Introduction
Many new investors are coming into the cryptocurrency space now. Most of them are here because of the popularity of cryptocurrency these days. So their understanding of cryptocurrencies and how they work are minimal. This article will give them a clear idea about a few essential concepts you need to know to become an educated and successful cryptocurrency investor and you will be able to increase your cryptocurrencies without buying more.
What is Bitcoin and, How Bitcoin works?
Learning about bitcoin is essential to every new investor because it is the cryptocurrency that made this fantastic community and unique asset class. Bitcoin was created in 2009 by a person or a team called Satoshi Nakamoto. Bitcoin has been designed to be a hedge against inflation. Inflation means if you have $100 now, after five years, It will decrease to a lower value of about $96 because of the inflation. The main reason for inflation is money printing by the governments. Bitcoin has a fixed supply of 21 Million coins. No one can create more than 21 million coins, and still, there are about 19 million in circulation because bitcoin mining takes time, and the last bitcoin will be mined in 2140.
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Bitcoin Mining
Bitcoin mining is a critical component of the maintenance and the development of the blockchain ledger. Mining is the process of making new bitcoins and adds them to circulation. Bitcoin mining needs powerful computers, and that computers should solve extremely complex computational math problems. These miners are rewarded with new bitcoins for their dedication to secure the bitcoin network and creating new coins.
To maximize the profits from mining, miners use thousands of ASCII computers because mining is costly and power consumption is enormous. Now there are dedicated Solar panel systems and wind power systems to power mining computers without harming the world.
Once miners have verified 1MB worth of bitcoin transactions known as a “Block,” they are rewarded with a quantity of bitcoin; miners Verifying 1MB worth of transactions make the miner eligible for the reward. Everyone confirms a transaction won’t be rewarded.
The mining rewards are reduced by half every four years, and it’s called bitcoin halving. In 2009 mining one block would earn you 50BTC. In 2012 that cut in half and made it 25BTC per block. In 2016 it reduced to 12.5BTC, and in 2020 it again reduced to 6.25BTC. Even though the reward is less bitcoin price is going up every year. Mining is highly profitable for more prominent mining companies. Bitcoin mining on personal computers is not as good as in 2012 now. Ethereum mining with a personal computer can still be profitable if you can buy high-power GPUs.
What is Staking?
Some blockchain protocols allow its investors to earn more cryptocurrency by contributing to the network. Staking is the process of actively participating in transaction validation on proof of stake blockchain. These blockchains need a minimum required balance to validate transactions and to earn staking rewards. On ETH 2.0, it’s 32 ETHs. If you have less ETH, you can’t earn rewards.
Staking Process
Staking is som much similar to the security deposit. When the minimum balance is met, a node deposits the amount to the network as a stake. When the staked position is more prominent, getting to forge the next block is higher. If the node successfully creates a block, the validator receives the reward. Validators lose part of their stake if they attempt to attack the network.
Coins and Tokens that have a staking process.
- Cardano
- Ethereum 2.0(ETH 2.0)
- VeChain(VET)
- Tezos(XTZ)
- Raptor Token(RAPTOR)(Buy on Pancakeswap)
What is Yield Farming
Yield farming is a way to generate rewards with cryptocurrency holdings. It’s called liquidity mining as well. Yield farming can be paralleled with staking. But yield farming works with users called liquidity providers, and they add funds to the liquidy pools. So yield farming focuses on getting the highest yield possible.
A liquidity pool is a smart contract containing funds, and by providing liquidity to the pool, LPs get rewarded. Some pools pay their rewards in multiple tokens, and yield farming is typically done using ERC-20 tokens. Yield farming is riskier than staking and build for advanced users. Yield farming is a hazardous and advantageous investment. There are a few popular Yield farming platforms and protocols.
Compound Finance – Compound is an algorithmic money market, and it allows users to borrow and lend assets.
Synthetix – Synthetix allows users to lock up SNX or ETH and get rewarded. SNX crypto is now famous.
Aave – Aave is a decentralized protocol for lending and borrowing, and its interest rates change algorithmically based on current market conditions.
Burning
Sending crypto assets(Coins or Tokens) to an eater address that is not accessible by anyone is called Burning. No one owns the private keys to this address.
In simpler words, the “Burn” is not like destroying them. They are just taken out of the supply, and quarantining is the burning.
Why some tokens or coins needed burning?
- Burning is sometimes a general agreement between all the holders and developers.
- Burning can help coins or tokens to rise in value.
- Because of that price rise, all the participants will work to the system’s advantage.
Conclusion
There are few ways you can earn more tokens without spending money. Those are Mining, Staking, and Yield farming. Mining is the oldest way of making money by using the proof of work method. Bitcoin and Ethereum 1.0 uses that method. But now, there are few other ways to earn tokens. Staking and Yield farming are those two, and Staking is beginner-friendly, and it’s low riskier than yield farming. Yield farming has higher rewards than staking. Through burning, you can increase the value of the coin or the token you have. But it needs permission from developers and the community. Safemoon has a burning mechanism.
