DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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There have been a lot of things in human history that have changed the world. Things like that keep getting invented or discovered from time to time. One such thing is the concept of Cryptocurrency. Ever since cryptocurrencies have become popular, a lot of people just can't stop talking about them.
The investing sector has grown a lot over the years and Crypto is just another way people can invest their money to get some profit out of it. Although there are high risks involved in the process, if you understand what you are dealing with, the risk factor can be brought down.
Even though Crypto has become popular all around the world, some people find it hard to wrap their minds around what Cryptocurrency is, and for people who are not familiar with it, it can be a difficult task as well. So to simplify it all and to clear away all your doubts, we bring to you this article about Cryptocurrency.
Before you understand what Cryptocurrency is or how it works, you need to first understand how money usually works. Money is run from a centralized market which is basically a financial structure that was made to keep all kinds of deals or trade related to money fair. This is a structure that determines our regular old currency.
According to this structure, all the governments of the world keep the money centralized and controlled. These are what determine how much 1 USD will cost as compared to 1 Euro. These values are set based on the respective country.
Now Cryptocurrencies basically run on a decentralized money structure. Which means that no government has any control over these currencies. These are just digital currencies that are used to do business or trade online. You can say that Cryptocurrency is an alternative to traditional money.
For all the technical geeks out there, Cryptocurrencies are digital currencies that are secured by Cryptography. This makes it impossible to counterfeit. A major amount of cryptocurrencies are decentralized networks which are based on blockchain technology (more on that below). These blockchains are basically just a distribution ledger.
Cryptocurrencies bring in a lot of advantages with them but they have some disadvantages as well. They enable faster money transactions as well. The decentralized system helps re-enforcing it because it cannot collapse at a single point of failure.
Cryptos are completed outside government control and maybe that is the reason they are very sensitive. They also require a lot of energy to be mined and they are often misused. The first ever Cryptocurrency was Bitcoin, which first emerged in 2009 and it has become a sensation since then. Let us now try to understand how Cryptocurrencies work.
As we have seen, cryptocurrency is a decentralized and encrypted digital medium for exchange that is not controlled by any central authority for its value. Cryptocurrency can be used like any other currency to buy regular goods and items but is usually used as a means of investment or you can simply say an asset.
Although investing in crypto is an asset, it can be risky if one does not have enough knowledge about how things work. So, it is fair to say that a good amount of research and understanding of how the systems work is a must before one decides to invest in crypto.
As even mentioned earlier crypto is in itself a medium for storing and exchanging value. However, it relies on or you can say it runs on a public ledger called blockchain in order to record and track all the transactions taking place by the user which we will be talking about further in this article.
So, there is a process called mining through which units of crypto are created. This process of mining consists of mathematical problem solving for the generation of coins which is obviously carried out by a computer.
Owning a cryptocurrency is not like owning something tangible. It is more like owning a way to pass around or move around units of value from one party to another without any involvement of a mediocre or a third party.
Well, even though Bitcoin was introduced back in 2009 the system of cryptocurrency and how the blockchain technology works is still emerging and we can say that we will see more of it in the time to come. Let us now move on to understanding blockchain.
As the name suggests blockchain can be described as a chain of different blocks where each block incorporates information transactions and related data. Each block keeps getting added to the chain with every transaction and this stored data is inalterable as the data it contains can’t be altered.
Blockchain basically keeps a record of the transactions in codes, one can call it a databook that is passed around innumerable computers carrying the transaction records. A blockchain is something that is available to anyone at any time as it is present on the internet and not limited to some conservatory.
For the safety of transactions, the blockchain technology involves private and public keys as a means of security that allows users to carry out their transactions safely without any third party involvement.
Blockchain technology enables the users to have their own personal records of all their transactions updated as they take place. Apart from that, in order to stay away from any fraud, there are methods called proof of work and proof of stake that are used for validating transactions.
It is believed that blockchain technology may overcome banking technology in the foreseeable future. With a world highly influenced by emerging technology and the internet, there is no harm to say that blockchain technology could be a pathway to taking finance on a digital platform.
To further understand cryptocurrency and blockchain technology as a whole, we need to understand what is a consensus mechanism and what types of these mechanisms can be utilized in the blockchain. Let’s begin with understanding the term “Consensus Mechanism”.
There will always be users who are buying and selling cryptocurrencies. But in order to ensure the continuous flow of cryptocurrencies on the blockchain and validate each and every transaction happening on the blockchain, there must be a group of people validating the transactions.
To encourage people to validate the transactions, they are offered incentives in the form of newly minted cryptocurrencies for every transaction they validate. Therefore, they are known as validators. Don’t get confused if you see terms like “node operator” or “miner”, as they all mean the same.
The incentive system decides what job validators have to perform and thus sets up rules for the validators, network, and the blockchain. Basically, it builds a principle that blockchain has to follow. This incentive system is known as a consensus mechanism.
In technical terms, a consensus mechanism is an algorithm used by a blockchain network to perform an agreement and secure the transactions on the blockchain. Blockchain networks can use multiple consensus mechanisms according to their working principle. Here are two of the most commonly used consensus mechanisms.
The proof of work consensus mechanism is being used by some of the oldest cryptocurrencies like Bitcoin and Litecoin and it is infamous for its energy consuming pattern of working. The validators or miners need expensive computers with high computational power to perform calculations and generate a winning code.
Upon generating the code, the miner gets the right to add a new block of transactions on the blockchain. In return as an incentive, they get rewarded with newly minted cryptocurrency as well as the transaction fee paid by the user.
Proof of stake is another consensus mechanism implemented by some popular cryptocurrencies like Polkadot, Cardano, and the upcoming Ethereum 2.0. Basically, all newer blockchains prefer using the proof of stake principle over proof of work.
The reason is simple, PoS is an upgrade over Pow in terms of costs and energy consumption. Unlike PoW, the validators do not need to have computers with high computational power. Instead, the validators or node operators are required to stake a particular number of tokens in order to be eligible as a public ledger.
The proof of stake mechanism then picks a random validator depending upon the number of tokens staked by the validators in a particular pool. These validators are assigned with a set of tasks and upon successful completion, they are rewarded with the newly minted or created tokens of the same cryptocurrency.
Now we have discussed enough to know what cryptocurrency is, let’s talk business now. Many of you will have some questions related to it like, How are you in profit after buying the cryptocurrency? Is it a long-term thing? How do they hold any value being in digital form?
We will cover all these questions under the valuation topic, so let’s start with it.
The value of cryptocurrency is mostly based on utilities. This statement means when you buy a cryptocurrency that comes under the utility category, it serves some sort of use to its ecosystem and every token is unique in its ecosystem.
You may know about some cryptocurrency that is on the top and does not belong to the utility category and this happens mostly because of the hype created on social media. So utility is one of those who run the industry and have some purpose to serve. The working is the same as a supply-demand chain. So now you may know how you can make a profit from a digital currency.
Another important thing about Cryptocurrency is, if any coin is out in the market, the number of coins to be mined is either fixed and limited or it can be unlimited as well. Let’s consider cryptocurrencies except for the ones with an unlimited supply. So these cryptocurrencies hold their value being in a deflationary-based system.
Our traditional currency does not work on this system, so the government can print the money, and you know printing too much can cause the downfall of the value of a particular currency.
Hope now you know much about the word “cryptocurrency”, let's go through the list of the top 3 currencies.
There are many coins out in the market, many coins hold the value which can cost a fortune to buy one. One of those is Bitcoin, for the establishment of the crypto market, Bitcoin plays a huge role. It was one of the early birds, launched in 2009, because of that the coins launched after bitcoin are called ALT coins or alternatives to bitcoins.
So on top, we have three coins in the crypto market
A digital currency was created by a person or a group named Satoshi Nakamoto. Bitcoin is decentralized, borderless, and a secure digital currency. Bitcoin is one of those currencies that laid the foundation of cryptocurrency. People have a nickname for it, they call bitcoin as Digital Gold.
The purpose of the currency was to create a seamless experience of transactions over the borders without any interference from the central power. People loved its working and interestingly they had their privacy by not revealing their identity.
Now 90% of bitcoin is mined, overall the limit was 21 million. The value of bitcoin has increased because of scarcity. Instead of making an exchange with bitcoin, people store their bitcoin for long-term use, just like we store our gold.
The cryptocurrency that stands next to Bitcoin in market capitalization is Ethereum. Ethereum is a decentralized, open-source blockchain. It comes with smart contract functionality. It was created by Vitalik Buterin and Gavin Wood.
Ethereum is the one cryptocurrency that actually attracted some startups to make real world usable utilities on the Ethereum blockchain. There is an upgrade coming known as Ethereum 2.0 which is going to be more energy efficient and thus more practical.
USDT or Tether is the cryptocurrency used as stable coins. In the crypto market, there are many coins that hold a value of $50k for each coin, and there are also coins which you can buy for $1. So, if you want to trade or use it as a payment, you need a stable coin.
USDT was developed by the crypto exchange BitFinex and has a market capitalization of more than $68. It is a coin based on the blockchain network, the worth of each coin is equal to one dollar.
So now that you understand all the basics of Cryptocurrency, you can start investing your money in the trade of the future. You will just have to do tons of research about the market and the specific Cryptocurrency that you are buying.
But you surely would be up to that task because this is obviously the money we are talking about and you can never be too careful when money is involved. However, trading tokens is not the only way to invest in Crypto. There are other options available as well if you understand the Crypto world well enough.
There are things like Launchpools and blockchain projects which will help you in the Crypto market. Even with all that, trading will be the main focus for a lot of people, so just choose what you’ll trade in and you can start. Check out our guides on various topics like blockchains, Metaverse, etc., and the tutorials about how you can set up a wallet, swap chains, etc.
So just READY your mind about Crypto, SET your goals and all the profits will GO your way!
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