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crypto hash power

Hash Power Explained

The hash power or hash rate is the combined computing power of a cryptocurrency network or the computational power of a mining rig on a crypto network that is solving cryptocurrency Proof of Work hashing algorithms.

Hash functions are a key part of, not only cryptocurrency protocols but also security systems within information technology as a whole. 

The “crypto” in cryptocurrency actually comes from the cryptography used in cryptocurrencies to make them secure. 

It’s how Bitcoin came about in the first place. 

Cryptography has been in use for many years outside of cryptocurrencies for highly secure authentication and encryption protocols.

In crypto, SHA256 is used to generate secure hash algorithms. Secure Hash Algorithm 256 (SHA256) was developed by the US government’s National Security Agency (NSA) to convert text of any length into a fixed-size string of 256 bits or 32 bytes. 

If the NSA developed and uses it, it ought to be pretty secure!

What is hash power?

Using SHA256, the sentence What is hash power? would look like:

DE7FC392151F1CB99BD751A959A3C6AB630A8EC7D51672654743F3786D089601

Now imagine, your password being the above, pretty hard to crack and way harder to guess than say the name of your favourite pet, 123456 or even password. 

Yes, a surprisingly large amount of people actually use 123456 or password as their password!

To crack the hash code above on the other hand would take a lot of time and computing power which brings us nicely to how crypto mining works and how hash power fits into the picture

Crypto mining and hash power

In crypto, bitcoin and other cryptocurrencies often use a process called proof of work (PoW) in order to earn crypto in exchange for solving complex computational problems. 

Solving these complex computational problems uses a lot of computing power. 

Miners try to solve these problems in exchange for a reward of a certain amount of coins such as bitcoin. 

Each hash that is created is totally random and generally impossible to predict, it can easily take millions of guesses (hashes) before the correct hash is guessed and the lucky miner wins the right to fill the next block and add it to the blockchain. 

At this point, a block reward of freshly minted coins is awarded to the successful miner as well as any corresponding fee payments attached to the transactions that are stored in that particular block.

How is the hash rate or hash power measured?

The amount of computation power used by a crypto network or a mining rig is called hash rate or hash power. The hash rate/hash power is the computational power used per second when mining. 

In other words, it is the speed of mining and is measured in units of hash/second. To be precise, it’s exactly how many calculations can be performed per second.

Computers or mining rigs with a high hash rate or high hash power are highly efficient and are able to process a lot of data in a single second. 

If we were to look at Bitcoin as an example, the hash rate/hash power would relate to the number of instances hash values are calculated for proof of work every second.

Hash power units are usually measured as follows:

k – kilo or 1,000 hash calculations per second

M – mega or 1 million hash calculations per second

G – giga or 1 billion hash calculations per second

T – terra or 1 trillion hash calculations per second

The hash power of an individual device is a key metric for measuring the potential profitability of a mining rig as it can help to determine the possibility of finding a good hash that is able to generate a mining reward. 

More hashes successfully found equals more rewards. As mining gets ever more competitive, more powerful rigs are needed in order to win the right to the next block.

Using auto manufacturing as a way to understand hash power

An easy way to make sense of hash power or hash rate could be to use auto manufacturing as an example. 

The number of cars produced by a factory per day could be like the hash calculation per second, instead, here it´s the number of finished cars per day. 

A large-scale, highly automated and highly efficient car manufacturing plant could churn out a lot of cars per day, using Volkswagen as an example that would be over 26,000 cars per day. 

On the contrary, a highly specialised and small car manufacturer like Morgan could maybe produce only 3 cars per day. 

Using these examples Volkswagen would have a way bigger hash power than Morgan due to its investment in sophisticated robotics and efficient production lines and will produce way bigger results/output. 

Not only would Volkswagen produce more output it will no doubt be way more efficient in terms of the resources required to build a single car thus being more profitable per unit. 

In crypto mining, a large and highly efficient rig with a large hash power would be capable of a way larger number of hash calculations per second compared to a very small mining rig.

Hash power and security

Continuing with the auto manufacturing example, the total hash power of a cryptocurrency like Bitcoin also relates to the security of a network, the higher the hash power, the greater the difficulty for hackers to infiltrate and manipulate the system. 

In much the same way, it’s way more difficult for an outsider to bring down a huge corporation like Volkswagen due to its huge resources, but much much easier to bring down a smaller player. 

For an attacker to hack, say Bitcoin, let’s call it the Volkswagen of crypto, they would need to overcome the total hash power of the entire network, this is almost impossible, however, a very small network with a low hash power would potentially be more vulnerable. 

In crypto as well, bigger is certainly better!

Conclusion

In summary, the hash power or hash rate is very important in crypto, both in terms of efficiency and potential profitability and also in terms of security for the crypto network as a whole. 

As competition increases, mining rigs need to be ever more powerful in order to be able to win the hashes that will, in turn, reward them with valuable coins and the security of the entire network needs to be rock solid in order to attract more users and increase transactions.

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crypto coins vs tokens

Crypto Coins vs Tokens Explained

It would be difficult not to have noticed just how much the world of crypto has exploded over the last few years, note here that I am using the word crypto and not specifically cryptocurrency. 

Crypto is nowadays no longer just about coins, but about tokens too. In this article we are going to get into crypto coins vs tokens and what this actually means.

Back in the day, a digital currency was the primary use case when the Bitcoin token arrived on the scene. Since then the crypto world has changed a lot! 

Where cryptocurrency was the main attraction, it’s now perhaps more of a supporting act without which the crypto scene wouldn’t be able to function. 

 

What are crypto coins?

Way back in 2009 when Bitcoin first arrived on the scene, we were looking at a revolutionary new form of digital currency built on an innovative technology called blockchain. 

The sole purpose of a cryptocurrency was to provide a decentralised means of digital value storage and transfer which was fit for the needs of the internet age, not controlled by any government or private organisation and not geographically limited. A digital currency for the entire world!

 

The basics of how blockchain technology works

A blockchain is a decentralised ledger running across a peer-to-peer network of computers. No single computer, organisation or person controls it. 

When done well, it’s near impossible to hack or manipulate and, if public, is totally transparent. 

A blockchain operates as a digital ledger validating and recording each transaction across the network according to strict protocols. 

Each blockchain has its own currency which effectively rewards the participant computers that make up the blockchain with coins such as Bitcoins or Ether in the case of Ethereum. 

Another key aspect of a blockchain is that the coins cannot be duplicated. 

All of these factors provided by blockchain technology have created a suitable environment in which digital crypto coins can be created and used as secure means of payment.

 

What are blockchain tokens?

Now that we have some understanding of what blockchain technology is, we can see that this non-centralised, robust, secure network of computers and strict protocols could be used to do a whole host of other things beyond simply being a currency and payment system. 

Well, some people realised this and the token was born!

 

What is a token? 

Tokens often get mistaken for digital coins but are in fact created on existing blockchains and are not a blockchain’s currency in their own right. 

The most popular blockchain platform for token developers is Ethereum due mainly to being a well-established blockchain and having a well-established cryptocurrency called Ether, which is the second most popular crypto coin after Bitcoin.

Tokens built on Ethereum follow several standards, but the most widely known and used is “ERC-20”. Those are “fungible” tokens. 

When built using the ERC-20 standard, tokens are known as ERC20-tokens. One such example is Uniswap’s UNI.

There are other blockchains that allow for the creation of tokens, such as Binance Smart Chain, Stratis, Waves, Lisk and NEO. 

NEO for example uses tokens known as NEP-5 tokens, Binance’s are BEP-20.

There are also “non-fungible tokens” (NFT) created atop blockchains. Those on Ethereum, for example, are known as ERC721.

In summary: a coin is a unit of value of and native to a blockchain network, and a token is a unit of value for something built atop a blockchain network.

 

Coins, tokens and blockchain simplified

A simplistic way to imagine how crypto coins, tokens and blockchains work together could be as follows: Imagine that blockchain is like the operating system running on your Android or iOS smartphone, something very powerful yet quite useless without any applications. An app like a video game – a piece of software running on the operating system – could be powered by a token. 

To play the game, you would pay for the use of your phone’s operating system with the OS’s native currency – the coin – and for in-game items using the game’s native currency, the token. 

The game can’t run on anything else than your phone, and the game’s currency can’t be used outside of the game, but any game can run on your phone and any game can create its own currency.

That’s how you have many decentralised exchanges on Ethereum (Uniswap, dY/dX, SushiSwap, …) each with their own tokens, but all requiring that you pay transaction fees in ETH for the privilege of using the underlying blockchain.

 

What are Stablecoins?

Stablecoins are called “coins” but are, in fact, an interesting application of the “token” use case.

Stablecoins are literally designed to be “stable” “coins”, and the name came in opposition to most crypto coins and tokens which experience very high volatility.

Stablecoins try to “peg” their price to that of something more stable and predictable. It can be a fiat currency like the US Dollar or EURO or a commodity such as gold or silver where the price does not fluctuate as wildly as is generally the case with crypto coins. 

Stablecoins on Ethereum usually follow the ERC-20 standard. 

Examples include USDC, Tether, Dai. But they are not all created equal, so let’s take a look at the types of stablecoins you can find.

 

A few types of stablecoins 

Fiat-backed stablecoins (USDC)

One of the ways stablecoins can manage price fluctuations is by tying the stablecoin to a fiat currency such as the US Dollar or the EURO. A currency like the US Dollar or EURO is way more stable when compared directly to crypto. 

Usually, the entity behind the stablecoin will have a reserve in place where it will secure or guarantee the value of each stablecoin on a par basis to a fiat currency. 

That way, if we take the example of the dollar,  1 coin can always be redeemed for 1 US Dollar. 

Just as in the old days of the gold standard, each coin is backed by real money sitting in a real bank somewhere. 

The price of the coin fluctuates as much as the currency does, in this case exactly as the US dollar fluctuates.

In this way, a digital stablecoin and a real-world asset such as the US dollar are neatly tied together.

 

Crypto-backed stablecoins (DAI)

DAI is a crypto-backed stablecoin on the Ethereum blockchain using the MakerDAO protocol. 

What sets DAI apart is that MakerDAO wants the DAI to be decentralised, i.e. there is no central authority that has control of the system. 

Instead, smart contracts running on Ethereum aim to maintain the “peg”. 

This effectively means that DAI does not hold collateral in a bank on a 1:1 basis like the fiat-backed stablecoin but rather holds decentralised Ethereum reserves in a smart contract that are not controlled by any single entity. 

Naturally Ethereum reserves can of course be converted to fiat money at any point thus still giving the stablecoin real value in the non-digital world.

Since Ethereum’s price can go up or down, DAI is “over-collateralized”; meaning that there the reserve of ETH is worth more, in dollar terms, than the value, in dollar terms, of all DAI in circulation. 

That way, if the price goes down, DAI can still be redeemed for 1 USD’s worth of ETH.

 

Algorithmic stablecoins (TERRA, CELO)

The algorithmic stablecoin takes a completely different approach and isn’t backed by “external” collateral waiting on the sidelines ready to step in if things go south. It uses its own native coins to make its tokens stable. 

Terra has a USD stablecoin (UST, and it actually has a lot of other stablecoins pegged to other stuff too) which is collateralized by LUNA, the native token of the Terra blockchain. 

The Terra protocol acts as a market maker for the stablecoin. If the stablecoin system runs out of assets, it restocks by inflating the native LUNA supply and it goes on the market to buy and sell the stablecoin to maintain the peg.

Some, like Terra and Celo, have done fairly well so far. 

Others, like FEI, haven’t fared too well. It’s admittedly harder to create that kind of market than to just hold the real asset which you will exchange on request against the “tokenized” proof.

 

Conclusion

In the ever-exciting and constantly changing world of crypto nothing ever stays still. 

What started out back in 2009 as a new and somewhat crazy idea of creating a digital currency that nobody owns or controls has morphed into something truly massive and continues to grow at an unprecedented rate. 

Crypto no longer just refers to a digital currency but to a plethora of digital assets in the form of coins and tokens. 

This constant innovation keeps the engine running and presents plenty of opportunities for investors. 

The blockchain technology that enables both coins and tokens really is something of an outstanding innovation to be marvelled at. 

From where we stand now, we are certainly nowhere near the end of the road but rather still very much at the beginning and opportunities abound. 

It will be exciting to see just where we go from here in the exciting and ever-changing world of crypto coins and tokens!

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CEX – Centralised Exchanges Explained

A CEX is a centralised exchange run by a 3rd party organisation that facilitates the buying, holding, exchanging and trading of crypto. 

A CEX is designed to be simple to use and in most cases makes the exchange to and from fiat currencies pretty easy and straightforward.

 

Okay, so you´re thinking of getting into crypto, where do you begin? 

The easiest and most convenient, especially for a crypto newbie would be via a centralised exchange also known as a CEX. 

Here you can buy your choice of crypto using a regular fiat currency like the EURO or US dollars.

Just as with a bank or a brokerage house, you have an account and in this account sits your crypto. 

The account allows you to trade that crypto with other crypto and whenever you like exchange that crypto back into a regular fiat currency.

 

The origins of the centralised exchange (CEX)

If you think the current world of crypto is the wild west, think again! In relative terms, we are nowhere near the kind of wild west scenario that was around in the very early days of Bitcoin. 

In order to understand the centralised exchange (CEX), we need to first go back to the genesis of crypto, Bitcoin.

When Bitcoin was virtually worthless and could be mined on a personal computer the only ways of getting it would be either via mining or by buying it from other Bitcoin holders. 

This initial buying and selling was somewhat risky and far from straightforward. It would usually require communicating via a forum like Bitcointalk which was set up by Satoshi Nakamoto, the mysterious inventor of Bitcoin. 

On that forum, early bitcoin enthusiasts could discuss, buy and sell bitcoin but there was no proper exchange in place. 

Of course, in those early days the stakes were low as bitcoin was virtually worthless, for example in 2010, Bitcoin peaked at $0.39, I´ll let that number sink in for a moment!

As bitcoin grew in popularity the need for some kind of centralised exchange was recognised and the seed for the first exchange was planted paving the way for the centralised exchanges and the crypto world that we know today. 

Interest in Bitcoin continued to grow and new ways of getting it started to appear. A core bitcoin developer, Gavin Andreson created a Bitcoin “faucet” ( a tap in British English).

It was a website that would give anyone with a Bitcoin address five bitcoins for free. It was around this time that the first bitcoin exchanges emerged. 

Bitcointalk launched Bitcoin Market in 2010, it offered a floating exchange rate for bitcoin and buyers could purchase bitcoin by sending another user US Dollars via Paypal during which time Bitcoin Market would hold the sellers’ Bitcoin in Escrow until the seller received their money. 

 

This got the ball rolling…

 

Things began to heat up and before long crypto highway robbers made their first appearance!

As crypto increased rapidly in value, the criminal elements began to take an interest, after all this was indeed a wild west environment with no regulation, no armed security guards or secure infrastructure in place, easy pickings!

A notable example of one of the first major crypto heists was Mt.Gox, an early centralised exchange created by Jed McCaleb in 2010 who would later go on to co-found both Ripple and Stellar. 

McCaleb sold Mt.Gox in 2011 and in that same year one of the first major crypto heists occurred on Mt.Gox where an account with a significant holding was compromised, allowing the hacker to sell the crypto causing the price of bitcoin to fall from $17 to $0 within a few minutes. 

The hacker also stole personal information forcing the exchange to temporarily go offline. However, by 2013, Mt.Gox was in full force handling 70% of all global bitcoin transactions.

Mt.Gox was the first of many crypto hacking victims, other major centralised exchanges to be hacked included Binance, Bithumb, Bitfinex, Poloniex and ShapeShift. 

The vulnerabilities of centralised exchanges to hacking attacks gave rise to the well-known and used mantra “not your keys, not your crypto”. 

What does that mean you ask? Well, very simply, unless you hold and secure your private keys yourself, your cryptocurrency is potentially vulnerable to criminal hacks. 

 

Let´s look at the centralised exchanges (CEX) of today

Some of the most popular centralised exchanges of today include Coinbase, Binance, Kraken, CEX.IO, Gemini and Bittrex. 

Compared to the early days of bitcoin where the trading volume was pretty tiny, these days we are talking massive numbers, in 2021, centralised exchanges recorded in excess of 2 trillion US Dollars in trading volume. 

That’s pretty amazing when we think that bitcoin and crypto only appeared on the scene in 2009!

 

The centralised exchange (CEX) as a physical marketplace

To look at the centralised exchange in a non-technical way we could imagine it like a physical marketplace owned and operated by a central 3rd party. 

People would store their goods in a large warehouse and the marketplace owners would facilitate trades between the owners of the goods in exchange for a fee. Pretty straightforward. 

If the warehouse was broken into by thieves they could make off with all the goods leaving the owners of the stock quite vulnerable. 

For small traders, perhaps it wouldn’t be too risky, but with large traders with a lot of stock, it could be a bit too risky. 

To reduce this risk these big traders could keep the majority of their stock in their own private warehouse and just add more stock to the central marketplace as and when needed. 

This would be a lot safer as not all their stock is at risk, however, the downside would be that they would not be able to immediately trade the goods that are sitting in their private warehouse. 

Well in crypto-centralised exchanges, something similar exists in the form of hot and cold wallets.

 

Custodial hot and cold wallets

With a centralised exchange (CEX), the crypto is held in what are known as custodial wallets, in simple terms this means that the centralised exchange is responsible for your wallets and the crypto you hold. 

As a customer, you do not hold a private key and therefore have no direct control over your crypto and its security. 

Think back to the “not your keys, not your crypto” scenario. Security of your assets is of course a major consideration and to make things a little less risky many centralised exchanges offer what are known as hot and cold wallets.

A hot wallet is directly connected to the internet, the “hot” and could potentially be vulnerable to outside attacks from hackers. 

Hot wallets however are fast as the crypto is immediately available for trading. On the flip side, a cold wallet is not directly connected to the internet, the “cold” and in the event of a hack, the attackers cannot get access to the cold wallets private keys which makes things a lot safer. 

There is a downside though, that is time and timing is pretty crucial in crypto trading due to the immense volatility. 

The crypto in a cold wallet is not immediately accessible for trades, the funds need to be first transferred to a hot wallet for trading. This could pose a disadvantage if the crypto is sitting in a cold wallet and you need to trade out really fast.

 

The centralised exchange (CEX) has a permanent bullseye on its back

As we have seen above, centralised exchanges are big business, over $2 trillion to be precise, this is naturally going to draw the gaze of both criminal organisations and governments as they are in many ways a perfect target. 

Centralised exchanges are a very attractive target for criminals for both the theft of crypto but also the theft of user data. Governments on the other hand, scrambling to find ways to maintain control over the money system and trying to bring about regulation would naturally make centralised exchanges their first stop. 

This is naturally quite disconcerting for the users of these exchanges, especially if they are holding large amounts of crypto.

 

What about alternatives? CEX vs DEX

Well, an alternative exists in the form of DEX, a decentralised exchange. 

Firstly, crypto is itself decentralised, but the buying, selling and trading of crypto is centralised when you use a CEX. 

A DEX, however, is decentralised, there is no central entity to hack and no central entity to seize by governments. 

Well, that fact has not been lost on the crypto community and decentralised exchanges are flourishing and not only that, challenging the established centralised exchanges pretty heavily.

In May 2021, the leading DEX, Uniswap processed over $76.9 billion in trading volume. Sushiswap did $23.4 billion and Ox Native did $12.8 billion. 

No small numbers. Overall centralised exchanges are still way ahead but the decentralised exchanges are growing fast. 

Aside from the vulnerability from criminals and governments, there is also the plain risk of the centralised exchange failing or the owners running off into the sunset with a huge chunk of your crypto. 

This centralised aspect and associated risk make the decentralised exchange appealing, after all, one of the appeals of crypto itself is the fact it is decentralised, why then have a central figure in the middle? 

Decentralised exchanges also tend to have lower fees. The downsides of decentralised exchanges can be a poor user experience.

Also, ironically there is a lack of any legal oversight or protection as transactions take place using smart contracts which are bits of code and quite importantly, decentralised exchanges trade crypto to crypto, there is usually no fiat on-ramp to make it easy to convert your Euros or Dollars into crypto. 

Lastly, there is the issue of liquidity, centralised exchanges are generally way more liquid and allow quick and easy trading in and out of different crypto. 

Decentralised exchanges on the other hand do not tend to be as liquid and this can be a definite disadvantage. 

The primary takeaway when thinking about centralised exchanges vs decentralised exchanges is that centralised exchanges have total control over your assets when trading whilst with decentralised exchanges the user has control over their assets and centralised exchanges tend to have greater liquidity, fiat currency on-off ramps and a better user experience.

 

Centralized Exchange (CEX): Pros & Cons

Below is a brief summary of the pros and cons of centralised exchanges (CEX)

 

First the pros

High Trading Volumes – This means liquidity in short. Centralised exchanges make it easy and possible to trade in and out of crypto assets fast which is a very good thing in the highly volatile world of crypto.

Fiat/Crypto and Crypto/Fiat Currency Conversions – Centralised exchanges tend to support fiat to crypto on and off ramps which means that you are able to buy say bitcoin with euros or US dollars.

Greater capabilities – Setting aside the huge array of crypto assets that CEXs support, they also offer features such as margin trading, crypto derivatives trading, exchange staking, margin lending and more.

Ease of Use – This is one of the greatest benefits of CEXs, ease of use. Nowadays crypto traders are not all techies, they are non-technical people too wanting to get in on the crypto craze. They need an app-like experience, similar to that of their online banking or Uber to get things done. CEXs are designed with this universal ease of use in mind.

 

Now the cons

Whilst overall centralised exchanges offer many advantages and ease of use, especially for those looking to buy and trade crypto using fiat currencies there are some disadvantages too 

A requirement for Know Your Customer (KYC) policies – for those that would like to trade anonymously a CEX is probably not the best choice as most if not all major centralised exchanges will require proof of ID before you are able to trade. For most people, it doesn’t pose a problem but for those wanting absolute privacy, it’s not the way to go.

You are not in complete control of your crypto – centralised exchanges (CEX) have custodial wallets, meaning that they hold control over your crypto, not you! If they disappear, your crypto disappears too.

Greater risks of hacks – as mentioned above, centralised exchanges are a prime target for criminals. There are centralised exchanges that have managed to avoid being hacked however, the risk is ever present and will continue to be well into the future. 

 

Conclusion

The above hopefully helps to explain why centralised exchanges exist and continue to thrive despite the inherent risks. 

Decentralised exchanges are nipping at their heels though and it’s not inconceivable to think that decentralised exchanges will soon catch up and eventually be able to offer the best of both worlds. 

For now, at least, centralised exchanges are big business and the easiest and most convenient way to get yourself onto the crypto superhighway!

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