Top 25 Bitcoin and Cryptocurrency FAQ
By: Vladimir Andral
Tags: Bitcoin, Blockchain, Proof Of Work, Cryptocurrency, Distributed Ledgers

Photo by Thought Catalog on Unsplash

As the resident crypto geek amongst my friends and family, I’m often asked various questions about Bitcoin and cryptocurrency in general. It’s usually the same questions asked in a different way. I also read various online comments criticizing cryptocurrency, some valid, that I would like the opportunity to address. In this post, I’ll tackle the top introductory and intermediate questions and topics on Bitcoin, cryptocurrency and blockchain. There are many other post like this on the Web, but I wanted to put my spin on it and participate in educating the world about this revolutionary technology. Note: as a crypto advocate, I am biased in my view; however, I take efforts to explore other sides of the argument and acknowledge known problems and issues in the space. With that background, let’s get into the top 25 beginner and intermediate crypto and blockchain questions.

[NOTE: This article is for educational purposes only and does not represent financial advice. All opinions are my own.]

1. What is Bitcoin? What are cryptocurrencies?

Bitcoin is a decentralized digital currency used by people and institutions globally as a store of value and medium of exchange.

It’s Decentralized because it’s not controlled by any person or entity; it exists as a global ledger/database with copies on thousands of computers, called nodes, around the world. You can send Bitcoin directly to anyone around the world 24/7 without any intermediary — no credit card company, bank, or money transfer agent needed. You just need the recipient’s bitcoin address. You don’t need to run a node to hold and send bitcoin, you just need a bitcoin wallet on your smartphone or computer (discussed later). You can run a node on your laptop if you like. The rules that govern bitcoin are defined in the Bitcoin Core protocol (software) which all bitcoin nodes run.

It’s a currency/medium of exchange because people can use it to pay for products and services. While today you generally can’t use bitcoin and other crypto to do your everyday shopping, many larger retailers accept cryptocurrency as a means of payment for large purchases. Even if many retailers don’t accept crypto, Visa and Mastercard are now issuing debit cards linked to cardholder crypto balances. Additionally, the list of crypto friendly merchants continues to grow. There’s even a recent push by some government agencies to start accepting cryptocurrency to pay taxes and/or classify them as legal tender.

While there are thousands of cryptocurrencies in existence today, Bitcoin was the first successful one that gained world-wide adoption. It takes about 10 minutes for a recipient to receive notice that you sent them bitcoin; it could take another 30–50 minutes or so for the transaction to “settle” such that the recipient could be highly confident that the transaction is final. (There are applications like the Lightning Network and Strike that sit on top of the Bitcoin network to offer transaction settlement in seconds.)

Some cryptocurrencies like Ethereum settle in 5 minutes or less. Others like Nano are near-instant. If you trade crypto on a centralized exchange (CEX) like Coinbase, Binance, or Kraken, the settlement is instant because the trades occur within the exchange’s database and not on the public blockchain of the purchased currency.

Bitcoin is a store of value because unlike national currencies, bitcoin has a limit to the amount that can be created (21 million) and a known annual inflation rate that reduces by half every four years. No central bank or other governing authority can unilaterally decide to “print” new bitcoin beyond the established inflation rate. This means bitcoin holders can be confident that their bitcoin stash will not lose dollar value over the long term due to unexpected inflation. (Short-term value loss due to market pricing and volatility will always be there, but over the long term the general consensus is that bitcoin value in dollar terms will increase as the dollar continually depreciates and Bitcoin adoption increases.) There are several prominent personalities in the financial services sector that say that Bitcoin is starting to compete with gold as a store of value. (Yes, gold has physical uses, but the majority of the world’s gold is used as a wealth store, not for its physical properties.)

2. How do Bitcoin and other cryptocurrencies work?

The best way to explain how cryptocurrencies work is via a Bitcoin example. Before we go there, you need to understand that Bitcoin transactions and user balances are stored in one global blockchain (akin to a database), with copies on Bitcoin nodes running on thousands of computers around the world. Some of these nodes are “miners” that compete to add new transactions (blocks) to the ever-growing blockchain.

Step 1: You sign into your crypto wallet

You sign into your crypto wallet Step 2 : Enter the Bitcoin address of the recipient and the amount to send [eg. 1 bitcoin, .1 bitcoin, .00001 bitcoin, … etc. Smallest unit is .00000001 bitcoin and is called a Satoshi — 100 millionth of a bitcoin]. Your wallet will add a transaction fee that will also come out of your wallet. This fee will go the winning miner that adds your transaction to the blockchain.

: Enter the Bitcoin address of the recipient and the amount to send [eg. 1 bitcoin, .1 bitcoin, .00001 bitcoin, … etc. Smallest unit is .00000001 bitcoin and is called a Satoshi — 100 millionth of a bitcoin]. Your wallet will add a transaction fee that will also come out of your wallet. This fee will go the winning miner that adds your transaction to the blockchain. Step 3 : Click the appropriate button to send the transaction. Your wallet will broadcast the transaction across the Bitcoin network.

: Click the appropriate button to send the transaction. Your wallet will broadcast the transaction across the Bitcoin network. Step 4 : After receiving your and many other transactions, thousands of miner nodes will select a group of transactions, and create a new block [note: each node’s new block may contain a different set of transactions]

: After receiving your and many other transactions, thousands of miner nodes will select a group of transactions, and create a new block [note: each node’s new block may contain a different set of transactions] Step 5 : The miner nodes that created the new blocks start competing to solve a cryptographic puzzle using their block’s data. They repeatedly run a section of their block’s data through a cryptographic function called SHA-256 — which produces random numeric output — until the outputted number is less than some predefined target number. The miner adjusts one variable section of their block, called the nonce, each time they run the block data through SHA-256. Note: it’s this repeated execution of the SHA-256 function that leads to miners consuming enormous amounts of electricity you hear about in the news. A miner may execute SHA-256 many billions of times while competing to mint a new block.

: The miner nodes that created the new blocks start competing to solve a cryptographic puzzle using their block’s data. They repeatedly run a section of their block’s data through a cryptographic function called SHA-256 — which produces random numeric output — until the outputted number is less than some predefined target number. The miner adjusts one variable section of their block, called the nonce, each time they run the block data through SHA-256. Note: it’s this repeated execution of the SHA-256 function that leads to miners consuming enormous amounts of electricity you hear about in the news. A miner may execute SHA-256 many billions of times while competing to mint a new block. Step 6 : One winning miner finds the right nonce that produces the desired SHA-256 output. This miner broadcast this winning block to the Bitcoin network. If this block is accepted by enough network nodes, the miner is rewarded all of the transaction fees paid by transactions included in the block, plus the block reward awarded to winning miners of new blocks.

: One winning miner finds the right nonce that produces the desired SHA-256 output. This miner broadcast this winning block to the Bitcoin network. If this block is accepted by enough network nodes, the miner is rewarded all of the transaction fees paid by transactions included in the block, plus the block reward awarded to winning miners of new blocks. Step 7 : Nodes in the Bitcoin network receive this new “minted” block, check that it’s valid, and add it to their copy of the blockchain. Your transaction is now part of the Bitcoin blockchain.

: Nodes in the Bitcoin network receive this new “minted” block, check that it’s valid, and add it to their copy of the blockchain. Your transaction is now part of the Bitcoin blockchain. Step 8: Steps 4–7 are repeated continually. After 5 iterations, 5 blocks are added to the blockchain on top of the block that contains your transaction. At this point your transaction is considered confirmed; the recipient of your bitcoin can be sure that the transaction is complete.

The iterative SHA-256 exercise described in Step 5 is called Proof-of-Work (PoW). PoW is the primary method of securing the Bitcoin blockchain — it’s what is called the consensus mechanism for securing the network and generating blocks. Miners can’t falsify new blocks because they must spend time and energy to create valid blocks — they must show proof that they did the work to create the block. To modify any prior generated block and double spend their funds, a hacker must execute PoW on that older block and each block after it. Due to the time required to modify all of those blocks, they will never catch up to the most recent blocks created by other miners and no nodes will accept their falsified replacement blocks.

Many newer cryptocurrencies no longer use Proof-of-Work or have modified it to produce a new block in under a minute or less, rather than 10. Other coins use an alternate method call Proof-of-Stake (PoS) which involves some nodes, called validators, putting up a cryptocurrency bond for the right to create new blocks and collecting associated rewards and fees. PoS doesn’t make heavy use of SHA-256 and thus consumes significantly less power. Additionally, there is no global race to solve a puzzle. Rather, random validators are repeatedly chosen to create new blocks and network nodes verify these blocks and add them to their copy of the chain.

3. Are cryptocurrencies and blockchains useful?

Yes. Here are several ways they’re useful:

They allow for low-cost peer-to-peer money transfer 24/7, 7 days a week, without the need for a third party between the sender and recipient. A huge advancement for cross-border money transfer and for private money transfer between individuals. They are an inflation hedge because they have a known inflation rate, which often diminishes to zero over time, and usually some maximum number of units. This quality makes crypto idea for people in high inflation countries with restrictions on usage of outside currencies; the only way for a country to prevent crypto usage is to disable internet access for the country’s citizens. Those worried about inflation in “normal” inflation countries would benefit from Bitcoin/crypto as well. They transfer monetary power from central authorities to the people. The people are no longer at the mercy of monetary policy decisions of central banks and government legislators. The global community of users of a cryptocurrency collectively decide the direction and policies of their currency in an open and transparent manner. The monetary policy of Bitcoin has not changed since it was launched in 2009 — still a max of 21 million Bitcoin and no change in the inflation schedule. Blockchains allow for a public ledger that can be used to record ownership of real-world assets from homes and cars to artwork, music, and established streams of income. Currently, Non-fungible Tokens (NFTs) are the primary tool used to do this (discussed later). Crypto allows for programmable money that can be transferred from one party to another based on a pre-defined set of rules (smart contracts). This programmability opens the door to countless new financial applications including decentralized lending, borrowing, wealth management, investing, insurance, betting, and many others.

4. Could the rules of a crypto change for the worse at some point in the future? Example, could Bitcoin later become highly inflationary or produce more than the advertised 21 million coins? Aren’t you switching your dependency from central banks to the developers who maintain Bitcoin and other cryptocurrencies?

In theory yes, the rules underlying a cryptocurrency can and do change. When it comes to inflation policies, some cryptos have made changes to be more deflationary by permanently reducing the max number of coins in use by destroying some coins over time. On the more decentralized crypto projects, changes like this are usually implemented by consensus of community and node operators of the project. These changes are made for the benefit of the overall user base and ecosystem.

Some changes are controversial and rejected by most node operators and users; this disagreement can lead to a new, separate version of the coin in question (a “fork”). This happened to Bitcoin when a disagreement on direction of the project led to creation of Bitcoin Cash. If a group of people wanted to change the 21 million Bitcoin limit or the annual inflation rate, the Bitcoin community would reject their proposal, which could then lead to another version of Bitcoin if the sponsors decided to move forward with the change regardless. Bitcoin as we know it today would continue as normal.

5. Why do I need crypto when I have my credit or debit card that works perfectly? What is the added benefit of crypto?

In countries with stable governments, low inflation, established rule of law, highly functional credit markets, and wide-spread usage of credit cards, the advantages of crypto may not be obvious. In countries without these attributes, cryptocurrencies fill a huge gap; users can be certain that: no one can take their money (they’re their own bank), their wealth won’t wither away with high inflation, they can send and receive money to anyone anywhere without government intrusion, and they can borrow and lend money from/to anyone and pay/get paid a reasonable interest rate (decentralized finance). People around the world can experience the benefits of open access of money and open credit markets.

In more advanced economies with generally low inflation, the benefits of crypto are: protection agains future unexpected inflation and government seizure of assets, utility of a public ledger to record asset and income stream ownership, and programmable money that facilitates activities defined in question 3.5 above.

6. Is crypto just a big Ponzi scheme?

No. Bitcoin and other crypto have utility as described in question 3 above. Additionally, Ponzi schemes require one central entity coordinating the scheme — there is no one person that controls Bitcoin since it’s a decentralized project. Lastly, Bitcoin has been traded since 2009 with no grand exit or crash to zero as seen with Ponzi schemes. Yes, Bitcoin is extremely volatile and investors may suffer losses over the short term, but over the long term Bitcoin is projected to continue growing in value, utility and user base — all with no central authority. You can go out to GitHub and view the code yourself and even submit recommendations to changes if you’re technically inclined!

7. Name X ways that crypto is useful over and above existing dollars in my bank account?

You can earn a sustainable 5%+ interest rate on your crypto using decentralized finance (DeFi) and centralized finance (CeFi). Banks don’t pay anywhere near this for checking and savings accounts. You don’t need a bank, credit card company or any 3rd party to send/receive money to/from anyone in the world Sending money to anyone person or organization cost a fraction of what it costs via a bank wire transfer; additionally the settlement is much, much faster — in a matter of minutes rather than days at a bank You won’t be charge any overdraft fees You can access and move your funds any time and from anywhere without needing permission from any organization to do so. You are your own bank. You never have to worry about a financial institution putting a block on your funds or having to call customer service to ask to send large amounts of money.

8. Why does bitcoin price keep crashing?

Bitcoin is a volatile asset that is still undergoing price discovery as demand increases over time and it gets more integrated in the world economy. With this growth comes speculation and excessive risk taking, which lead to wild price swings. Bitcoin has never crashed to zero. While it has dropped 80+% in a year, it has increased by an average of 200+% over the last 10 years — the best performing global asset in the world during that period.

9. Who can afford bitcoin? It’s so expensive at X thousands of dollars each!

You can buy fractions of a bitcoin. Each Bitcoin can be split into 100 million parts — called a Satoshi. If you only have, say, $5, you can buy $5 worth of Bitcoin.

10. Will the government ban it?

Some have, but most have not and will not — if anything, over time we are seeing more countries embrace it. In the U.S., banning Bitcoin would be very difficult because it’s essentially just software that does not impede on any person’s property or rights and is not controlled by any one person. It falls under freedom of speech. Banning crypto completely would mean removing access to the internet. On the contrary, the U.S. and most other countries are embracing crypto by creating crypto-specific regulatory structure to accelerate integration of crypto into their financial systems and to protect their crypto users. Others, like China, Russia, Vietnam, Bolivia, Columbia, and Equador ban cryptocurrencies. Some like India and Nigeria have banned it, only to reverse their stance later after much public complaint. Recently, the President of El Salvador stated his intention to make Bitcoin legal tender in his country.

11. Is it used for illegal purposes? I hear it’s used to buy drugs, money launder and for terrorist financing.

Yes, some crypto is used for illegal purposes, but the most popular instrument for financial crimes is fiat currency because they’re harder to track. Most cryptocurriences have a public ledger that allows anyone to track the transfer of coins over time — not good for money laundering. All the illegal things people claim crypto is used for are done with fiat currencies at a grander scale. Even with all the money laundering and financial crimes prevention infrastructure in place for decades, the world governments barely put a dent in the global illegal money exchange.

According to former federal prosecutor Katie Hahn, 99.9% of money laundering crimes go un-prosecuted. And to achieve that lowly .1% success rate of prosecution, the financial services sector spends upwards of $20 billion on Asset and Money Laundering (AML) and Know-your-customer (KYC) activities. These figures have been bad even before the advent of Bitcoin. Should we stop using cash to stop money laundering?

Similarly, financial market data company Refinitiv estimates that only “1% of criminal proceeds generated in the EU are confiscated by authorities” and “[only] 0.5% of all transactions reviewed by bank compliance officers lead to a criminal investigation.” Clearly money launderers are already are doing a great job avoiding detection even without cryptocurrency!

12. Should I buy bitcoin?

If you are willing to hold for the longer team and bear the risks as the market evolves, then buying Bitcoin may have a place in your overall investment portfolio. Don’t invest any money you can’t afford to lose. Bitcoin is volatile and while it will likely increase in value over the long term, the short-term price may vary wildly. Over the long term, your wealth would likely hold more of its value in Bitcoin than in your national currency. If you want to use crypto for purchasing goods and don’t want to deal with the volatility, you can use stable coins that are pegged to fiat currencies (USDT, USDC, etc.)

13. Why are there so many cryptocurrencies?

Each one serves a different use case or the creators wanted a version of an existing crypto with different properties. Sample:

Bitcoin (BTC) was the first successful, decentralized cryptocurrency and is the most recognized and battle-tested. It was the first to introduce the concept of PoW consensus. It’s the gold standard.

(BTC) was the first successful, decentralized cryptocurrency and is the most recognized and battle-tested. It was the first to introduce the concept of PoW consensus. It’s the gold standard. Ethereum (ETH) was created to introduce advanced programmability, via smart contracts, to cryptocurrency. It uses PoW, but will transition to PoS.

(ETH) was created to introduce advanced programmability, via smart contracts, to cryptocurrency. It uses PoW, but will transition to PoS. Litecoin (LTC) and Bitcoin Cash (BCH), are faster versions of Bitcoin, meant to be used less as a store of value and more as a transactional currency.

(LTC) and Bitcoin Cash (BCH), are faster versions of Bitcoin, meant to be used less as a store of value and more as a transactional currency. Ripple (XRP) is a blockchain with fast transaction times, ultra-low transaction fees and features that make it ideal for financial institutions to use for cross-border payments. It’s billed as next generation infrastructure for global money exchange.

(XRP) is a blockchain with fast transaction times, ultra-low transaction fees and features that make it ideal for financial institutions to use for cross-border payments. It’s billed as next generation infrastructure for global money exchange. Polkadot (DOT), Avalanche (AVAX), and Cosmos (ATOM) are smart contract blockchains that other blockchains can connect to and leverage a shared infrastructure and security policy. All simplify the process of launching a new blockchain/cryptocurrency that is secure, reliable and scalable from the beginning.

(DOT), (AVAX), and (ATOM) are smart contract blockchains that other blockchains can connect to and leverage a shared infrastructure and security policy. All simplify the process of launching a new blockchain/cryptocurrency that is secure, reliable and scalable from the beginning. Cardano (ADA) is another smart contract platform that aims to do what Ethereum does but more efficiently and with a more robust and flexible design inspired by academic research.

(ADA) is another smart contract platform that aims to do what Ethereum does but more efficiently and with a more robust and flexible design inspired by academic research. Tether (USDT), USD Coin (USDC), and DAI are stable coins pegged to the U.S. dollar. Tether is backed by currencies, cash equivalents and, to a lesser extent, other assets. USD Coin is backed only by cash and cash equivalents and is audited by a major U.S. accounting firm. DAI is backed by other cryptocurrencies (over-collateralized).

(USDT), (USDC), and are stable coins pegged to the U.S. dollar. Tether is backed by currencies, cash equivalents and, to a lesser extent, other assets. USD Coin is backed only by cash and cash equivalents and is audited by a major U.S. accounting firm. DAI is backed by other cryptocurrencies (over-collateralized). Solana (SOL) is a blockchain focused on ultra-high speed (blocks produced in about half a second) and ultra-low transaction fees (fractions of a cent). Best for running applications that need these qualities — like trading applications.

(SOL) is a blockchain focused on ultra-high speed (blocks produced in about half a second) and ultra-low transaction fees (fractions of a cent). Best for running applications that need these qualities — like trading applications. THETA is a cryptocurrency used to secure (used as a bond by validating nodes) the Theta streaming video platform. The Theta platform also uses TFUEL as a currency users use to pay to watch streams; viewers can also receive TFUEL for watching certain streams (pay for attention).

is a cryptocurrency used to secure (used as a bond by validating nodes) the Theta streaming video platform. The Theta platform also uses TFUEL as a currency users use to pay to watch streams; viewers can also receive TFUEL for watching certain streams (pay for attention). ChainLink (LINK) allows other blockchains to incorporate real-world data (like prices of other coins/stocks, weather data, and sports scores) to power their smart contracts.

(LINK) allows other blockchains to incorporate real-world data (like prices of other coins/stocks, weather data, and sports scores) to power their smart contracts. Monero (XMR) is the privacy coin that makes it almost impossible to track who is spending what money (most other coins above can be tracked and viewed using a blockchain explorer)

14. What are the chances bitcoin goes to zero?

This is hard to quantify, but my guess is that Bitcoin has <1% chance of going to zero. The one scenario where I could see Bitcoin dropping 90+% is if a fatal flaw is discovered that allows double spending or if the SHA-256 or Eliptic Curve Digital Signature Algorithm (ECDSA) are cracked (or overpowered with a quantum computer) such that someone can double spend their coins or steal anyone’s Bitcoin at will. Given that Bitcoin has been a globally accessible hacker target for 12 years without any non-fixable defect, the likelihood of such an event is very low. If a fatal flaw is found, it possible that the Bitcoin community would band together to fix the issue (with, say, a new hashing encryption algorithm) via a hard fork of the code; the Bitcoin price would likely drop drastically, but could rebound over time as the fork takes hold. If SHA-256 or ECDSA are cracked, then our global financial system is also in jeopardy as these tools are used within the global banking system as well — Bitcoin would be one of many, many problems.

15. How do I buy bitcoin? Where do I buy it?

Coinbase.com, Binance.com, Binance.us. Kraken.com, OKEx.com, Huobi.com, Kucoin.com, Robinhood.com, Cash.app, and other exchanges. You could also buy it directly from other people and at crypto ATMs.

16. How do I hold bitcoin once I buy it?

Keep it in the exchange you bought it in (not recommended by many in the crypto community) or store it in a hardware wallet like Ledger or Trezor (most secure) or a software wallet on your smart phone or computer (less secure).

If you keep it in the exchange you bought it in, make sure the exchange has a good reputation for protecting user funds. Some of the most reputable exchanges include Coinbase, Binance, Kraken, OKEx, and Gemini.

A software wallet (aka “hot wallet”) — like Exodus, Trust Wallet and Coinbase Wallet — is accessed via a web page or app on your computer or smart phone. The private keys that secure your crypto are kept on the device itself, making software wallets susceptible to hackers connecting to your device and stealing your coin. It’s recommended that you not keep significant amount of crypto on a software wallet. Only keep “spending money” on your software wallet.

Hardware wallets (aka “cold wallet”) are the most secure because the private keys are stored on a separate physical device that never reveals the private keys to the computer or smartphone it connects to. (You need the private keys to spend your coins.) Storing crypto in a hardware wallet involves sending the coins from the exchange you bought it from to your unique public address managed by your hardware wallet. The hardware wallet manages the private keys associated with the public addresses you use to receive your coins. Hardware wallets ensure no one has access to your private keys and can’t steal your coins. Managing your private keys with hardware wallets can be confusing and intimidating for new users and can be risky if you are not careful to backup your passwords.

17. What do I do with my bitcoin and other crypto once I buy it?

There are several options: 1) keep it for the long term 2) trade it back to your fiat currency at a late time for a profit (or loss) 3) Deposit it in a decentralized or centralized finance app to earn interest 4) stake it to earn interest if your coin’s blockchain supports it 5) spend it to buy products and services

18. What are the risks with cryptocurrencies?

A critical software defect renders the cryptocurrency useless. See question 14 above.

Your government bans it, requiring you to liquidate it or hide your usage of it.

The price of your chosen cryptocurrency declines significantly because people lose faith in it for any number of reasons including a future cryptocurrency that people prefer.

For Bitcoin, some nation state or organization accumulates enough hardware and mining power to control 51% of the mining power of the network, then starts spending other people’s coins for the purpose of undermining global faith in the network. Highly unlikely, but odds are greater than 0%.

19. Could cryptocurrencies stop working one day? What if the electricity or the internet stops?

Only thing that can stop crypto is a shutdown of internet service or long-term power loss in your area/region. Even then, the crypto’s blockchain will continue operating in other regions with continued internet and power service. Even if internet and power stops globally all at once, when it all comes back the crypto networks will pick up where they left off.

20. Why are cryptocurrencies valuable if they don’t produce any cash flow?

See questions 3, 5 and 7 above.

21. What are the weaknesses of Bitcoin and other cryptocurrency?

Volatile price of most coins

Risk of losing your coins if you forget your wallet passphrase (password)

Risk of losing your coins if the exchange you use gets hacked or fails

Risk of losing your coins to hackers if you don’t protect your account

Risk of losing your coins if the cryptography securing the blockchain is reverse engineered or brute-force attacked using a quantum computer [our entire global financial system is at risk of this as well, not just cryptocurrencies. researchers are working on quantum resistent encryption technologies that Bitcoin and other blockchains could incorporate at a later date]

Slow transaction confirmation time for Bitcoin and some other coins. [addressed by new software layers — like the Bitcoin Lightning Network — that run on top of Bitcoin and complete transactions in a few seconds or less]

Power consumption of some blockchains [see question 22 for response]

Crypto is not yet accepted for payment at most retail stores

[recently issued crypto Visa and Mastercard debit cards tackle this problem]

22. Does Bitcoin waste energy?

The Bitcoin network does consume a considerable amount of energy. The Cambridge Center for Alternative Finance estimates that the Bitcoin network consumes between .5% and 1% of global electricity — enough to power a small country. On the positive side, a significant portion of that energy is generated from renewable sources such as wind, hydro and solar (whether it’s 30% or 70% is not entirely clear as it is very difficult to assess the energy sources of all global Bitcoin miners). Increasing the renewable energy consumption of and providing transparency into the energy sources of the Bitcoin network is an ongoing initiative that the Bitcoin community takes seriously. In fact, the Bitcoin network encourages renewable energy use by rewarding the lowest cost miners with higher profit margins. Electricity is the most significant operating cost for Bitcoin miners. Miners can maximize profit by mining in remote areas with access to low cost, renewable energy sources. Today, renewable energy is cheaper than fossil fuel-based energy in many parts of the world.

The key question is whether this energy usage — be it renewable-based or not — is worth it. Is it wasteful? Some would say that regardless of source, we need to reduce energy usage globally. Bitcoin advocates believe that a decentralized, censorship-resistant, individual-empowering, deflationary monetary technology is worth the energy consumption — especially if it’s based on renewable energy that doesn’t pollute the environment. If the much larger global power consumption of the global banking system is worth it, then why not for Bitcoin?

It’s important to note that non-PoW consensus blockchains consume a tiny fraction of energy of the Bitcoin network. Not all blockchains require large amounts of energy. Ethereum — the second largest cryptocurrency by market value — will switch to PoW from PoS consensus sometime in the next 12 months. In fact, most newer cryptocurrencies are not PoW.

23. I hear all this talk about centralized and decentralized cryptocurrencies. What’s that all about?

Each cryptocurrency uses what is called a consensus mechanism/algorithm to “mint” new blocks that are added to the blockchain. Consensus mechanisms are software rules blockchain nodes follow to add new blocks to the blockchain. There are several consensus mechanisms to choose from, some cryptocurrencies use consensus mechanisms that allow only a limited set of network nodes to collate new transactions and add them to the ever growing blockchain (a database-like repository of transactions); these cryptocurrencies are considered less decentralized or flat out centralized since the authority to create new blocks is available only to a limited set of participants in the network.

Bitcoin is a decentralized blockchain because anyone can run a Bitcoin miner node and participate in block creation — you don’t need anyone’s permission to start mining bitcoin. If fact, there is no governing body that could provide this permission to begin with. There are many thousands of full bitcoin nodes in operation worldwide.

Other blockchains such as the Binance Chain (coin symbol BNB) are considered centralized because only a specific set of nodes are allowed to mine new blocks. This consensus mechanism is called Proof-of-Authority (PoA). In Binance Chain’s case, there are less than 21 nodes that mint all new blocks — several of which are owned and operated by Binance. This centralization introduces risk of loss to BNB holders if the mining nodes are ever compromised, Binance ever acts nefariously, or if Binance introduces network rules that disadvantage BNB holders (not likely). BNB holders must fully trust that Binance will manage the Binance Chain responsibly. One benefit of PoA for Binance Chain is speed. BNB transactions settle in seconds and cost pennies.

One potential downside of decentralization is that decentralized blockchains normally have hundreds or thousands of network nodes that must agree on which new blocks to add to the blockchain via their consensus mechanism. Getting such large sets of nodes to agree on one state may take minutes (10 minutes on average for Bitcoin). Centralized blockchains generally avoid this delay because they rely on a small set of mining nodes that can reach consensus quicker. Centralized blockchains are generally faster, but are usually less secure due to the power granted to a small set of node operators.

Decentralized blockchains are generally slower, but are more secure. There are 3rd-generation decentralized blockchains — such as Solana, Algorand, and Avalanche — that are fast — minting new blocks in under a second by way of novel, non-PoW consensus algorithms. There is debate in the crypto community as to the degree of decentralization and long-term viability of these newer, faster blockchains (primarily due to the limited history of their consensus algorithms).

24. What is the scalability trilemma (aka blockchain trilemma)?

The scalability trilemma is a term, coined by the creator of the Ethereum blockchain Vitalik Buterin, that states that it is very difficult for distributed blockchain systems to achieve 1) security 2) decentralization and 3) scalability — you can achieve two out of three, but solving for all three is a significant challenge.

A secure and decentralized blockchain has a large number of nodes that share responsibility for securing the network and minting new blocks, but may not maintain high levels of performance as the number of transactions it processes increases exponentially — it is not scalable. For example, as is, Bitcoin is not very scalable because it can only handle less than 10 transactions per second (TPS). (Rather than mess with the core Bitcoin Protocol that secures over $1 trillion in value today, developers prefer to rely on 3rd party solutions that sit on top of the Bitcoin network to provide scalability.)

A scalable and secure blockchain can remain secure while handling exponential growth in transactions, but may sacrifice of decentralization— only a small set of authorized nodes may be responsible for creating new blocks. Binance Chain is a perfect example — a set of only 21 validators produce new blocks (some of which are under Binance’s control). The benefit of this limited validator set is scalability — blocks are created roughly every second and transactions are confirmed within a few seconds. Some would argue that security is also violated here because 21 validators is not enough to secure a network worth billions of dollars.

A scalable and decentralized blockchain can hand exponential growth in transactions and not have any central authority, but may be insecure because they use an unproven or risky consensus mechanism. Some argue that scalable and decentralized PoS blockchains — like Cardano, Algorand, and Ethereum PoS — use an unproven consensus algorithm that is insecure long-term because an entity with a big enough wallet can acquire enough coins to disrupt the validation process. Others argue that PoS may be sufficiently secure only if the validator count is in the hundreds or even thousands. The Polygon blockchain (symbol MATIC) is a PoS blockchain that some say is insecure because it only uses 100 or less validators and the smart contracts that power the network can be changed (in case of critical software defects) and are controlled by a small group of people/entities.

25: What are NFTs and are they a scam?

Non-fungible Tokens (NFTs) are a class of cryptocurrencies that represent ownership of a digital or real-world asset. Non-fungible means each token is unique and not like any other — they are not interchangeable. (Dollars are an example of a fungible asset. Each dollar is interchangeable with any other dollar — they’re all worth the same.) Today, NFTs are mostly used for digital artwork and video clips. There’s a recent push to create NFTs linked to full or partial ownership of real-world assets like real estate & event tickets. NTFs are akin to real-world receipts, contracts, and other forms of proof of purchase/ownership.

NFTs are popping up in many industries. Artist are using NFTs to sell their digital artwork (and sometimes even physical artifacts associated with the digital artwork). There is talk that music artist will use NFTs to sell their songs as limited edition NFTs directly to their fans. There are several active online market places for artwork NFTs. The NBA and other sports leagues have also sold millions of dollars worth of NFTs associated with their players, mostly video clips and still images (think baseball cards). Are there NFT scams out there? Definitely. Some NFTs are sold by users who don’t have the rights for the underlying artwork. And some NFTs are blatant attempts are selling virtual “junk” to see what can make the seller money.

NFTs are a new use case for blockchains and cryptocurrencies that some say will drastically change how the world manages asset ownership and income streams; others say they’re a fad with no future. My guess it that the future will bring us closer to the former rather than the latter.

Conclusion

The cryptocurrency industry has grown significantly since the launch of Bitcoin and is at the cusp of upending how we save, exchange value, and manager our wealth. Crypto brings many benefits to people and institutions around the world, but also has its weaknesses and detractors. Collectively we’ll decide if this technology ushers in a new era of innovation not seen since the expansion of the internet and World Wide Web or fades in significance as the current financial infrastructure remains the de facto standard.

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Sources and further reading:

Bitcoin energy consumption:

https://ourworldindata.org/cheap-renewables-growth#:~:text=In%20most%20places%20in%20the,declines%20by%20the%20same%20fraction.

https://www.thebalance.com/how-much-power-does-the-bitcoin-network-use-391280

https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume

https://www.nasdaq.com/articles/how-much-energy-does-bitcoin-really-consume-2021-05-13

https://techcrunch.com/2021/03/21/the-debate-about-cryptocurrency-and-energy-consumption/

Blockchain Trilemma:

https://www.gemini.com/cryptopedia/blockchain-trilemma-decentralization-scalability-definition#section-what-is-blockchain-security

Binance Chain:

https://academy.binance.com/en/articles/a-quick-guide-to-bnb-staking-on-binance-smart-chain-bsc

https://cointelegraph.com/news/messari-researchers-slam-binance-smart-chain-over-centralized-validators

Quantum computing impact on crypto: https://www.forbes.com/sites/rogerhuang/2020/12/21/heres-why-quantum-computing-will-not-break-cryptocurrencies/

https://www2.deloitte.com/nl/nl/pages/innovatie/artikelen/quantum-computers-and-the-bitcoin-blockchain.html

NFTs:

https://rwanft.io/

https://news.bitcoin.com/pandora-raises-2-4m-from-industry-heavyweights-to-bridge-off-chain-assets-to-open-finance-via-nfts/

Money Laundering:

https://youtu.be/ql-dQ_ecsvw?t=2547

https://www.refinitiv.com/content/dam/marketing/en_us/documents/reports/true-cost-of-financial-crime-global-focus.pdf