SHA-256.

Cryptography is an essential part of the blockchain technology and, therefore, is crucial for any cryptocurrency. Cryptographic proofs applied to distributed networks enabled the creation of trustless economic systems, giving birth to Bitcoin and other decentralized digital currencies.

Decentralized Finance (DeFi)

DeFi stands for “decentralized finance” and refers to the ecosystem comprised of financial applications that are being developed on top of blockchain systems. 

DeFi may be defined as the movement that promotes the use of decentralized networks and open source software to create multiple types of financial services and products. The idea is to develop and operate financial DApps on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols.

Currently, the three largest functions of DeFi are:

• Creating monetary banking services (e.g., issuance of stablecoins)
• Providing peer-to-peer or pooled lending and borrowing platforms
• Enabling advanced financial instruments such as DEX, tokenization platforms, derivatives and predictions markets

Within those three fields, there are several types of DeFi services. A few other examples of products and use cases include funding protocols, software development tools, index construction, subscription payment protocols, and data analysis applications. DeFi dApps may also be used for KYC, AML, and other identity management services.

Decentralized finance brings numerous benefits when compared to traditional financial services. Through the use of smart contracts and distributed systems, deploying a financial application or product becomes much less complex and secure. For instance, many dApps are being developed on top of the Ethereum blockchain, which provides reduced operational costs and lower entry barriers.

Summing up, the DeFi movement is shifting traditional financial products to the open source and decentralized world, which removes the need for intermediaries, reduces overall costs, and greatly improves security.

Decentralized Exchange (DEX)

An exchange which does not require users to deposit funds to start trading and does not hold the funds for the user. Instead, users trade directly from their own wallets.

Encryption

What is encryption?

Encryption is basically the process of converting clear information into code in order to prevent unauthorized parties to access it. Governments, businesses, and individuals use encryption techniques to safeguard their personal data and prevent fraud. Recent studies suggest that roughly 50% of the internet data and communication is already encrypted through the HTTPS protocol.

How does data encryption work?

Encryption involves the conversion of plain data into unreadable data. In a basic process of text encryption, a plaintext (data that can be clearly understood) undergoes an encryption process that turns it into ciphertext (which is unreadable). By doing this, one can guarantee that the information sent can only be read by a person in possession of a specific decryption key. When this key is used to decrypt the data, the information converted back into its original state.

Contrary to popular belief, most cryptocurrencies and their blockchain networks do not rely on encryption techniques. Instead, they rely on hash functions and digital signatures. For instance, the Bitcoin Protocol makes use of cryptographic proofs in order to secure the network and ensure the validity of each transaction. Digital signatures guarantee that each user is only able to spend the funds of his own wallet and that these funds cannot be spent more than once. 

However, cryptocurrency websites might use encryption to keep the details of their customers safe. Cryptocurrency wallets also use encryption to protect wallet files and passwords.

What are the benefits of encryption?

Encryption is useful for protecting sensitive information like names, addresses, phone numbers, private messages, and social security numbers. If hackers infiltrate a computer network and access a system, they will be unable to decipher this data without a decryption key.

Encryption also provides businesses and individuals with privacy. They can exchange coded information over the internet and prevent surveillance from government agencies. Many of the world’s biggest companies are currently using this technology to keep customer information safe. In the event of a data breach, hackers will be unable to access a customer’s sensitive data, such as credit card number or personal address.

Organizations might also use encryption to improve their compliance procedures. Healthcare companies in the United States, for example, need to encrypt patient data in order to adhere to HIPAA data quality standards. The federal government can fine companies who fail to protect patient data properly.

Encryption prevents hackers from accessing data, improves compliance, reduces fraud, and makes it safer to send money online when using cryptocurrencies. More organizations and individuals are using this technique to shield their sensitive data.

Exchange

An exchange is an organized marketplace in which financial instruments – such as cryptocurrencies, commodities, and securities – are traded. An exchange may operate on a real-world facility or on a digital platform. Many traditional exchanges, which were initially restricted to physical trading, are now providing digitized services as a way to enable electronic trading (also known as paperless trading).

One of the main functions of an exchange is to provide liquidity within a secure and organized trading environment, acting as an intermediary for traders to easily buy and sell their assets while being less susceptible to financial risks.

Exchanges may be classified according to the type of trade being executed. Classical exchanges are the ones that perform spot trades (immediate settlement). On the other hand, there are exchanges that provide derivatives trading, such as futures and options. Exchanges may also be classified according to the financial instruments being traded: cryptocurrency exchange, stock or securities exchange, commodities exchange, and the foreign exchange market (Forex). But, many exchanges provide a variety of services and trading options. For instance, many commodities exchanges are also offering futures trading.

Within stock exchanges, the most important one in a given country is called the primary exchange. A few examples of primary exchanges include the New York Stock Exchange, the Tokyo Stock Exchange, and the London Stock Exchange. Most stock exchanges present a strict listing criterion, which ensures that only companies that meet certain requirements are effectively listed.

In the context of cryptocurrencies, digital exchanges are responsible for providing a platform where users can trade one cryptocurrency for another or buy and sell their coins for fiat money. Currently, most cryptocurrency exchanges are based on a centralized system, maintained by a private company that acts as an intermediary and is responsible for conducting all trades and transactions. Ease of use and liquidity are the major advantages of centralized exchanges. In regards to disadvantages, these centralized systems are susceptible to downtimes and cyber attacks, making security a major point of concern. Considering that users need to trust their holdings to the company in order to be able to trade, it is important to choose an exchange that has proven to be reliable and secure. 

In contrast, decentralized cryptocurrency exchanges (also known as DEX) were created as an alternative for centralized exchanges. DEX platforms remove the need for a middleman and perform trades and transactions within a trustless automatized environment (based on smart contracts). Despite the fact that these trading platforms are less susceptible to cyber attacks and infrastructure downtimes, decentralized exchanges are not able to provide fiat currency services, such as fiat/crypto tradings or fiat withdrawals/deposits. In addition, the trading volume tends to be much lower on these types of exchanges, since they are less popular than centralized ones and have limited functionality.

Fiat

A currency that has been established as a valid form of money, typically supported by a government regulation that declares it to be legal tender. The term fiat comes from the Latin and as a word used to describe a government decree, order or resolution. By definition, fiat money is a currency that does not have any intrinsic value as it is not backed by a physical commodity and is usually made of a worthless or low-value material (such as a small piece of paper). Even so, fiat money is widely accepted as a means of payment.

Besides the government approval and regulation, the main reason why fiat money is considered valid and valuable in our society is due to a collective belief. In other words, the fiat value is highly dependent on a collective agreement that it has market value and may be used as a medium of exchange, with an intrinsic purchasing power. Thus, the acceptance of fiat money is strongly dependent on a government decree along with a social convention (and expectation that it will keep its value in the future). If either the social belief or the government decree gets compromised, the real value of the currency, as a means of payment, is quickly and greatly reduced.

Due to the fact that most fiat currencies are not backed by precious metals (such as gold, silver, and copper) nor any other commodity, central banks are able to cause large variations in the supply of money, which may eventually lead to episodes of extremely high inflation rates (hyperinflation). 

Historical records suggest that the first form of paper money was created in the 11th century China. The Song dynasty is known for issuing the so-called jiaozi, regarded as the first government-issued paper money in history. Jiaozi was a primitive form of banknote created to replace the heavy iron cash coins that were being used at that time. However, the succeeding Great Yuan dynasty was the one to actually adopt and use fiat money on a large scale – as the predominant medium of exchange. The Great Yuan period lasted from 1271 to 1368, but the fiat money continued to be adopted by the following Great Ming dynasty (1368-1644).

Oracle

An oracle may be defined in multiple different ways, according to the context. Within the blockchain context, an oracle is basically a data source that is used as a bridge between smart contracts and other external sources.

More specifically, an oracle is an agent that not only communicates with external data sources but also verifies and authenticates that the data being provided is accurate. Thus, oracles are responsible for providing vital and reliable information to smart contracts, which in turn perform certain tasks.

The importance of oracles relies on the fact that blockchain smart contracts are only able to access the data that is contained within their own digital network. Therefore, oracles are needed as a communication instrument that “translates” real world events (non-deterministic data) to digital values that be recognized by smart contracts (deterministic data).

Blockchain oracles may be classified according to their use case. The most common types are:

• Hardware Oracles: Integrates with physical systems and technologies, providing real-world data for smart contracts. For instance, hardware oracles can communicate with RFID sensors used in various industries (automobile, pharmaceutical, supply chain, etc.)
• Software Oracles: most commonly used; retrieve online data from external programs and web APIs – such as market prices, flight status, and weather data.
• Consensus Oracles: sort of decentralized oracles that collects large amounts of data from a set number of other oracles, following specific methods to determine the validity and accuracy of data collected. Consensus oracles are being used in prediction markets platforms, such as Augur and Gnosis.
• Inbound Oracles: transmits external data to smart contracts or software oracles. Can be configured as a set of “if” guidelines (e.g. “if an asset hits a certain price, place a buy order”).
• Outbound Oracles: transmits smart contracts data to external systems, making it possible for smart contracts to communicate with non-blockchain sources.

In general, a blockchain oracle consists of a third-party data source that is dependent on external permission to work properly, which means they are usually a tool provided by centralized entities. Therefore, most oracles end up sacrificing the decentralized properties of the smart contracts. 

The Oracle Problem

Depending on the data provided by the centralized oracles, smart contracts will execute different functions, meaning that oracles have immense power over smart contracts. This is known as the Oracle Problem, which rises as a conflict of trust that centralized third-party oracles bring to trustless smart contracts and blockchain systems.

Although decentralized oracles, such as the consensus oracles, may present a possible solution, there are still many challenges to be overcome, since decentralized oracle networks are quite difficult to implement in a secure, functional, and trustless way.

Yield Farming

Yield farming is a high-risk practice in decentralized finance (DeFi), where users lock up their cryptocurrencies in return for interest or rewards. It’s a way to generate passive income by leveraging various DeFi protocols. 

In yield farming, users typically move their assets around to various DeFi platforms to maximize their return on investment. These platforms might include decentralized exchanges, lending services, or other financial tools built on blockchain technology.

The platforms incentivize participation by offering rewards to users who provide liquidity, lend, or stake assets. This creates an ecosystem where users can earn passive interest or rewards while holding crypto assets.

Yield farming can have its benefits, such as earning passive income, potential for high returns, and token rewards. However, it’s very important to take into account that yield farming can be a very risky practice. Here are some potential risks associated with yield farming:

• Rug pulls: schemes where developers abandon a project and run away with investors’ funds, often causing the value of the project’s token to plummet.
• Smart contract issues: security issues such as bugs, hacks, or other vulnerabilities can occur and cause users to lose funds.
• Volatility: significant price swings can drastically affect the value of both the staked assets and the rewards received, potentially leading to substantial losses or impermanent loss.
• Regulatory risk: changes in the regulatory landscape can impact the legality, operation, or value of yield farming practices, potentially causing financial loss or legal complications for participants.

Yield farming can promote financial inclusion and offer an alternative to traditional financial systems. Nevertheless, it’s crucial to understand the risks associated with this type of investment strategy before participating in such practices.