Academy Icon

Academy

Basics

Crypto for Beginners

Oct 21, 2022
10m
Yavor Kaludov Ariel Monjes

At Sonar, we make crypto easy for beginners. From blockchain to DeFi, we want to get you started on the right footing, make wiser investment decisions, and stay safe on your journey toward financial independence. 

If you’re unfamiliar with this market, our crypto tips will help straighten things out!

What’s Cryptocurrency?

Cryptocurrencies are digital currencies issued on decentralized systems which employ cryptography for security purposes. More simply: Cryptocurrencies are coins and tokens used for transacting and storing value on a blockchain. 

The word cryptocurrency itself means “cryptographic currency” (ie. digital currency secured with cryptography). 

What Is a Blockchain? 

Blockchains are decentralized databases of transactions and account balances. They’re also distributed because identical copies of them are spread out among a network of computers. 

Known as validators, these computers work together to produce blocks (ie. groups of transactions), but they don’t have any central authority to dictate how this is done. Instead, validators generate new blocks by constantly referencing each other's blockchain copies and performing cryptographic operations to achieve consensus. This is known as a consensus mechanism. 

As a reward for their effort, validators receive a certain amount of a blockchain’s main cryptocurrency (i.e. its coin), which generally appreciates in value as the blockchain acquires more users. 

Coins vs. Tokens

In addition to coins, there are also tokens. Crypto tokens are different from crypto coins because they’re not issued by the blockchain but rather by programs called smart contracts running on top of the blockchain. They can have many purposes (e.g. equity in a company, utility in a service, proof of ownership).

What Does Centralized and Decentralized Mean?

Centralization and decentralization are two opposing approaches to organizing any system. Any existing system like an organization, company, or blockchain network falls somewhere on a spectrum between total centralization and complete decentralization. 

What Is Centralization?

Centralized systems rely on a central authority or governing body to dictate their functions and actions. A dictatorship is an extremely centralized system, where a single leader is calling the shots. The classic company structure is a more common example of centralization with different levels of management. 

What Is Decentralization?

In decentralized systems, central authorities and governing bodies don’t exist. Instead, participants reference a shared pool of knowledge and decide how to act using an approach similar to direct democracy.  

In such systems, no single entity can make a unilateral decision or disproportionately influence other participants. 

Who Owns Cryptocurrency?

“Cryptocurrency” is a general term that encompasses all cryptographically-secured digital currencies. Different cryptocurrencies are created to be used on specific blockchains. 

Coins are a blockchain’s main medium of exchange. They’re not owned by anyone, however, the blockchain that created them is “owned” by the network of validators that keep it running.

We put “owned” in quotes because the concept of ownership in the blockchain space is different from what we’re used to in daily life. Here, ownership is shared over a trustless, decentralized system (a network where participants don’t have to know or trust each other to agree on things). 

What all cryptocurrencies have in common is that, once they’re created, they essentially become completely open to the public. They can be used by anyone with an internet connection and a crypto wallet – and they can’t be recalled or destroyed. 

While no one owns cryptocurrencies, companies, foundations and Decentralized Autonomous Organizations (DAOs) control some of the infrastructure that enables them to function.

This begs the question: How decentralized are cryptocurrencies, really? 

Can Crypto Be Centralized?

The short answer is, not exactly. 

As mentioned, once created, cryptocurrencies can’t be recalled and once a transaction is recorded to the blockchain, it can’t be undone. This is because all cryptocurrency runs on top of decentralized blockchains that are designed to be immutable (i.e. unable to be changed). To attempt sabotage would either require an enormous amount of effort or it would be prohibitively expensive. 

That said, while the actual cryptocurrencies themselves can’t be centralized, the infrastructure used to support them can sometimes be more centralized than expected. 

For example, some blockchain networks have a large number of validators but a large part of those validators are operated by a single centralized company. 

Centralization appears even more when looking at tokens. These cryptocurrencies are issued by smart contracts and are often developed by centralized companies. Additionally, decentralized services can sometimes partially rely on centralized services to function. If one of these services was to go offline, this could leave them exposed. An impaired service could negatively affect the price of its tokens.

What Can I Buy with Crypto?

Crypto is seeing more and more global adoption. In the early days, you could use Bitcoin to buy simple things like coffee or pizza in places where it was accepted. Nowadays, crypto can be used for everything from collateral for loans to booking your next holiday trip. 

Most cryptocurrencies are designed to be some sort of store of value or medium of exchange. That said, the majority were never meant to be used as currencies for everyday payments in the same way as fiat currency (e.g. US Dollar). 

Instead, they were created to facilitate the use of certain software or services – or as a way to reward the validators helping to maintain the blockchains they run on. 

Digital money is just one of the many use cases for crypto. 

Cryptocurrencies are at the heart of countless breakthrough technologies which may have a profound effect on the future. While some currencies were exclusively made for use as digital cash, the most popular way to spend your crypto is via a centralized exchange and/or simple debit card. 

Using Crypto-Based Debit Cards

Centralized exchanges (like Binance and Crypto.com) offer debit cards linked to users’ accounts. Just like a regular bank account, your crypto debit card draws money from your crypto holdings on the platform and converts it to fiat currency on the spot. These cards are most often Visa or Mastercard and are accepted almost anywhere. 

They work just like regular debit cards: You can use them to book a flight, pay for a meal, or see a movie. 

Using Web3 Services

The hottest development as a result of the introduction of blockchain technology and cryptocurrency is Web3. This is the decentralized web, where websites and services are accessed via crypto wallets (instead of passwords and identification) and payment happens with crypto, too. 

There are already decentralized versions of most of the popular websites we use on a daily basis, including blockchain games and a whole host of innovative services. Nearly everything on Web3 works – and is paid for – with cryptocurrency.  

What Do I Need to Use Crypto?

Even though crypto is still relatively young, there are plenty of things to do in this space. Most people are focused on either investing or building foundational products that serve as the backbone of an emerging crypto economy.

Storing Your Cryptocurrency in Wallets

To use crypto, you need to store it with a crypto wallet. There are two types of wallets:

  • Custodial wallets (storing crypto on a CEX)

  • Non-custodial wallets (personal, anonymous, direct links to the blockchain)

Using Crypto On a Centralized Exchange (CEX)

If you put your crypto in the hands of an exchange, you’re entrusting them to keep it safe. People tend to use exchanges to invest in and trade cryptocurrencies. If that’s what you’re looking to do, they can be a solid, relatively safe option. 

Investing in Decentralized Finance (DeFi)

Another way to invest in crypto is on Decentralized Finance (DeFi). This is the world of peer-to-peer (P2P) markets where nearly all of the new and interesting projects are. Here, you’ll need to use a decentralized non-custodial wallet. 

If you’re thinking about entering DeFi, read our guide on staying safe in crypto.

It’s no secret that crypto is exploding in popularity. There are coins and tokens with capitalizations in the billions (even trillions) of dollars. 

All this money is coming into crypto for a reason: The technologies crypto was founded on have opened the doors for projects that can revolutionize entire industries and make a profound impact on all our lives. 

Bitcoin

Bitcoin was among the first cryptocurrencies ever created and is the oldest crypto currently in existence. Its creation gave way to the rise of this asset class, making “blockchain” a household term. 

It was created in 2008 by an anonymous person or collective (known only as Satoshi Nakamoto) and released to the public in January 2009. Also referred to as Bitcoin, the Bitcoin blockchain uses Proof-of-Work (PoW) consensus. It involves validators (ie. miners) who perform resource-intensive computations to generate new blocks of transactions.  

Bitcoin is considered the most decentralized blockchain but this has resulted in issues regarding its scalability. Transactions on the network take a long time to process and, while they're safe, the network isn’t considered suitable for rapid peer-to-peer payments as it was originally intended. 

Today, it’s used mostly as a very reliable store of value. In fact, it’s often compared to digital gold.

Ethereum

After the creation of Bitcoin, the biggest crypto innovation was the introduction of Ethereum. 

Ethereum brought with it smart contracts. These are agreements written in code that run on the blockchain. This innovation caused a Cambrian explosion of development and paved the way for the emergence of both DeFi and Web3

The execution layer of Ethereum’s architecture (the environment that runs smart contracts) is called the Ethereum Virtual Machine (EVM) and it’s been widely copied to be implemented on other subsequent blockchain projects. As a result, many blockchains today support Ethereum-based tokens and can communicate easily with its smart contracts. This interoperability has put Ethereum at the heart of the modern blockchain and crypto ecosystem.  

How Many Blockchains Are There?

It’s hard to say how many blockchains exist at any given time. Additionally, there are multiple types of blockchains (e.g. Public, Private, Hybrid). Looking at only public blockchains, their numbers are already in the hundreds. If you consider all existing blockchains, they probably number in the thousands. 

Is Bitcoin a Blockchain?

Yes, Bitcoin is both the name of the cryptocurrency and the blockchain. 

Is Every Cryptocurrency Based on a Blockchain?

All cryptocurrencies exist on distributed ledgers but not all use blockchains to record transactions. A small number of them use something called a directed acyclic graph (DAG) which is another form of data structure that’s quite different from blockchains. 

Because this is a beginner’s introduction to cryptocurrency, all you need to know about DAGs is that, instead of grouping transactions into blocks and chaining those blocks together, they link transactions to each other directly in a tree-like data structure. 

Read more about the differences between blockchains and DAGs here.

Are Blockchains Secure?

Blockchains are only as secure as the network that controls them. As mentioned earlier, the network is made up of individual computers called validators which work together to create new blocks. These validators are economically incentivized to behave in a way that’s beneficial to the success of the blockchain. They can also be penalized for acting maliciously. 

A blockchain’s security is intimately tied to how decentralized it is. And decentralization, as we’ve learned, is a result of how much individual power participants on the network hold. 

If a bad actor were to take control of a large enough portion of the network participants, they could potentially alter the blockchain. This is also known as a 51% attack

For the bigger blockchains that have thousands of miners or validators, such a scenario is highly unlikely to occur. Moreover, the bigger the blockchain, the harder it is to inflict any serious amount of damage.

The Biggest Pros & Cons of Cryptocurrency

Because it introduces so many new concepts and methods of thinking, we understand that crypto can feel overwhelming. Success in crypto depends on learning about its strengths and weaknesses, managing expectations, finding opportunities, and seeking out quality information. 

Pros of Cryptocurrency

In our opinion, the current pros of crypto far outweigh its more negative aspects. The biggest selling point of cryptocurrency (and blockchain technology) is that it reduces the reliance on trusted intermediaries. 

Crypto’s decentralized nature makes it possible for regular people to participate in the creation, ownership, and governance of innovative products and services. These services make people’s lives better by saving them money, keeping their data private, and freeing them from the restrictive control of centralized companies and monopolies. 

Cons of Cryptocurrency

Crypto is young and – just like any revolutionary technology – it takes time for people to get used to it. All technology is in a constant state of evolution. Crypto is no different. 

Many cycles of iteration have made blockchain and crypto viable alternatives in multiple industries. However, even on the biggest, most successful projects, many issues need to be addressed.

Most of crypto’s cons have to do with security and ease of use. Simply put, crypto’s user experience (UX) still leaves much to be desired. With so much conflicting information out there, new users are often left to figure things out on their own. 

No cryptocurrency guide would be complete without mentioning the importance of “doing your own research” (DYOR). Sonar Studio makes this incredibly easy.

Best Crypto App for Beginners

Sonar is building an all-encompassing suite of tools to democratize access to crypto and Web3.  Our services are designed to improve users’ lives, by sharing crypto tips, helping them invest in their future, and even participate in its creation. 

So whether you’ve been meaning to dip your toes into the crypto world or are a seasoned pro, Sonar’s next-generation tools (from project analysis to trading to Web3 development) are at your fingertips.

Welcome to our community!

Private Sale Open ✨ ——— Join Now 🚀 ———

Watchlist
Save tokens you want to track over time
Beta Version: 0.5.1