Help me, I’m a blockchain newb!

I keep seing people buying cryptocurrencies without having the slightest clue of what these are, or what blockchain networks are, and what blockchain wallets do. This is a simple list of simple blockchain topics explained as simply as possible. If you are new to crypto, you should read carefully.

Blockchain is a database that uses hashing and cryptographic methods to assure immutability of blocks of data. It differs from other databases by being immutable, or at least very difficult to modify, but it is also extremely slow and inefficient. For this reason it is mainly only useful for ledgers where all parties need confidence that the information cannot be compromised (e.g., value transfers).

Blockchain network is a public blockchain database where everyone can read and write data using cryptographically signed transactions. Interacting with the network requires the ownership of a blockchain network address (public key) and a private key. Transactions can be used to do either simple operations, like subtracting and adding a number associated with an address (e.g., Bitcoin network), or much more complex operations like calling functions on a smart contracts (e.g., Ethereum network).

Coins or tokens are abstract representation of any given unit of account on the blockchain database. The term token is more often applied to units run by smart contracts (e.g., ERC-20 standard tokens). Coins and tokens cannot be owned directly, but can be controlled by a key that can be owned directly. They are stored as ledger data on a blockchain, and this data is only relevant while immutable on the blockchain. The keys to such coins and tokens can be owned and stored outside the blockchain (e.g., in a wallet, or simply written on paper).

Blockchain address (also called public key) is the blockchain database entry associated with the corresponding private key. All the ledger information of the balance, transaction history, or code, is stored in a blockchain address. Generally it is a string of alphanumerical characters (example: 0x441d7EB8A30AF4745DDAbA18c7476b393Dce9De6).

Private key (or just key) is a string of alphanumerical characters that is cryptographically complementary to the blockchain address. The private key is used to sign any transactions on the blockchain. For this reason, it is equivalent to the value stored on its associated address or ledger entry. Explained simply: the private key is equivalent to money, so NEVER EVER EXPOSE THE PRIVATE KEY TO ANYONE! This would be equivalent of giving away all the value held within.

Seed phrase is a sequence of 12 or 24 words that is used to generate a set of private keys using a special function available in most blockchain wallets. One seed phrase can cover a large number of addresses and each address has its own private key. NEVER EVER EXPOSE THE SEED PHRASE TO ANYONE! This would be equivalent of giving away all the value held within that entire set of private keys.

Smart contract is an executable code stored on the blockchain. Not all blockchain networks support smart contracts (the older networks like Bitcoin and similar do not). Contract functions can be called by signing them with a private key. A smart contract without an administrator key is essentially immutable program code.

Blockchain wallet is a software or device that acts as an intermediary between the private key and the blockchain network. A wallet creates a string of data that can be sent to the network as a cryptographically signed transaction. Contrary to the name and popular belief, blockchain wallets do not store any coins or tokens, but they do store the private keys used to access and change the public ledger associated with that keys. One can have multiple wallets with the same key, or a single wallet with multiple keys. ALWAYS HAVE A SAFELY STORED BACK UP OF THE SEED PHRASE and/or PRIVATE KEYS of a SOFTWARE WALLET!

Hardware wallets also exist and they are devices dedicated to securely storing private keys in a way that does not expose them to the network during the signing operation.

Paper wallet is a piece of paper on which the seed phrase or private keys are stored. Private keys are just strings of characters, so they can be stored on written form, or as a QR code. A paper wallet generally serves as a backup to restore a software wallet to full functionality. SAFELY STORE A PAPER WALLET TO PREVENT ITS DESTRUCTION OR THEFT.

Miners are network entities that take care of discovering new blocks, validating transactions and compiling them in the blockchain. They get rewarded by the right to mint themselves coins (by inflation) and with transaction fees.

Transaction fee is the cost of executing a transaction on the blockchain (to write data on a blockchain). The fees on the Ethereum network are determined by the gas cost multiplied by the number of hexadecimal characters to be added in the block.

Gas cost is determined by supply/demand mechanisms. Those transactions that offer a higher gas are given priority by the miners. The lower the gas, the longer time a transaction needs to be confirmed and included in a block.

Stuck transactions are transactions that for whatever reason don’t get approved. The most common reason is low gas or network congestion. Eventually these transactions get cancelled (expelled from the transaction pool), but until they are not, no other transaction can be signed with the same private key (no transaction with a higher nonce number can be processed). Wallets generally offer the option to either speed up the transactions, or to cancel it. When even this does not help, a transaction can be sent with the same nonce number (with nonce set manually) and with a higher gas (at least 10% higher) to override the stuck transaction.

CRYPTO SAFETY RULE NUMBER ONE:
KEEP YOUR KEYS SAFE!

Your seed phrase and keys is what controls your coins and tokens.

Never ever hand them over to anyone. Never fall for scammers and phishing attempts (like someone pretending they are a support service and wants your seed phrase – no support would ever do that!).

Keep them safe from hackers, malware and theft.

When your keys store significant value, make sure you do not store them in an insecure wallet, a device that can be compromised, or accesible to anyone. Preferably use a hardware wallet that allows signing transactions without exposing keys to any other device. Avoid mobile devices that can be lost or stolen. Secure your wallet and device with strong passwords, and preferably use dedicated devices with less commonly attacked operating systems (preferably Linux distributions), because of the risk from keylogger malware stealing your seed phrase or keys.

For more info on security practices, see hexsafe.win, or the videotutorials HexSafe channel.

By @Benzenoid

Disclaimer: None of the above is meant to be a financial advice. Never rely on a single source of information and do your own research before any investment. Don’t trust, verify!

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