DE-FI [-1-]

INTO THE WORLD OF DE-FI !

SERIES NAME:- "LEVEL UP" BY CHITEKI KUN!

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DE-FI MEANS "DECENTRALIZED FINANCE"!

What Is Cryptocurrency (it is an exp of de-fi)& lets know how it works and functionalities ?..  

Let's go!

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.                  

Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptic curve encryption, public-private key pairs, and hashing functions.

Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Not all e-commerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies, even popular ones like Bitcoin, are hardly used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments. To a limited extent, they are also used for cross-border transfers.  

Blockchain:-

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.1The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.

Experts say that blockchain technology can serve multiple industries, such as supply chain, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.                

Types of Cryptocurrency:-

Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in 2008. There are thousands of cryptocurrencies present in the market today.

Each cryptocurrency claims to have a different function and specification. For example, Ethereum's ether markets itself as gas for the underlying smart contract platform. Ripple's XRP is used by banks to facilitate transfers between different geographies.

Bitcoin, which was made available to the public in 2009, remains the most widely traded and covered cryptocurrency. As of November 2021, there were over 18.8 million bitcoins in circulation with a total market cap of around $1.2 trillion. Only 21 million bitcoins will ever exist.

In the wake of Bitcoin's success, many other cryptocurrencies, known as "altcoins," have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. They include Solana, Litecoin, Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion—Bitcoin represented approximately 41% of that total value.

Are Cryptocurrencies Legal?...

Fiat currencies derive their authority as mediums of transaction from the government or monetary authorities. For example, each dollar bill is backstopped by the Federal Reserve.

But cryptocurrencies are not backed by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world. It doesn't help matters that cryptocurrencies have largely functioned outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of its Travel Rule, which requires AML compliance.

As of December 2021, El Salvador was the only country in the world to allow Bitcoin as legal tender for monetary transactions. In the rest of the world, cryptocurrency regulation varies by jurisdiction.

Japan's Payment Services Act defines Bitcoin as legal property.6 Cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer. China has banned cryptocurrency exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December.

Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will need to qualify as "financial instruments." In June 2021, the European Commission released the Markets in Crypto-Assets (MiCA) regulation that sets safeguards for regulation and establishes rules for companies or vendors providing financial services using cryptocurrencies.8 Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. The Securities and Exchange Commission (SEC) has said that Bitcoin and Ethereum are not securities.             

Advantages and Disadvantages of Cryptocurrency:-

Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure. As with every revolution, however, there are tradeoffs involved. At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.

Advantages:-

1.Cryptocurrencies represent a new, decentralized paradigm for  money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one that was triggered in 2008 by the failure of institutions in the United States.

2.Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake.

3.Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. Flash loans in decentralized finance are a good example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading.

4.Cryptocurrency investments can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade, at one point reaching almost $2 trillion. As of Dec. 20, 2021, Bitcoin was valued at more than $862 billion in crypto markets.

5.The remittance economy is testing one of cryptocurrency's most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders and, subsequently, converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper.

Disadvantages:-

1.Though they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. They leave a digital trail that agencies such as the Federal Bureau of Investigation (FBI) can decipher. This opens up possibilities of governments or federal authorities tracking the financial transactions of ordinary citizens. 

2.Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases.  Cryptocurrencies have also become a favorite for th bad people  who use them for ransomware activities.

3.In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a block chain. In reality, ownership is highly concentrated. For example, an MIT study found that just 11,000 investors held roughly 45% of Bitcoin's surging value.

4.One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs coupled with the unpredictability of mining have concentrated mining among large firms whose revenues running into the billions of dollars. According to an MIT study, 10% of miners account for 90% of its mining capacity.

5.Though cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of "coins" stolen.

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What Is Bitcoin Mining?

Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger's maintenance and development. "Mining" is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.

Cryptocurrency mining is painstaking, costly, and only sporadically rewarding. Nonetheless, mining has a magnetic appeal for many investors who are interested in cryptocurrency because of the fact that miners receive rewards for their work with crypto tokens. This may be because entrepreneurial types see mining as pennies from heaven, like California gold prospectors in 1849. And if you are technologically inclined, why not do it?

The bitcoin reward that miners receive is an incentive that motivates people to assist in the primary purpose of mining: to legitimize and monitor Bitcoin transactions, ensuring their validity. Because many users all over the world share these responsibilities, Bitcoin is a "decentralized" cryptocurrency, or one that does not rely on any central authority like a central bank or government to oversee its regulation.

However, before you invest the time and equipment, read this explainer to see whether mining is really for you. 

               

Why Bitcoin Needs Miners?

Blockchain "mining" is a metaphor for the computational work that nodes in the network undertake in hopes of earning new tokens. In reality, miners are essentially getting paid for their work as auditors. They are doing the work of verifying the legitimacy of Bitcoin transactions. This convention is meant to keep Bitcoin users honest and was conceived by Bitcoin's founder, Satoshi Nakamoto.1 By verifying transactions, miners are helping to prevent the "double-spending problem." 

Let's say you had one legitimate $20 bill and one counterfeit of that same $20. If you were to try to spend both the real bill and the fake one, someone who took the trouble of looking at both of the bills' serial numbers would see that they were the same number, and thus one of them had to be false. What a blockchain miner does is analogous to that—they check transactions to make sure that users have not illegitimately tried to spend the same bitcoin twice. This isn't a perfect analogy—we'll explain in more detail below.                   

Why Mine Bitcoin?

In addition to lining the pockets of miners and supporting the Bitcoin ecosystem, mining serves another vital purpose: It is the only way to release new cryptocurrency into circulation. In other words, miners are basically "minting" currency. For example, as of February 2022, there were just under 19 million bitcoins in circulation, out of an ultimate total of 21 million.

Aside from the coins minted via the genesis block (the very first block, which founder Satoshi Nakamoto created), every single one of those bitcoins came into being because of miners. In the absence of miners, Bitcoin as a network would still exist and be usable, but there would never be any additional bitcoin. However, because the rate of bitcoin "mined" is reduced over time, the final bitcoin won't be circulated until around the year 2140. This does not mean that transactions will cease to be verified. Miners will continue to verify transactions and will be paid fees for doing so in order to keep the integrity of Bitcoin's network.

To earn new bitcoins, you need to be the first miner to arrive at the right answer, or closest answer, to a numeric problem. This process is also known as proof of work (PoW). To begin mining is to start engaging in this proof-of-work activity to find the answer to the puzzle.

No advanced math or computation is really involved. You may have heard that miners are solving difficult mathematical problems—that's true but not because the math itself is hard. What they're actually doing is trying to be the first miner to come up with a 64-digit hexadecimal number (a "hash") that is less than or equal to the target hash. It's basically guesswork.

So it is a matter of randomness, but with the total number of possible guesses for each of these problems numbering in the trillions, it's incredibly arduous work. And the number of possible solutions (referred to as the level of mining difficulty) only increases with each miner that joins the mining network. In order to solve a problem first, miners need a lot of computing power. To mine successfully, you need to have a high "hash rate," which is measured in terms gigahashes per second (GH/s) and terahashes per second (TH/s).

Aside from the short-term payoff of newly minted bitcoins, being a coin miner can also give you "voting" power when changes are proposed in the Bitcoin network protocol. This is known as a Bitcoin Improvement Protocol (BIP). In other words, miners have some degree of influence on the decision-making process for matters such as forking. The more hash power you possess, the more votes you have to cast for such initiatives.                           

What You Need to Mine Bitcoins ?

Although individuals were able to compete for blocks with a regular at-home personal computer early on in Bitcoin's history, this is no longer the case. The reason for this is that the difficulty of mining Bitcoin changes over time.

In order to ensure the blockchain functions smoothly and can process and verify transactions, the Bitcoin network aims to have one block produced every 10 minutes or so. However, if there are 1 million mining rigs competing to solve the hash problem, they'll likely reach a solution faster than a scenario in which 10 mining rigs are working on the same problem. For that reason, Bitcoin is designed to evaluate and adjust the difficulty of mining every 2,016 blocks, or roughly every two weeks.

When there is more computing power collectively working to mine for bitcoins, the difficulty level of mining increases in order to keep block production at a stable rate. Less computing power means the difficulty level decreases. At today's network size, a personal computer mining for bitcoin will almost certainly find nothing. 

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TO BE  CONTINUED!

FOR YOUR VALUABLE TIME!