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Altcoin Explained

Altcoin Explained

An altcoin is any type of crypto that is not bitcoin. The word altcoin is made from the portmanteau of the words alternative and coin

Once upon a time not so long ago there was this one lone cryptocurrency called bitcoin. 

It was a strange new creation by a mysterious person or group of people who went by the name Satoshi Nakamoto. 

Even with the huge amount of interest in crypto and the level of information we have available to us, nobody to this date knows who Satoshi Nakamoto is, that’s pretty astounding! 

For a while, at least, bitcoin was this strange new digital currency that few people really understood or even cared about. 

Fast forward to today and crypto is big business, there are literally thousands of crypto coins and tokens out there and it’s growing by the day.

 

What is an altcoin?

The clue is in fact in the name, altcoin stands for alternative coin. 

Going back to the early days of crypto when there was only bitcoin, the lone cryptocurrency, people began to recognise the potential of blockchain technology beyond what bitcoin was doing or offering. 

So new coins began to appear and these new coins, basically anything that wasn’t Bitcoin began to be referred to as an altcoin or alternative coin to bitcoin. 

 

A simple analogy to understand what altcoins are and how they came about

We can liken the current crypto craze to that of the birth of the internet in the 1990s. 

Let’s imagine the internet starts with a single website, it’s pretty basic compared to today’s websites but functional. 

That one initial website could be thought of as Bitcoin. 

The whole concept is new, there is a basic browser and people can access and use this one site from anywhere. 

So, some people began to see the potential of the internet and its underlying technology and began to create websites of their own, let’s call them “altsites”. 

Now there are an estimated 1.86 billion websites out there or 1.86 billion “altsites” out there.

In much the same way, bitcoin was the pioneer that created the first crypto and its underlying blockchain technology, since those days over 9000 altcoins are out there and this number is going to keep rising as it did with websites.

 

The history of altcoins

In 2009 bitcoin arrived on the scene, what happened next? Well around 2011 the first altcoins appeared running on the bitcoin blockchain.

The very first altcoin was Namecoin. Namecoin was based on Bitcoin’s code and arrived in April 2011. 

Namecoin demonstrated that there was space for more coins beyond bitcoin and from there the race to build more altcoins began.

 

An altcoin is not second best

It may seem obvious but we must also understand that the first is not necessarily the best, just like the first automobile cannot be compared to the automobiles of today. 

The first car simply paved the way for others and validated a need, utility and demand. 

In much the same way, using the internet example again, today’s websites are far superior to the very first websites. 

The first websites indeed played a huge part in the development of the internet but they are not superior. 

This is a very important thing to keep in mind as sometimes we can think of an alternative as maybe being second best. 

This is definitely not the case with altcoins. They are simply alternatives or derivatives of Bitcoin in some way.

If we look at Ethereum, it is an altcoin. 

Ethereum however serves a very different purpose to that of bitcoin. 

Whilst bitcoin is purely a digital currency, a way of holding and transferring value, Ethereum is a cryptocurrency with its own powerful ecosystem capable of a lot more applications such as decentralised finance.

 

Altcoins can be highly experimental and volatile!

If we go back once again to the Internet analogy and think about e-commerce, there are limitless possibilities to sell things online. 

Some make a lot of sense and will take off and succeed like Amazon but there are also millions of others that just won’t make it. 

Putting money into altcoins can be very risky, especially very new ones as there’s no guarantee of success, just like investing in a brand new startup that sounds promising but could eventually implode or of course, become mega-successful. The same with altcoins!

 

The technology behind all altcoins

Just like the core technology behind all websites is basically the same, we can say the same with crypto. 

All cryptos run on something known as a blockchain. Call that the “internet of crypto”. 

Blockchains are literally chains made up of blocks. 

In the case of Bitcoin these blocks are mined using something called proof of work (PoW), validated and added to the chain, each time a new block is added to the chain, the miner receives coins in payment. 

All altcoins use some form of blockchain. 

Ethereum has its own blockchain that currently also works using proof of work although that is likely to change soon but that’s a separate topic. 

For now, though, it’s important to understand that the core technology or principles that drive Bitcoin form the basis or foundation of all altcoins in some way.

 

Conclusion

In summary, the vibrant and diverse world of crypto that we see today started out with a single coin, bitcoin. 

Everything that has followed ever since is referred to as an altcoin. It’s not conceivable that at some point, perhaps even now, the term altcoin will not be very relevant and go out of use. 

For now, all you need to know is that an altcoin is any coin that is not bitcoin, easy enough!

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Tokenomics Explained

Tokenomics Explained

Tokenomics is a combination of the words “token” as in crypto token and “economics” and is about understanding the economics and fundamentals of a crypto token.

Economics is at the root of our lives and always has been. 

Whilst today’s economies are way more complex and sophisticated than from the days of our ancestors the basics still remain the same. 

There is always some form of demand and supply, some form of value measurement and some form of exchange like a currency or barter system to facilitate transactions.

Today’s economies are highly complex and fast-moving, economists, governments and businesses need to understand the trends and in the case of businesses navigate the economy for maximum benefit.

In much the same way, investors, traders and others interested in crypto need to be able to understand the fundamental economics behind the tokens they are interested in in order to be able to ascertain if they are wise investments. 

Tokenomics is the study of the economics and fundamentals of a crypto token.

 

What are tokens?

The first thing we need to look at and understand is what are tokens?

A crypto token can typically represent an asset or a utility that resides on a blockchain, allowing for the user to use it as an investment or for economic purposes. 

In the non-digital world, one could imagine a piece of gold as a token, as it could be used as a means of pure investment, i.e. hold onto it and let it appreciate in value, as a currency, pay for something with gold, not common nowadays but technically still possible or you could turn the gold into a piece of jewellery which can be considered a form of utility, a piece of jewellery to wear. 

If we looked instead at a $1 banknote, it serves no other purpose other than as a way to hold and transfer value, there’s nothing else you can actually do with it. 

These two examples could be used to crudely illustrate the difference between a crypto coin such as Bitcoin or a token just to be able to understand what a crypto token in fact is. 

In more specific terms a coin is native to the blockchain, for example, ETH or Ether is the native coin for the Ethereum blockchain whereas a token is not native to a blockchain such as Ethereum but independently operates on the Ethereum blockchain and provides some form of utility or service.

 

Let’s examine some token types so as to see how this fits into tokenomics?

There are four principal types of crypto tokens, these are:

Payment tokens – payment tokens are generally coins and their primary purpose is to act as a medium of exchange, a way to hold value or as a unit of account. In economic terms, the price of the payment token is highly influenced by supply and demand, just as in fiat currencies like the EURO, GBP or USD.

Security tokens – security tokens are similar to securities in the world of stocks and shares. If one owns shares in a company they can use their shares to vote for actions, hold onto the shares as investments in the hope the price will rise and also be able to enjoy a share of profits in the form of dividends. In a similar way, security tokens come with certain rights, privileges and means to earn money beyond simply the appreciation of the price of the token

Utility tokens – utility tokens give the holder access to a blockchain-based product or service. Where security tokens have some form of money-making at their core, utility tokens provide some form of utility hence the name. Imagine a piece of software like WinZip, it compresses and decompresses files on a computer, you cannot make money with it. However, you could buy shares in the company behind WinZip which would be a security token in this case. WinZip itself would be a utility token.

Non-fungible tokens – all crypto coins and most tokens are interchangeable, my one bitcoin is exactly the same as your one bitcoin. Just like my €20 banknote is worth exactly the same as yours. Non-fungible tokens (NFTs) are different as these tokens can represent a unique item, property or asset such as the deeds of a particular house, a piece of artwork or a collectible, no two are the same. The NFT can be considered as the legal title or deed to that asset, much like the deeds to a property.

 

What is tokenomics in crypto?

Okay, so now we have an understanding of what tokens are and the common types of crypto tokens out there. 

How does tokenomics fit into the picture? 

As we determined at the very beginning of this article, demand and supply are at the root of all economic systems, they in most cases determine the supply and the price. 

If the demand for something is high and there is limited supply the price will go up, if demand is low and/or the market is flooded then we can expect the price to come down. 

In much the same way, in tokenomics, we need to study the demand and supply of a crypto amongst other things in order to get at the fundamentals and determine if it’s a good buy or simply goodbye!

 

Below are some of the fundamentals we would be looking at in tokenomics

Allocation and distribution of tokens – how are the tokens being distributed, there’s a fair launch in which case the token is mined, owned, earned and governed by the community at large without any pre-release. 

On the other hand, some tokens can be pre-mined and issued to developers and early investors in an ICO for example. Imagine there’s a wallet with a huge amount of tokens sitting there, the owner of this huge amount of tokens could dump them on the market and cash in causing the price to plummet, this would represent a significant risk to the other token holders. 

Token supply – the supply is probably one of the biggest factors when it comes to the ongoing price of the token, there’s circulating supply, the amount of the token currently in circulation potentially available to buy and sell, there’s the max supply which is the maximum amount of the token that will ever be produced and there’s total supply which is the total amount of tokens out there excluding any that may have been burned.

Market capitalisation – the market capitalisation of a token is similar to that of a company, it’s basically the price of a share multiplied by the number of issued shares. In the same way, it’s the price of the token multiplied by the number of tokens in circulation. The higher the market capitalisation the more solid the token, or in theory at least.

Inflationary or deflationary token type – a token is deemed to be deflationary if there is a limit to the total supply, for example, there will only ever be 21 million bitcoin, no more can be produced and this should lead to an increase in value in the long run due to the ultimate scarcity, just as with oil or gold, there’s only so much out there and this keeps the price up. An inflationary coin is the opposite, there is no upper limit to the amount that can be created, very much like fiat currencies like the EUR or USD, in these cases, oversupply can force the price down and this means that each token has less buying power or inflation as it is known in economic terms.

 

Conclusion

In summary, tokenomics is about understanding the fundamentals of a token in order to be able to determine if it is a potentially good investment. 

Just as government and business economists study economic fundamentals and patterns the same is true with tokenomics when it comes to crypto.

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Circulating Supply Explained

Circulating supply is the best approximation of the number of coins or tokens currently active in the crypto market and in the hands of the general public.

 

Supply and demand are at the root of our economies and the businesses and services within them. 

A shortage of workers creates demand for workers. A hot new widget that everybody wants creates demand and businesses frantically make products to meet the demand. 

The amount or rather a scarcity of available workers to fill open positions or the number of widgets available to buy helps to dictate or even elevate the price. 

 

A simple example of supply and demand dynamics

Let’s say you want to sell your car. 

It is a VW Golf GTi, with an average amount of kilometres and is in average condition. 

The demand for your car will be pretty average as there will no doubt be many other cars like yours on sale. 

Now instead, imagine that your VW Golf is in like-new condition and has very few kilometres, this makes your car more valuable as there are fewer cars like yours available to buy and therefore there is greater demand for yours and this will push the price of yours up. 

If more cars like yours enter the used market, the price of yours will come down as buyers have more choices. 

So, what does this have to do with crypto you might ask? 

Well, the price of crypto very much like stocks and shares is driven by demand and supply amongst other things.

 

What is circulating supply in crypto?

Circulating supply is the approximate amount of coins or tokens currently in circulation and in the hands of the public. 

What does this mean exactly? 

Let’s start from the very beginning and use the biggest and best-known crypto, bitcoin as an example. 

When Bitcoin was created, the mysterious Satoshi Nakamoto “hardcoded” the total amount of bitcoins that will ever exist, 21 million Bitcoins to be exact. 

This means that there will never be more than 21 million bitcoins in existence. 

This limit creates scarcity, just like with gold or oil. 

There is only so much oil or gold out there and this keeps the price high and rising as it generally has with bitcoin. 

If we think of an alternative and certainly way more valuable commodity, water, the price is very low, this is because there is so much supply, water is generally available everywhere. 

If this heaven forbid changed, the price would skyrocket as we literally cannot live without it. 

Going back to Bitcoin, the 21 million is not the circulating supply but rather the max supply, the maximum amount there will ever be. 

The circulating supply of bitcoin is 19.4 million in August 2023. This 19.4 million refers to the actual amount of bitcoin in circulation and is potentially available to buy and sell. 

We haven’t yet reached the 21 million as those coins have yet to be mined and are therefore not yet available and not in circulation.

Now that we hopefully understand what circulating supply is we can look in a little more detail at what max supply and total supply are.

 

What is max supply?

The max or maximum supply of a crypto coin or token refers to the maximum amount of coins or tokens that will ever be produced. 

Taking the earlier example of Bitcoin above, the max supply would be 21 million coins. 

No more Bitcoin can ever be produced. 

Those same 21 million coins will make up the total supply globally for eternity. This is very different to fiat currencies like the GBP, Euro or US Dollar where the respective central banks can and do continue to issue more money into the economy and there is no max supply limit.

 

What is total supply?

The total supply is the number of coins or tokens that currently exist, either in circulation or locked up in some way and have yet to be released onto the market. 

This could be for example that they are in some form of escrow or similar situation. 

So, the total supply is the total supply of coins to date minus the total number of coins or tokens that have been burned or destroyed. 

Total supply differs from Circulating Supply in that, the circulating supply does not count coins or tokens that are locked up and not yet in circulation. 

This is one of the reasons why the circulating supply value is approximated, as it’s very difficult to accurately measure the number of coins at any one time that are in some form of escrow or lockup. 

These dynamics are literally changing by the second.

 

Now that we have an understanding of what circulating supply, max supply and total supply are we can go back to the used VW Golf GTi example to see how these three aspects relate to each other.

Let’s begin with the Max supply, So the used VW Golf we are using for the example is a 2010 model year and it is a GTi model. Let’s assume that a total of 10,000 of these 2010 model Golf GTi cars were manufactured. 

This would be the total supply as no more 2010 year model cars can in fact be produced. 

Now let’s look at the max supply. In this example, we would take the 10,000 2010 model Golf GTis produced and subtract the cars that have been written off and no longer exist, let’s say that is 1500. 

This means that the total supply is 8,500. The total 10,000 produced, minus the 1,500 that are now dead. 

Now let’s say, out of the 8,500 remaining cars out there 1,000 are stuck on a transport ship and temporarily unavailable but will soon be available for sale, then the circulating supply would be 7,500 on this given day.

This is of course a very crude example to demonstrate how it works and hopefully explains in a simple way how these three terms, circulating supply, max supply and total supply interrelate and how circulating supply fits into the picture. 

 

Conclusion

The final takeaway, circulating supply is the total number of coins or tokens actually in the hands of the public and potentially available to buy and sell at any given moment.

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CryptosStaking Explained

Staking Explained

Staking in crypto allows cryptocurrency holders to earn a passive income by staking their coins in a proof of stake (PoS) network to help verify blockchain transactions in exchange for a reward. 

Before we get into what staking is, we first need to have a basic understanding of how crypto works and core to all crypto is something called blockchain technology. 

A blockchain is basically software running on a decentralised network of computers. 

Unlike a centralised network, say, something like a central server in a company that stores a single copy of all company data, the blockchain is a peer-to-peer network where the data is simultaneously spread across a wide network of computers. 

If one computer goes down, the network isn’t affected and the data is safe. 

In the centralised company setup, however, if the central server goes down, the entire network comes to a complete halt. This would not be good at all in crypto!

 

Imagine the Blockchain being something like an e-book

The e-book would represent the blockchain itself and each new page in the e-book would represent a new block. 

Each page is numbered sequentially and there are thousands of exact copies of this e-book scattered on computers all over the world. 

Each time a new page (block) is added, it is added simultaneously to every single e-book. 

This means that every one of those ebooks has the exact same information on the exact same number of pages. 

It is not possible for anyone to just randomly add a page anywhere in the book. 

It has to be sequential and has to correspond to data on the previous page and once complete, the following page too. 

This process is what is known as consensus and is what stops malicious actors from being able to add fake transactions or manipulate the system. 

It is therefore very clear that consensus is crucial in crypto. Without it, the whole of crypto would fall apart pretty quickly.

 

Proof of Work (PoW) and Proof of Stake (PoS) consensus methods

Bitcoin, the granddaddy of crypto, uses something called proof of work (Pow) as a means of consensus to verify transactions on the network and to provide the required level of network security. 

With proof of work, miners using high-power computer rigs solve complex computational problems in order to win the right to issue the next block in the blockchain. 

So, using the above analogy, to add a new page in the e-book.

Proof of work has some downsides though, these are primarily the high levels of computational power needed to solve random and complex mathematical problems and the relatively low speed at which new blocks can be added to the blockchain. 

As crypto and blockchain technology gets ever more popular and especially in the DeFi world new applications are added constantly, a faster, more scalable consensus method is required. 

 

This is where proof of stake (PoS) steps neatly into the picture

In response to the above-mentioned issues, a newer consensus system called Proof of Stake has recently emerged with the goal of increasing transaction speed and efficiency whilst at the same time lowering fees. 

Proof of Stake also reduces infrastructure costs as the computational need is much lower due primarily to the computers not having to solve highly complex mathematical problems. 

Instead, transactions are validated by stakers (validators) on the network who are actually invested in the network by way of their stakes which represent real money. 

In effect, the network is backed by the stakers and their crypto assets.

 

A simple way to imagine staking could be to think of a large group of friends who each put €500 into a pool of money

The pool of money is then lent out to borrowers. Each time a new loan is created, one of the friends gets to record the loan transaction and enter it into the lending ledger and for doing this that particular person earns a small fee. 

Now, if that person gets caught doing something malicious, they stand to potentially lose their €500 stake. 

Also, if that person does not perform the transaction as required and on time they could lose some of their stake. 

In the blockchain world, that would be downtime or a malfunction on their computer system.

In this very simple example, we can get an understanding of how this proof of stake system can ensure a level of integrity as ultimately the stakers have their own money on the line and don’t want to lose it. 

This is in essence proof of stake and what makes it work.

 

Some benefits of staking

For long-term crypto holders, staking provides a means of making their assets work for them by generating income in the form of rewards as opposed to their crypto sitting in their wallet and earning nothing. 

In our current still, relatively low-interest rate environment, crypto staking can potentially provide quite generous returns in the form of passive income for people with savings in crypto. 

The rewards can go anywhere from say 6% up to as much as 100% on smaller networks like PancakeSwap or Kava.

There are benefits for the entire network too. 

Staking contributes to the security and efficiency of the entire blockchain being supported by stakers. 

As more funds are staked. The blockchain becomes increasingly resistant to attacks and also improves the blockchain network’s ability to process transactions.

As the proof of stake consensus method is not nearly as intensive as proof of work, less computing resources are needed thus taking less of an environmental toll and also it´s possible to process transactions faster which in turn can lead to lower fees.

Lastly, some networks award stakers “governance tokens” which gives the token holders a say in future changes and protocol upgrades. 

This can be particularly beneficial for people with large amounts staked as they are at least able to influence decisions on the management and future of the network that they are supporting via staking.

 

What about the potential downsides of staking?

As with all things, there´s no such thing as a free lunch! 

There are potential downsides too. 

Staking often requires a vesting or lockup period where the crypto cannot be withdrawn for a certain time period.

If the price of the asset staked goes down it’s not easily possible to liquidate the token and reduce the losses. 

Once you are staking, you are in it for a period of time and have to assume the risk that the price of your token could well go down and if this happens you have to hope it recovers again. 

It would be wise just to be safe to look carefully into the terms and conditions, vesting periods etc before going ahead as a staker.

There is always the risk of a cybersecurity or hacking incident that could result in the total loss of your tokens held within a particular exchange or online wallet. 

To minimise this risk, some crypto investors choose to store their crypto on a special piece of hardware like a pen drive that is not connected to the internet. 

This is known as cold staking.

Finally, there is a risk related to the uptime of the validator node that is holding your staked tokens. 

In the majority of cases, networks can penalise a validator if the ability to process transactions fails. 

This could result in your staking income being reduced due to validator uptime disruptions.

 

How can I go about staking?

In general, staking is open to anyone wishing to participate as per the general spirit of crypto.

However, to become a full validator can require a substantial investment, for example, to become an ETH2 validator, a minimum of 32 ETH would be required along with a decent level of technical knowledge and of course, a good and reliable computer that can perform validations 24/7 without any downtime. 

As mentioned above, issues with downtime could cost you by way of your stake being slashed. Not what you want!

If you are not able to become a full validator, there is another much easier way. 

You can become a staker via an exchange and staking pool. 

Here you can contribute any amount you wish into the staking pool along with others. 

This provides much easier access to staking and the ability to earn a passive income without the need for your own validating hardware or technical expertise.

 

Conclusion

As crypto has continued to evolve beyond simply bitcoin, the original proof of work consensus method is showing signs of strain and to maybe save the day proof of stake has stepped in to provide an alternative and perhaps more efficient means of consensus validation. 

For investors holding crypto assets for the medium to long term, staking provides a means of putting those assets to work. 

With staking, potential gains are not simply tied to the price of the token but those very same tokens can provide quite a generous passive income much like investing money into stocks and earning dividends or a high dividend bond. 

Staking does not come without risks though as mentioned above, so it would be wise to look into the details and rules of the network where you are thinking of staking and also the potential cybersecurity risk of your tokens before putting them to work as stakers and dreaming of your retirement.

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GPU crypto mining explained

GPU Mining Explained

GUP mining is the mining of cryptocurrencies using a GPU (Graphics Processing Unit) to solve complex mathematical calculations called “hashes’ instead of purely using the CPU as was more common in the early days of crypto.

 

Before we get into the specifics of what GPU mining is, we should briefly cover what crypto mining is, for those that may be new to crypto and are still learning. 

Mining is the way that new crypto is created by cryptos that use what is known as proof of work (PoW). 

Very simply proof of work (PoW) is the solving of complex mathematical puzzles or hashes as they are known and being rewarded in coins. 

Bitcoin uses proof of work as does Ethereum at the moment, although this is likely to change soon. 

However, we won’t go into that. For now, it’s important to understand what mining is and what proof of work is in order to be able to understand what GPU mining is.

 

The basics, what is a central processing unit (CPU)

In any computer, whether that be a Mac, PC or any other type of computer there sits a CPU or central processing unit. 

This is effectively the brains of the entire computer. The CPU handles calculations and the use of the computer’s resources. 

 

GPU vs CPU mining

In the early days of Bitcoin, it was possible to mine Bitcoin using a relatively modest computer and the CPU was capable of handling the task of solving complex mathematical puzzles or ‘hashes’ pretty easily. 

As the number of miners exploded it became ever more competitive and the computing power naturally increased as each miner competed with other miners to solve the puzzle first and be rewarded with coins and transaction fees. 

The race for higher computing power and the need to solve the hashes or mathematical puzzles faster led to the discovery of using a GPU or Graphics Processing Unit to take over the heavy lifting from the CPU and do a way better job.

 

What is a GPU?

A GPU stands for Graphics Processing Unit and is a piece of hardware that is either a separate card or is part of the motherboard and is responsible for rendering complex graphics. 

The GPU is used heavily in gaming and video rendering. 

The GPU says to the CPU, “hey, leave those heavy mathematical calculations to me, it’s what I’m good at, you worry about the other stuff”. 

Okay, the GPU doesn’t talk but if it did it would probably say something like that. 

So the GPU is a dedicated piece of hardware that is capable of over 800 times the processing power of a CPU. 

You can see straight away why the GPU became attractive to crypto miners. 

The GPU is solely responsible for video-rendering or mathematical problem-solving in the case of crypto mining, whereas before the CPU handled it all. 

By bringing in a dedicated resource, the CPU has to work less hard and has a better qualified and more capable resource, the GPU to take care of the complex problem-solving.

 

What is GPU mining?

Very simply, GPU mining is the mining of crypto using a graphics processing unit (GPU). This would be as opposed to CPU mining, where the central processing unit (CPU) is handling the mathematical puzzle-solving as well as ensuring that the computer as a whole is functioning.

 

What are the advantages of GPU mining?

The primary advantages of GPU mining are:

  1. Speed
  2. Easy maintenance and upgrades
  3. Better energy efficiency
  4. Handle complex calculations better

 

Speed

A GPU-based mining rig can be up to 800 times faster than a CPU-based one, additionally, it is common for mining rigs to use more than one GPU to provide even more power, it’s not uncommon for a GPU mining rig to have three powerful GPUs. 

This will blow a single CPU-based mining rig out of the water!

 

Easy maintenance and upgrades

A separate GPU generally tends to have updates and can more easily be exchanged for a replacement unit if it fails or can later be easily upgraded for a newer, more powerful model. 

This is not so easy or generally possible with CPUs.

 

Better energy efficiency

Graphics Processing Units (GPUs) provide a more energy-efficient way to mine crypto when compared to CPU mining. 

GPUs conserve energy better. High energy use is a common issue and criticism of crypto mining.

Handles complex calculations better

Whilst you can throw complex problems at CPUs they will get hot and this could cause problems and even lead to a system failure which is the last thing a crypto miner needs. 

A powerful GPU or series of GPUs on the other hand is way more efficient and better suited for a demanding and intensive task like crypto mining.

 

What about alternatives to GPU mining?

While GPU mining has no doubt superseded CPU mining, GPU mining is still utilising hardware actually designed for gaming and graphics-intensive applications like video editing or gaming. 

An alternative is ASIC, which stands for Application-Specific Integrated Circuit. 

Instead of using general-purpose integrated circuits for mining, ASICS are integrated circuits specifically designed and optimised for the demanding task of crypto mining. 

They are literally designed for the job. ASICS generally beat CPUs and GPUs when it comes to reduced energy consumption and computing capacity.

 

Conclusion

Crypto mining is still very much in its infancy in relative terms, let’s face it, bitcoin only appeared on the scene in 2009 and in those days almost any half-decent spec computer could be used for mining. 

Fast forward to today, the stakes are way higher leading to intense competition amongst miners and an endless technological race for faster and more powerful mining rigs that can complete the hashes the fastest and claim the rewards. 

The GPU has certainly played its part and still continues to be used, although more dedicated ASIC-based mining hardware is generally favoured for serious mining rigs. 

For now, though GPU mining can still be considered valid although it’s fair to say that its days could be numbered.

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oversold in crypto explained

Oversold Explained

A crypto can be considered oversold if a large amount of selling has pushed the price down over a period of time but in fact, the price does not reflect the true value, meaning the crypto could actually be undervalued and likely to go up.

 

Stock, crypto or the speculation of any other asset or commodity is neither pure science, pure art or guesswork, but rather a blend of all three. 

Nobody knows for sure where anything is going. 

In the film, The Wolf of Wall Street the trading manager played by Matthew McConaughey in the famous chest-bumping scene tells Leo Dicaprio that nobody knows where the price is going, up, down, sideways or in circles, not least the traders. 

In real life, in order to have any kind of success in trading or investing, you clearly have to have some idea, otherwise, financially at least, it will be game over really fast.

The name of the game is to somehow anticipate if a crypto or stock is undervalued or overvalued and trade accordingly.

In the very simplest of terms, a stock, crypto or other asset or commodity will either be temporarily overvalued in which case the price may correct and come down, temporarily undervalued and likely to go up or correctly valued or at fair value and not going anywhere anytime soon. 

When a stock or crypto is considered by traders as undervalued at its current price, this is known as being oversold.

 

What is oversold in crypto?

Let’s take bitcoin as an example as it’s the most well-known cryptocurrency and let’s face it, a lot of people are in it. 

Is bitcoin overvalued and the price is going to come crashing down or is it currently undervalued and likely to keep going up? 

If it’s undervalued it is oversold, literally meaning that it has been “over” “sold” due perhaps to negative sentiments which has driven the price down due to excessive selling. In fact, the price should be higher and perhaps there is an upward correction coming in which case it could be a good time to buy.

 

What is fair value?

In order to understand if a crypto coin or token is oversold or undersold, it’s helpful to know where the middle is, 

This ‘middle’ is the fair value and in the world of stocks, traders will usually make calculations based on things like earnings per share and the price-to-earnings ratio. 

These figures can help a trader get an idea of if the stock is undersold or oversold when compared to competitors in the same industry and based on this information make a decision whether to buy, sell or ignore.

 

What is the opposite of oversold?

The opposite of oversold is unsurprisingly, overbought. In much the same way it literally means that. It has been “over” “bought” and could see a downward correction.

 

How can we tell if a crypto is oversold, overbought or at fair value?

Crypto is generally way more difficult to accurately predict as it doesn’t have the history or the same traditional fundamentals that traders can use to evaluate a stock or commodity like profits, dividends, market data, economic conditions and so on. 

Crypto is highly volatile and so one of the only real indicators is past price performance, demand and supply dynamics and expected returns, looking to the future to anticipate future growth and of course some instinct for what may happen in the future. 

If we look at bitcoin again, it’s not a company per se and doesn’t actually own the infrastructure, the computers that support the blockchain and is purely a cryptocurrency and blockchain. 

So how can we determine if bitcoin is likely to go up or down in the future? 

We would need to look at bitcoin’s position and importance in the larger crypto universe, where does bitcoin fit now and how could bitcoin and its blockchain fit into the overall crypto space in the future?

How will governments deal with crypto in the future and how about its network effect? 

We could do the same with Ethereum, the second-largest crypto after bitcoin. 

Ethereum is more than a cryptocurrency, it’s an entire ecosystem. Will this ecosystem continue to be a major player in DeFi for example or are there competitors lurking on the sidelines that could knock Ethereum off its perch? 

Let’s use this example to imagine an oversold scenario for Ethereum. 

Imagine, there’s talk of Ethereum losing its hold on the DeFi space and people start selling in droves, this drives the price down. 

In fact, however, this sentiment has been total FUD (fear, uncertainty and doubt) and now Ethereum is in fact trading lower than it should be and could be likely to correct and go back up. This would be a case of being oversold. 

 

What is an oversold indicator?

There are some technical methods used by traders to try and ascertain if a crypto, stock or commodity is oversold, overbought or at fair value. 

A couple of methods used include using relative strength index (RSI) and Bollinger bands. 

The RSI indicator looks at the pace of recent price changes to try and determine if a crypto is oversold, overbought or at fair value whereas the Bollinger bands consist of lower, middle and upper bands. 

The middle band reflects the cryptos moving average position while the lower and upper bands measure and record price deviations relative to the middle band. 

A crypto would be considered to be oversold when the values shift towards the upper band, the contrary would be true if the values shift towards the lower band in which case a crypto could be showing signs of being overbought.

 

Conclusion

In the world of traditional trading, it’s difficult enough to know in which direction a stock or commodity is likely to head, in crypto it’s perhaps even more difficult. 

In its most basic form, the most important thing to be able to understand is if a stock or crypto is overvalued (overbought), undervalued (oversold) or in fact where it should be (fair value).

If you are able to determine if a crypto is in fact oversold, it could be the perfect time to jump in!

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BUIDL in crypto

BUIDL Explained

BUIDL is a warp of the word build and is a movement of sorts that encourages the building of the entire crypto eco-system as opposed to purely investing in and holding crypto for personal gain.

The world of crypto is full of slang and strange terms like ‘HODL’ which stands for Hold On for Dear Life when a person buys crypto and holds on to it without buying more or panic selling or ‘Lambo’ when a crypto holder becomes rich enough to buy a Lamborghini or say ‘Mooning’ when the price of a crypto is skyrocketing and heading for…well the moon. 

In much the same way there is ‘BUIDL’ which is a warping of the word ‘build’.

What is BUIDL in crypto speak?

The crypto universe attracts a whole host of character types, those that are in it to make a quick buck, those that join the crypto bandwagon because everyone else seems to be and the purists.

These purists for want of a better word are in it beyond solely personal gain and believe in a much bigger idea. 

They see crypto changing the world, challenging the status quo and hopefully bringing about greater equality in the world. 

This group and perhaps also the developers want the crypto ecosystem to grow, to infiltrate all aspects of society one day, they are builders or ‘buidlers’ in crypto terms. 

These buidlers encourage people from all walks of life, techies and non-techies alike to contribute to the growth of crypto as a whole. 

This could mean simply using crypto-based services based on smart contracts, writing about crypto as we are, using crypto wallets, playing blockchain-based games and so forth.

The importance of buidling and not just hodling

If we look at our societies the majority of us exist within the system, contribute taxes and perhaps support some social causes dear to us but for the most part, we are not really involved in what happens in our local neighbourhoods.

We are not building, we are existing, using and consuming what is available to us. 

However, for any system or society to thrive and grow there needs to be a group of people that have a broader vision. 

One such proponent and user of the buidl term is Ethereum co-founder Vitalik Buterin who has used the term when referring to the ongoing development of Ethereum.

Let’s use the example of the internet to illustrate the importance of buidling

One of the biggest technological revolutions of modern times and in many ways the precursor to the crypto world now was the arrival of the internet and before that the beginnings of the personal computer revolution. 

They were revolutionary, disruptive and very geeky. 

Just as with crypto. In the early days of personal computing and the internet, it was the techies who were experimenting with the fledgling technology as it was back then. Think of the two Steves in their garage building the Apple 1 or Jeff Bezos turning to selling books on the internet.

If personal computers and internet technology had only stayed within these niche circles they probably would not have gotten to where they are now. 

Nowadays not only techies use personal computers and the internet! 

People from all ages and walks of life use the internet and personal computers without really needing to understand how they work. 

To get to where we are now, people outside of the tech community had to start using early personal computers hence creating demand for manufacturers to make and sell computers. 

Early internet companies created e-commerce websites (Web2) selling all manner of things and people started using them, think of tiny little Amazon.com when it started off selling books online

We could think of those early Amazon customers buying books as buidlers. 

In much the same way, crypto is a little like the early days of the internet and as more and more people use crypto services they are buidling. 

Conclusion

As it stands today anyone who buys crypto or uses a crypto-based service is in some ways a buidler as they are aiding adoption and helping the crypto ecosystem to grow. 

We are buidlers as we are writing about crypto to help people understand what it is. 

The level of buidling, of course, varies depending on the contribution but in the end, it all counts. 

It’s not inconceivable to imagine crypto in another ten or twenty years as an everyday utility as the internet is today, especially with the growth of DeFi. 

So, let’s all get buidling and play our parts in the crypto revolution taking place under our noses right now!

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crypto rug pull

Rug Pull Explained

A rug pull is when a crypto project creates a huge amount of hype leading to lots of people buying in. Once a sufficient level of liquidity has been reached, the people behind the project pull the rug and abandon the project leaving behind worthless tokens.

The pump and dump in share trading, the predecessor to the crypto rug pull

Let us begin by looking at the pump-and-dump scheme in share trading.

If you have ever watched the movies Boiler Room or Martin Scorsese’s The Wolf of Wall Street you will no doubt have come across the infamous pump and dump scheme usually pertaining to penny shares in unknown companies. 

In The Wolf of Wall Street, Jordan Belfort played by Leonardo DiCaprio and his crew of merry men and women were selling penny shares to unsuspecting investors by hyping the opportunity “the pump”, using FOMO (Fear Of Missing Out for the uninitiated) and high-pressure sales techniques on shall we say “not so sophisticated” private investors. 

Once a sufficient amount of penny shares have been sold the people behind the scheme sell their usually significant holding of shares “the dump” and cash in before the price inevitably plummets. 

Usually, the whole venture collapses thereafter, the remaining shares are worthless and the unsuspecting investors are well and truly burnt. 

Now, when it comes to share trading, pump-and-dump schemes are highly illegal in the US as with most countries, organisations like the SEC regulate the market and the penalties can be pretty harsh. 

Jordan Belfort, the Wolf of Wall Street himself ended up in jail and with a massive multi-million dollar fine.

Currently, in the crypto world, there is no SEC, no proper regulation and no centrally managed organisation in place to protect unsuspecting investors. 

To put it mildly. It’s a wild west scenario!

The crypto rug pull

The crypto rug pull works pretty similarly to that of the pump and dump in share trading except, as mentioned above, crypto trading is largely unregulated and the investment is in tokens and coins rather than shares. 

This unregulated market naturally creates an enticing and attractive environment for criminals and scammers to capitalise and boy have they!

Rug pulls tend to occur in the DeFi space and especially on decentralised exchanges (DEXs) such as Uniswap or Sushiswap. 

The scammers can very easily create a token for free on a DEX and pair it with a leading cryptocurrency such as Ethereum. 

Once investors have swapped their ETH for the new token or coin, the scammers would remove the liquidity from the DEX pool. 

This results in the price of the coin going to zero, leaving investors with virtually worthless coins.

Imagine the pump and dump in share trading and the crypto rug pull like two parallel highways. 

The “shares” highway has speed limits, traffic cops, cameras, fines, law-abiding drivers and maybe even jail time for those significantly breaking the law. 

Now comes the crypto highway, there are no speed limits, no rules, cameras or traffic cops. 

Anyone can join the highway and drive their car as fast as they like without worrying about traffic tickets, other drivers, traffic police or ending up in jail. 

These are clearly two very different environments! 

It’s fair to assume that this situation will not last forever however, for the time being, it is very much the case. 

Rug pulls could technically be deemed to be illegal however the grey areas are still very murky. 

A rug pull could be considered a fraud, but then if the founders of the token sell, they are not technically doing anything illegal. 

If they abandon a project it can be difficult to prove it was an intentional rug pull. 

For now, it’s very easy to become a victim of a crypto rug pull with little to no recourse except to chalk it up as experience and hopefully make enough elsewhere to still be up overall.

How does the crypto rug pull work?

The crypto rug pull is similar to the pump and dump in that the scammers launch a coin or token on a decentralised exchange (DEX) and then reward influencers in return for generating hype on social media, discord, Telegram etc. 

Investors buy these coins or tokens in exchange for valuable crypto like Bitcoin or Ethereum. 

As the hype builds the price starts to go upwards, as the price skyrockets, FOMO goes into overdrive and more people pile in causing an even larger price rise, then the rocket’s engines cut out, it pauses for a moment, faces the earth and comes crashing down. 

The point at which the rocket’s engine cuts out is the point at which the proverbial rug is pulled from below the investors’ feet, the scammers drain the liquidity from the pool, abandon the project and leave behind worthless tokens. That is in essence how the crypto rug pull works.

A real-world way to visualise a crypto rug pull

If the crypto rug pull sounds too technical, another way to visualise it could be as follows. 

Imagine a bunch of scammers creating a company claiming to be able to sell the latest iPhone model at unbelievable prices. 

Investors pool together to finance the purchase of the iPhones in Euros or Dollars and a large number of iPhones are expected to be sitting in a warehouse somewhere ready to be sold and shipped out. 

In return for helping to finance the purchase of the iPhones the scammers issue the investors with shares in the company. The iPhones never materialise in the end, the scammers make some lame excuses and abandon the venture, but not before draining the company bank account. 

Now, these investors are left with what are worthless shares, no iPhones and their money is long gone.

The rapid growth in DeFi has led to a rise in crypto rug pulls

At the end of 2020, the US dollar value of DeFi was around $19.8 billion, which roughly represented 23% of Ethereum´s total market cap. This was already a more than 1000% increase from $1.7 billion at the beginning of 2020. Since then, the US dollar value of DeFi grew to a staggering 130 billion US dollars by May 2021 and peaked at $220 billion in 2022 before dropping down to around $75 billion in 2023. This immense growth and influx of capital has also attracted many hackers and scammers and resulted in a rise of exit scams and crypto rug pulls.

A few crypto rug pull examples include Compounder finance where around $10.8 million in investor funds were stolen. 

There was a bigger one, Meerkat Finance that led to over $31 million being scammed and one of the biggest was Thodex, a Turkish cryptocurrency exchange with around 400,000 users that was accused of pulling an exit scam. The CEO allegedly ran off with an eye-watering $2 billion. Ouch!

How to spot and avoid the crypto rug pull

Okay, so you really don’t want to fall victim to a crypto rug pull. How do you avoid it? 

Well, firstly, it’s pretty difficult to completely avoid as at the early stages it is not so easy to distinguish between a legit project and one that will turn out to be a rug pull. 

There are however some age-old truths that apply just as well to crypto. 

A classic is “if it sounds too good to be true, it probably is”. Take a good look, do some homework and try not to fall prey to FOMO or hype. 

Sure, there is a way higher level of risk with new tokens but also potentially huge rewards. Below are a few tips to help you minimise the risk.

Check out the team – who are the people behind the project? Are they credible, what else have they done, check out their social media, employment info and so on, there´s plenty of information out there on the internet if you are prepared to look hard enough.

Check out their whitepaper – it’s worth taking the time to study the whitepaper. Is it well-written and credible? If not, there could very well be a rug pull lurking in the future.

Excessive hype – this is a tricky one as marketing is needed to promote a project and can very well be legit. However, if it feels more like hype than legitimate marketing it´s perhaps worth exercising some caution

Not many wallet holders and only listed on DEX platforms – you can use a block explorer tool like Etherscan to verify the number of token holders. Take a look to see if the token is listed and traded on other popular exchanges. Finally, a search on Coingecko can provide more information about the coin.

Unrealistic return projections – as mentioned earlier, if it sounds too good to be true, it probably is. It is very easy to get swept up in the euphoria and the lust for huge profits. Exercise some caution, it could very well save you from a rug pull.

Conclusion

The world of crypto really is still like the wild west or a gold rush. Huge amounts of money can be made or lost in a very short space of time. 

As crypto grows, especially DeFi, the temptation for scammers and hackers will continue to grow. 

Perhaps if regulators step in things may change, however, regulation and crypto are not really very good bedfellows. 

For now, at least, it is well worth exercising some caution, tread carefully and do some research before piling in. 

In the end, there are no guarantees and the risk of a rug pull is ever-present. Now that you know what a crypto rug pull is, you can hopefully avoid becoming its next victim!

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crypto coin burn

Coin Burn Explained

Crypto coin burn is when crypto coins or tokens are permanently and intentionally removed from circulation in order to help elevate the price by decreasing supply.

 

The crypto market is driven largely by supply and demand economics

Unlike say the money supply which is backed by the government or a commodity such as oil or gold which has an inherent value, there is no such inherent value in crypto. 

If Bitcoin were to collapse, there is no liquidation process where assets can be sold off in order to compensate shareholders and suppliers. 

As demand and supply are the primary levers behind the price, more coins or tokens can be added to the supply which can bring prices down, or coins or tokens are permanently destroyed “burned” in order to drive the price up. 

What is a crypto coin burn?

A crypto coin burn is the intentional permanent destruction of a crypto coin or token by the development team behind the crypto. 

The coin burn removes the desired amount of crypto tokens or coins from circulation. 

It is as permanent as taking a big wad of Euro notes, wildly spraying them with gasoline and setting them on fire. 

Once those notes are burnt, they are totally unusable and out of circulation. 

Well, the same happens with a coin burn, without the gasoline and fire of course!

What is the purpose of a crypto coin burn?

There are a couple of primary reasons why coin burns take place. 

One of them is to help maintain/stabilise the price of a stablecoin. 

Stablecoins are generally pegged to a fiat currency like the US Dollar or to a valuable commodity such as gold or they maintain their price using an algorithm. 

If the price of the coin or token were to fall beyond a certain level a coin burn would take place which would lead to the price going up to the desired price point, for example, to match the price of the US Dollar due to the decreased supply. 

Naturally, the reverse happens should the price be too high, more coins or tokens would be added to the supply. 

A further reason for coin burns is to help push the price upwards by removing coins or tokens from the available circulation. 

The decrease in supply makes each coin more valuable and therefore more attractive to investors. 

Corporations employ a similar technique known as a share buyback, where they are reducing the supply of available shares in the market in order to drive the share price up. 

The key difference is that the shares are not being destroyed, but rather reabsorbed by the corporation. 

The end goal is very much the same though. 

To reduce the supply in the open market and drive the share price up. 

Another example of a similar dynamic is the supply of oil into the market. If the price of a barrel of crude oil drops below a certain level, the oil-producing nations will often restrict supply in order to drive the price back up in order to maximise their profits.

How does crypto coin burn work?

A crypto coin burn is a totally transparent process and anyone can verify the coin burn on the blockchain. 

As dramatic as it may sound, there is no fire or actual burning involved, it’s all happening in the digital realm. 

A crypto coin burn occurs when a predetermined amount of coins or tokens are sent to a special address also known as an “eater address”. 

Nobody has an access key to this address, not even the developers and once the coins or tokens have been transferred there, there’s literally no way of getting them back. 

Think of it like a safety deposit box where you can push valuables in, but you have no way of opening the box to take anything out. 

The valuables remain there. Now, in the case of the safety deposit box, it’s still somehow possible, for example by opening the box by force, no such possibility exists in the crypto world. 

The coins or tokens are technically still accounted for but not available for use. 

It’s worth remembering that coin burn is intentional, it is different to situations where coins or tokens are accidentally sent to the wrong address or a person loses access to their wallet after they have lost their private key and those coins or tokens are no longer retrievable. 

The crypto world is brutally clear and very unforgiving when it comes to lost coins, burned or otherwise.

A couple of high profile coin burn examples

Ethereum, the second-largest crypto after bitcoin undertook a major coin burn event, burning through an eye-watering $144m ETH in 2021 following major network upgrades. 

ETH was being burned at a rate of 3.15 tokens or around $10,000 per minute. Another different coin burn event was by the founder of Ethereum as it happens, Vitalik Buterin. 

In this case, it was a Dogecoin, Shiba Inu. Vitalik burned a staggering 410 trillion SHIB, 90% of what was in his wallet, this drove the price up 40%, as the coins Vitalik burned represented about 40% of the total SHIB supply. 

In this case, his motives were different, but, the end result was as expected, the removal of a significant number of coins from circulation, made the remaining coins more valuable, well, for some time at least.

Conclusion

Demand and supply dynamics drive the crypto market, pure and simple. 

As non-stablecoin crypto typically does not have an inherent value and is not generally backed by anything or anyone, there are not many levers that can be intentionally pulled to somehow control the price. 

Coin burning is one useful lever available to all crypto coin developers and also communities. 

By reducing supply via a coin burn event the price can be artificially driven up thus making existing coin and token holders happier and making the coin or token more attractive to new investors.

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Crypto layer-2

Crypto Layer-2 Explained

Layer-2 is a scaling solution to enable faster and lower-cost transactions on a blockchain network like Bitcoin or Ethereum.

As crypto has exploded in popularity it has inevitably stretched the capabilities and limitations of the major blockchain crypto networks like Bitcoin and Ethereum.

You could imagine the early days of crypto like a shiny new three-lane highway, freshly tarmacked for a smooth ride and almost no traffic due to the relatively small number of cars. 

Fast forward to today and that same highway is bursting at the seams just as our real highways are. 

It’s not easy or sometimes even possible to add a new lane to ease the traffic. Crypto networks like Bitcoin and Ethereum face a similar dilemma.

The limitations of layer-1 when it comes to transaction speed

The core blockchain network is what is known as Layer-1. 

In the case of crypto, one major problem with layer-1 is the relatively slow speed at which transactions can be confirmed. 

Take the case of the credit card company Visa, it is capable of processing up to 20,000 transactions per second (TPS).

Bitcoin on the other hand is capable of 3 to 7 transactions per second on the main blockchain. 

This is a gigantic difference and poses serious scalability issues. 

The reasons why are too complex to get into here but in essence, Visa uses a centralised system whereas Bitcoin uses a completely decentralised system where every single transaction needs to be verified by every node on the blockchain. 

This produces a highly secure, cost-effective and super-resilient network but this security and robustness comes at the cost of lower transaction speeds. 

Layer-2 is one solution to the problem of scaling

As a result technologists in the crypto world have been exploring ways to ease this congestion and layer 2 is one such solution.

To illustrate what layer-2 is we can use a different analogy this time. That of banking. 

Imagine a major bank like HSBC or Barclays. It has a centralised technology or systems that store all the balances and transactions for thousands or maybe even millions of customers. 

Every time money is deposited, withdrawn or transferred by an account holder the information is updated on the central network and most often in real-time. So far so good. 

Now imagine we didn’t have online banking or ATMs and like the old days of banking, every single customer would have to physically visit a branch office and conduct the desired transaction no matter how small. Imagine the queues! 

Well, this is what layer-1 kind of looks like. 

As you can imagine, even with lots of branches it would take a lot of time to get things done. 

Banking solved much of this problem by going online and by offering ATMs. 

This has resulted in a huge amount of daily transactions being removed from the workload of branch offices. We could think of ATMs and online banking as layer-2 in crypto.

Now that we have an idea of what layer-1 and layer-2 are we can go a little deeper into what they are in crypto terms

Blockchain networks like Bitcoin and currently Ethereum, (although this will change), use what is known as a Proof of Work (PoW) consensus mechanism. 

In simple terms, every time a transaction or “block” is recorded on the blockchain a miner has to solve a highly complex computational puzzle first by beating other miners and winning the opportunity to record the new block and in return earn some coins and corresponding transaction fees. 

This transaction has to be verified by the entire blockchain network and then it is set in concrete so to speak. 

This process takes time and energy, literally. If this proof of work consensus mechanism didn’t exist, say in the case of Visa, a transaction could be recorded instantly and naturally 20,000 transactions per second are possible. 

In the case of Bitcoin, it is a physical limitation due to how the blockchain was originally conceived and developed. 

Layer-2 is designed to divert transactions from the layer-1 network onto a faster network

What layer-2 does in very simple terms is “divert” a transaction away from the main layer-1 network, process it on a faster separate layer, “layer 2” and then when the transaction has been completed punch it back into the main layer 1 and set it in concrete so to speak. 

This results in a reduction in small transactions occurring on the main layer 1 of the blockchain but still recording the final transaction with the same level of surety. 

In addition to reducing congestion layer-2 also helps by offering lower transaction fees which are essential for very small transactions or micro-transactions where high fees simply wouldn’t work.

We could go back to the highway analogy again to illustrate layer-2 as well. 

Imagine the main highway as layer-1, the primary blockchain of say Bitcoin or Ethereum. 

Layer-2 could be an exit onto a separate super wide and fast stretch of road that leaves the main highway and then rejoins again several junctions later. 

Now if we imagine a lot of these separate stretches of road in existence that are diverting traffic away we could expect a reduction in traffic on the main layer-1 highway. 

Of course, it’s not as simple as that but hopefully, the analogy makes it easier to understand the issue and how layer 2 can ease congestion.

The Lightning Network is an example of a layer 2 crypto scaling solution for Bitcoin

One example of a layer-2 scaling solution is the Lightning Network on the Bitcoin blockchain. 

The Lightning Network simultaneously takes transaction loads from the Bitcoin layer-1 and reports to it as well. 

This results in an increase in processing speed on the Bitcoin blockchain. In addition to this, the Lighting Network brings smart contract capabilities to the Layer-1 Bitcoin blockchain. 

This is pretty major as the layer-1 Bitcoin blockchain, unlike Ethereum, does not inherently support smart contracts. 

Smart contracts, in very simple terms, are automated contracts that allow for more complex possibilities on a blockchain beyond the storing and transferring of cryptocurrencies. 

Conclusion

As with almost all new technologies that experience mass adoption, like banking or cars, there is inevitably going to be a scaling problem. 

Crypto is experiencing this scaling problem right now. In order for crypto to truly go mainstream robust solutions will be needed. 

Layer-2 is one such solution trying to help ease congestion and keep traffic moving!

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