Fundamentals of blockchain and cryptocurrency
Blockchain is a decentralized, digital ledger that records transactions in a way that is secure, transparent, and immutable. It's like a shared, publicly accessible spreadsheet where everyone with an internet connection can see the data.
Features of blockchains:
• Decentralized: No single entity controls the blockchain. It's distributed across many computers, making it resistant to manipulation or failure.
• Digital Ledger: It records transactions in blocks, which are linked together chronologically, forming a chain.
• Secure: Cryptography ensures that each block is linked to the previous one, making it practically impossible to tamper with the record.
• Transparent: Anyone with access to the blockchain can view the transactions.
• Immutable: Once a transaction is recorded, it cannot be altered or deleted.
• Applications: Beyond cryptocurrencies like XRP and Bitcoin, blockchain technology can be used for various real-world applications, such as supply chain tracking, electronic signatures, and secure data storage.
Cryptocurrency is a digital or virtual currency secured by cryptography, meaning it uses complex mathematical processes to ensure secure transactions. Unlike traditional currencies backed by governments, cryptocurrencies operate on a decentralized system, using blockchain technology to record transactions and issue new units.
Cryptocurrency enables peer-to-peer transactions globally, offering speed, lower costs, and financial inclusion for those underserved by traditional banking systems.
Features of cryptocurrencies:
• Digital Currency: Cryptocurrencies exist solely in electronic form, not as physical money.
• Decentralized System: They operate on a decentralized network which means there's no central authority like a bank or government controlling the currency.
• Cryptography: Advanced cryptographic techniques are used to secure transactions and control the creation of new units, ensuring the integrity of the system.
• Peer-to-Peer (P2P) Transactions: Cryptocurrencies facilitate peer-to-peer transactions, allowing individuals to transfer value directly without needing a third-party intermediary like a bank.
• Alternative Asset Class: While some cryptocurrencies function like money and currency, many also serve as an alternative asset class with various forms of utility.
A decentralized digital ledger that records transactions across a network of computers called nodes.
A digital currency secured by cryptography, operating on a blockchain that can be sent, received, and stored.
A coin is a cryptocurrency native to its blockchain (e.g., XRP, BTC, ETH) whereas a token is a cryptocurrency built on an existing blockchain (e.g., Fuzzy on XRPL, Pepe on Ethereum).
A cryptocurrency pegged to a stable asset like the US Dollar or Euro (e.g., RLUSD, USDC, USDT).
Unique digital assets on a blockchain, often representing items like art, collectibles, or virtual real estate. Each NFT has distinct properties and cannot be swapped one-to-one. Fungible assets like BTC or XRP are interchangeable units with equal value and can be swapped one-to-one.
A platform run by a company that lets users on/off-ramp fiat money to buy, sell, and trade cryptocurrencies, acting as a middleman to manage funds and transactions (e.g., Coinbase, Binance).
CEXs are user-friendly with higher fees, fewer asset pairs, mandatory KYC, and risks like hacks or shutdowns, unlike DEXs, which are less intuitive but offer more control and lower fees.
A process used by financial platforms, such as CEXs, to verify the identity of their users. It typically involves collecting personal information like name, address, and government-issued ID to comply with regulations, prevent fraud, and combat money laundering. KYC ensures a secure and trusted environment but may reduce user privacy.
A blockchain-based platform where users trade cryptocurrencies directly from their wallets, using smart contracts without a central authority (e.g., XRPL DEX). DEXs allow users to retain control of their funds through their own wallets instead of trusting CEXs to custody their crypto for them.
DEXs are less intuitive, with lower fees, more asset pairs, no KYC, and fewer centralized risks but may face smart contract issues or lower liquidity and trading volume compared to CEXs.
An online platform where users can create, buy, sell, or trade NFTs (e.g., XRP Cafe, Bidds).
A series of words or numbers (typically 12-24 words) used to gain access to a crypto wallet. Seed phrases are randomly generated and previewed during wallet setup. They must be saved, stored securely, kept secret, and never shared, as anyone with the seed phrase can access the wallet.
A unique string of characters used to send and receive cryptocurrency to a specific wallet.
An extra identifier used to specify a recipient on centralized exchanges or shared wallets, ensuring funds reach the correct account.
A secure, permanent record of value or data transfer (e.g., sending crypto or minting an NFT) between parties, verified by the blockchain network and stored in a block.
A feature specific to the XRP Ledger (XRPL), allowing users to hold and trade non-XRP assets (tokens) issued on the ledger. Users establish a trustline with an issuer to accept their tokens, ensuring controlled and secure token interactions.
Digital and programmable agreements on a blockchain that execute automatically when set conditions are met.
An AMM is a type of decentralized trading system that allows users to buy and sell cryptocurrencies directly from a liquidity pool, instead of through a traditional order book with buyers and sellers. The AMM automatically determines prices based on supply and demand in the pool and eliminates intermediaries in the market making process required for trading assets.
A liquidity pool is a smart contract that holds pairs of cryptocurrencies (e.g., XRP/RLUSD) so that users can trade between them. These pools are the backbone of AMMs. When you make a trade on a DEX using an AMM, you’re trading against the pool—not against another person.
Liquidity providers are users who deposit pairs of tokens into a liquidity pool to enable trading. In return, they earn a share of the trading fees and sometimes extra rewards. LPs are essential for keeping AMMs functional and liquid.
Liquidity refers to how easily an asset can be bought or sold without significantly changing its price.
High liquidity means trades can happen quickly with minimal price movement.
Low liquidity can lead to slippage and bigger price swings when buying or selling.
Impermanent loss/gain happens when the price of tokens in a liquidity pool changes compared to when they were first deposited. The change can result in a temporary loss or gain in value for the liquidity provider—especially in volatile markets. It’s “impermanent” because it may resolve if prices return to their original levels, but if funds are withdrawn before that, the loss or gain becomes permanent.
A blockchain explorer is an online tool that lets you view and search all transactions, accounts, and blocks on a blockchain in real time. It works like a public search engine for the blockchain, showing details such as wallet balances, transaction histories, and token transfers (e.g., XRP Ledger Explorer, XRP Scan, Bithomp).
How a blockchain network agrees on which transactions are valid and in what order. Since blockchains are decentralized and don’t have a central authority, they rely on these systems to keep every copy of the ledger in sync and prevent fraud or double-spending.
A blockchain consensus mechanism, used most notably by Bitcoin, where specialized computers compete to solve complex mathematical puzzles. The first to solve it gets to confirm the next block of transactions and earns a reward in the form of new cryptocurrency. This process is called mining.
A blockchain consensus mechanism, most commonly used by Ethereum, where validators are chosen to confirm new transactions based on how much of the cryptocurrency they “stake” (lock up as collateral). If they validate honestly, they earn rewards. If they cheat, they can lose some or all of their staked funds.
The XRP Ledger uses a unique consensus model. Instead of mining or staking, it relies on a list of trusted validators known as the Unique Node List (UNL). These validators work together to agree on which transactions are valid. As long as 80% of them agree, the transaction is confirmed.
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