Cryptocurrencies and Bitcoin Architecture
- boranbezgen
- Nov 12, 2024
- 22 min read
Introduction to Bitcoin Architecture
If we look at the dictionary definition, the exchange of stock exchange or capital market is an organized market where tradable securities , stocks , shares , commodities , foreign exchange , borrowing , futures contracts and option contracts are sold or purchased publicly. Stock exchanges have different types and names according to transactions or commodities bought and sold. There are many types, from buying and selling foreign currencies to exchanging stocks or "Futures", which are futures transactions in Turkish. However, in our article, we will examine the most important and recently popular Cryptocurrency Market, which drags many questions along with it.
The concept of cryptocurrency is not actually a new concept, those who had such a thought, the need and idea of creating a virtual currency have made attempts before, but the conditions of the period, the population or their luck were not good and they were born as dead projects. B-Money and Bit Gold can be given as examples of these projects. The creator of Bitcoin , which is currently the most popular cryptocurrency and is considered the father of cryptocurrencies , gave it this name. Unfortunately, it is not known who the creator of such a well-thought-out and successful project is. The author of Bitcoin, whose nickname is "Satoshi Nakamoto", used such software that we still know something like Bitcoin today, we keep it, we send it and although it is not very common in our country, we make our payments. The most important thing that prevents us from doing this is that BTC has a supply limit. Unfortunately, BTC is not something that can be printed unlimitedly like the US dollar, and perhaps the best part is that the balance between supply and demand is the biggest factor in the BTC price reaching this point. So how is BTC printed or issued, put into circulation?
ARCHITECTURAL
MINING
In order to understand how BTC is put into circulation, this term, which is Mining in English, can be considered to have been born with BTC. BTC consists of a structure called Blockchain . People called miners mine BTCs that they will integrate into the system by using their processor power, that is, by consuming electricity. That is why they are called miners. Miners receive a commission for each BTC they dig. So is this the only task of miners, of course not! While miners are digging BTC, they also audit the transactions made by other users in the system (payments, money transfers, verification of transfers between accounts, etc.). They process the data resulting from each audit into capsules called blocks. They also receive a commission while doing this. The data generated is processed into the block, but blocks hold a limited number of data. Each block can contain up to 1 MB of data. The first block that emerged was called Genesis Block . So what happens when the block is full? It is added to the chain by miners. As the blocks come together, they form a chain, and it is almost impossible to change the data processed here. In other words, if you sent BTC to someone, there is no way you can get it unless they send it back to you. In fact, if we look at what miners do, it is like doing the job of a bank. When you send money from person A to person B through the bank, the bank verifies it, performs this transaction, and charges you a certain amount of commission. You keep your money in your bank wallet, just like miners process the money in your wallet into the block. I told you this in street language, but there is a real architecture behind it, and this architecture tries to protect you from malicious people. Now let's examine the academic part:
BLOCK STRUCTURE
As we mentioned above, each block is 1 MB in size and as the blocks are filled, they are added one after the other to form a chain, but in order to explain how this chain cannot be broken and how changes cannot be made to the 50th ring while the 100th ring has been processed, we need to explain the block structure. Each block contains three main components:
BLOCK TITLE: Provides the identity and link of each block. It contains 5 critical pieces of information:
Hash:
Each block has an encrypted connection key called Hash. This connection key does not belong to this block but to the block before it. In fact, this is one of the most important features. Because if we assume that we want to change the 2nd block, we have to change the 3rd ring as well. Let's say we managed to change both, then we have to go to the 4th ring, then 5 and 6, and so on, until the block with "n" spaces. Because when you change a block, there is a Hash ID in the block after it, which contains the summary of that block. In other words, the most effective feature in not breaking the chain is the Hash summary created with cryptographic methods.
Timestamp:
Indicates the time the block was created.
Merkle Root:
This is a Hash structure that contains the summaries of transactions within the block. Changing one of the transactions changes all the Hash values, which ensures the security of the chain.
Difficulty Target:
Determines the difficulty level used in block mining.
Nonce:
Block miners change the Nonce value to find the correct Hash. This process is part of the Proof-of-Work (PoW) process in Bitcoin mining, which we will cover later .
TRANSACTIONS: The transaction data in a block represents all transfers of value that take place on Bitcoin's blockchain. Transactions are defined as Input and Output. Input references the output of a previous transaction, while Output indicates a new Bitcoin recipient.
HASH FUNCTIONS: Hash summaries that ensure the security of BTC use a Hash algorithm called SHA-256. Blocks authenticate with this function and create a summary. The summaries created as a result of the hash process constantly check the content of that block like a living being and detect even the slightest change. This ensures that the entire system remains secure without being changed.
PROOF OF WORK: BTC miners use a Proof of Work algorithm to solve blocks. This algorithm solves complex mathematical puzzles to confirm transactions. Proof of work ensures:
Security of the Chain:
With Proof of Work, changing blocks becomes almost impossible because making a change here requires changing the entire chain.
Chain Compatibility:
The network accepts the longest chain as the most correct chain and miners try to add to this chain. As can be understood from here, the chain branches at certain places and this is called "Fork". We will discuss the causes and types of forks later.
MERKLE TREES: This structure organizes the transactions within the block. The advantages that the structure adds to the system are as follows:
Hashing:
We mentioned above that the term Hash is a summary. Hashes are added to the tree and form its leaves. These summary Hashes are subjected to the Hash operation again and form the roots of the tree.
Data Integrity:
In the Merkle tree, which is obtained with its root and leaves, each information package is connected to each other and confirms each other. This ensures the accuracy and integrity of the data.
NETWORK STRUCTURE: When you work with a bank or trade on an exchange, you are faced with a centralized management and in extreme cases, you can lose your money, stocks, gold and many other commodities. One of the best aspects of BTC is that it has a decentralized network structure. What do we mean by this decentralization? Imagine that a miner can no longer perform transactions or does not want to do this job anymore, what will happen now? You want to send money. Who will approve your sending transaction? Who will fulfill the bank's duty? Of course another miner! Miners receive a commission for the transaction they make, the BTC they mine, so a miner leaving the system does not disrupt the integrity of the system because you are not connected to a person, a community does this job. The community does this job with nodes on the network. Each validator has copies of these node ledgers. So how does the network work:
Nodes:
The BTC network consists of thousands of nodes around the world. These nodes store and verify all transactions on the network.
Full Nodes:
It stores the entire chain and ensures the security of the network. It is here that it is checked to verify blocks and that the rules are not violated.
Miners:
When miners who perform transactions with the help of their computers catch the correct hash values, they receive the block reward and mine new bitcoins.
MINER REWARDS
As we explained above, miners verify transactions, verify blocks and receive BTC and commission in return for committing them to the chain. In 2024, a miner successfully solving a block means the miner will receive exactly 6.25 BTC in reward. If calculated at the current price as I write this article, it is equivalent to 429,456.2 US Dollars. If written in Turkish lira, it is worth 14,595,068 ₺.
Halving
Every four years, the rewards received by miners on the BTC network are halved in an event called Halving. The first miners received 50 BTC for each block. The current amount is 6.25 and this will decrease gradually. The commissions are not fixed in transaction fees either. The more transactions awaiting confirmation on the network, i.e. the higher the traffic, the higher the fee increases.
Difficulty Level
This expression is an indicator of how difficult it is to solve a block. The difficulty level is automatically adjusted every 2016 blocks (approximately every two weeks) based on the power of all miners in the network (Hash Rate). This is done so that BTC can produce a new block every 10 minutes. If the mining power increases, the difficulty level increases, and if the mining power decreases, the difficulty level decreases, allowing the BTC network to add blocks at a fixed time. This is intended to prevent attacks such as the 51% attack (more on that later).
Mining Hardware
Bitcoin mining requires special hardware because it requires a lot of computing power. The hardware used in mining is:
CPU (Central Processing Unit)
In the early days of BTC, mining could be done with the CPUs of ordinary computers. However, as the network grew, CPUs became insufficient.
GPU (Graphics Processing Unit)
GPUs started to be used instead of CPUs. GPUs were more efficient for mining.
ASIC (Application Specific Integrated Circuit)
Nowadays, specifically designed ASIC devices are used for Bitcoin mining. These devices are high-powered hardware that is designed and optimized for a specific purpose (such as Bitcoin mining). ASICs are much more efficient and powerful than CPUs and GPUs, which is why they have become the standard in modern mining.
Energy Problem
BTC's need for devices that operate with such high processing power causes high electricity consumption and increases the prices of graphics cards and processors. Today, the BTC network alone creates a high amount of energy consumption and this is seen as the cause of carbon emissions and environmental problems, and those who do not like decentralization and virtual money use this against BTC.
Bitcoin ve Visa ağında enerji tüketimlerinin farkı
Mining Pools
As Bitcoin mining has become extremely competitive, the chances of individual miners finding blocks have decreased. For this reason, miners come together to form mining pools. Through these pools, miners increase their chances of finding blocks by combining their strengths and share the BTC they earn among themselves according to their contributions.
Supply Shortage
The maximum supply of Bitcoin has been set at 21 million BTC. This limit is expected to be reached around 2140. After this date, block rewards (the giving of new Bitcoins to miners) will cease, as no new Bitcoins will be produced. So, what kind of incentive will miners receive after this point?
After the supply runs out, miners will continue to be rewarded from transaction fees. Each Bitcoin transaction includes a certain amount of transaction fees, which are paid to miners by users who want to increase transaction speed. Once block rewards run out around 2140, miners will only earn these transaction fees.
The Future of Mining and Incentives
Dependence on Transaction Fees
With the end of block rewards, miners will be solely dependent on transaction fees. This means that transaction fees must be high enough for mining operations to be economically sustainable. This requires high transaction volume and high user demand.
Network Security
If a fee-based structure continues to attract miners, the Bitcoin network may remain secure. However, as mining rewards decrease and become limited to transaction fees alone, the security of the network may become uncertain. If sufficient transaction fees are not earned, mining activity may decrease, making the network more vulnerable to attack.
Lightning Network and Scaling Solutions
Layer-2 solutions such as the Lightning Network have been developed to solve Bitcoin’s scaling problems. With these solutions, many small transactions can be processed without being added to the main blockchain. However, this can reduce transaction fees on the main blockchain and reduce miners’ income. However, complex or high-value transactions are expected to be processed on the main chain and pay high transaction fees.
FORKING
A fork is a situation where nodes in a network have to decide which version of the blockchain to follow. Forks usually occur due to software updates, rule changes, or disagreements. In rare cases, a fork can occur as a result of malicious attacks. Forks occur in two ways:
Soft Fork
It happens when a set of software changes are made to bring new rules to the blockchain and increase the security of the network. This fork is compatible with backward blocks, but there are new rules. New blocks can be verified with old nodes. This fork usually does not split the chain in two, it is just a rule change. The best example of this is reducing or increasing the size of a block.
Hard Fork
With this fork, old nodes lose their official status and can no longer verify new blocks. In this case, the network forks and sometimes even the old chain can continue its life. If the miners in the network can choose the old chain or the new chain, two different cryptos emerge.
BTC Forks
Although BTC is the father of cryptocurrencies, many Fork events have occurred to date. Here are BTC Forks:
BTC XT | 2014
It is a hard fork and it was decided to increase the size of the blocks from 1 MB to 8 MB, but it could not find node support due to not receiving enough attention among miners.
BTC Classic | 2016
This is a hard fork like BTC XT and it was suggested that the block size be increased to 2 MB. The reason for this much effort with block sizes is a problem called scaling. The result of this fork was like BT XT and faded away over time.
BTC Unlimited | 2016
It is a hard fork where the limitation of block size was deemed unreasonable and it was advocated that this size limit should be relaxed. The end result was a disappointment like other forks.
SegWit (Segregated Witness) | 2017
SegWit was implemented as a soft fork to reduce Bitcoin’s transaction sizes and increase its scalability. It also opened the door to second-layer solutions like the Lightning Network. SegWit freed up space in BTC blocks by separating a portion of each transaction, allowing more data to fit into a block of the same size. This fork was accepted by many nodes and miners.
BTC CASH | 01.08.2017
BTC CASH wanted to increase the block size to 8 MB like BTC XT. The biggest reason for this was scalability problems. As a result, it was accepted by some miners and is still used as a BTC derivative cryptocurrency, which is used even today as a hard fork.
BTC GOLD | 24.10.2017
It is a hard fork that aims to increase decentralization by making mining possible with GPUs instead of ASIC devices that are not accessible to everyone. The fork has occurred and is currently used as a BTC derivative.
SegWit2x | 2017
It is a hard fork that envisions the implementation of SegWit and increasing the block size to 2 MB. It was created in response to BTC Cash and other forks. However, this fork was never implemented due to the community not being able to reach a consensus.
BTC SV | 15.11.2018
BTC SV is a hard fork of the BTC CASH network. Some miners argued that the block size was too large, up to 128MB, and that it had too much processing capacity. As a result, BTC SV continued as a separate cryptocurrency.
As can be seen, even if there are forks in the BTC main network, the most basic network still continues on its path with determination.
%51 ATTACK
A 51% attack is a type of attack that threatens the security of a blockchain network. This attack refers to a situation where a person or a group of miners gain the majority of control (more than 51%) over a cryptocurrency network. Especially in a blockchain that works with the Proof of Work (PoW) consensus mechanism, when attackers gain this control, they can have the power to manipulate the network. Yes, you heard right, we said blockchains that work with the PoW principle because blockchains that work with different proofs are actively working today. We will discuss these later. However, let's take a look at the technical details of the 51% attack:
DOUBLE SPENDING
It is the name given to the same cryptocurrency being spent more than once. Under normal circumstances, such a spending is not possible because the verification of the blocks we explained above prevents this. However, during a 51% attack, the following may occur:
The attacker spends some BTC and a block containing this transaction is verified by miners.
The attacker rolls back the first transaction with the secret chain he created with his high data processing capacity.
After reverting the transaction, it reactivates the mining power and creates a new longest chain, thus blocking the old chain.
In such a case, the network accepts the attacker's secret and longest chain as the correct chain and the spent BTCs appear in the attacker's wallet again.
TRANSACTION BLOCKING
Attackers can censor the network with a 51% attack. They can use this by not accepting transactions from certain addresses or blocking them completely, as well as refusing to verify transactions from other users and disrupting the network's function, causing congestion.
THREATENING THE GENERAL SECURITY OF THE NETWORK
If the attack succeeds, the network operator will be seriously damaged. The loss of trust that users will experience will reduce the popularity of the network and the network will not draw traffic. Considering that there will be no transactions for miners, it is even possible for the network to collapse.
Limitations of the 51% Attack
Attackers are not given the freedom to do anything they want to do. Some limitations prevent them, and these limitations are critical. Attackers cannot create new BTC or manipulate the supply. Although a double-spending attack is possible, it cannot affect blocks that are very far in the past and is limited to the most recent blocks. In other words, block manipulations are concentrated on the most recently created blocks. Let's say they made a transaction and don't want to be found. We have some bad news! User transactions cannot be anonymized. If an attacker makes a double-spend, it will be known which wallet address it was made from.
Defense Methods Against 51% Attack
DISTRIBUTION OF NETWORK HASH POWER: In a decentralized structure, the hash power is distributed across a larger base of miners, making it harder for a single group to gain the majority.
PROOF OF WORK TRANSITION: Instead of proof of work, a different consensus algorithm such as Proof of Stake, which we will explain later, can reduce the risk of a 51% attack. In proof of stake, the cryptocurrencies owned, not the computational power, play a role in directing the network.
MONITORING MINING POOLS: Constantly monitoring the hash power of mining pools and preventing one pool from controlling too much of the network can also help prevent an attack.
SCALING PROBLEMS
Scaling is not actually related to a single block size. Scaling should be discussed in the entire architecture. Speaking specifically about BTC, the expanding use of the network and its limited transaction capacity create scaling problems. One of the biggest scaling problems is of course related to block size. If you recall what we wrote above, all of the forks experienced by BTC, except for one, are an update request to change the block size. BTC's block size is limited to 1 MB, which means that 2000-3000 transactions will fit per block. As the use of the network increases, two problems arise due to this limited capacity:
Let's say there are 10,000 transactions waiting to be confirmed and processed into a block in a queue for a period of 10 minutes. There is a queue in the middle and at least 3 or maybe 4 blocks that need to be created to process the transactions. This can make it take quite a long time for you to send money.
High transaction fees have emerged as a solution to long waiting times. Let's say you have a transaction and it needs to be confirmed immediately. You need to be able to transfer the money to the other party as soon as possible. However, imagine it's noon and there are thousands of transactions in the queue. In this case, miners say the following. I'll give priority to whoever wants to pay more commission. In other words, the one who pays the piper calls the tune!
Bitcoin blockchain size (Gigabytes)
BTC is not only disadvantaged in terms of block size. It has not been able to create an efficient system in terms of transaction volume. The central payment network Visa can process approximately 25,000 transactions per second. However, when we look at BTC, this is a very low figure of 7 transactions per second. We have already mentioned the 51% attack on block production time. A 10-minute block production automatically reduces the transaction volume. On the downside, constantly producing blocks makes the system even more cumbersome. Each block added to the chain requires more storage space. Updates that can solve this scaling problem can cause great damage to BTC's decentralization. In particular, more processing power, more storage space, and increasing energy costs can lead to miners being taken over by powerful and wealthy people and becoming monopolized. So how does the community approach this scaling problem with solution suggestions?
SEGWIT (SEGREGATED WİTNESS)
It was a BTC fork proposal. It was a fork that aimed to compress the size of transactions without increasing the block size, thus providing more transaction inputs for each block.
LIGHTNING NETWORK
It is a second layer protocol. It creates an off-chain payment channel between users, and transactions can be completed faster and at lower cost. In doing so, only the users' latest balance information is recorded on the blockchain.
INCREASING BLOCK SIZE
The biggest obstacle to increasing the block size is that it can lead to centralization. Otherwise, Bitcoin Cash has implemented this update and moved on.
SCHNORR SIGNATURES
It is a solution that aims to reduce the signature size in transactions and make multi-signature transactions more efficient.
TAPROOT UPDATE
It is a solution that aims to optimize multi-signature and smart contract transactions in terms of privacy and efficiency. This optimization also allows for effective use of block size.
WALLETS
When talking about money, it is impossible to forget wallets! When it comes to wallets in the cryptocurrency world, virtual wallets come to mind, but this is not exactly the case. Wallets actually appear as both software and hardware, like BTC. The aim is to store the user's assets in a secure environment, allow them to control these assets and communicate with the blockchain and make transactions on that chain. Wallets store private keys that allow the user to control their crypto assets. Wallets are generally divided into two basic categories: Hot Wallets and Cold Wallets. There are also different wallet types depending on their technical structure and purpose of use.
1. HOT WALLETS
Hot wallets are wallets that are constantly connected to the internet. These wallets allow users to access their crypto assets quickly and easily. However, hot wallets are more vulnerable to cyber attacks because they are connected to the internet. They are easier to use, but more attention should be paid to security. Hot wallet types can be listed as follows:
Desktop Wallets: Allows you to manage your cryptocurrencies through software that is downloaded and installed on your computer. Private keys are usually stored on the user's computer. While private keys are under user control, they can pose a security risk in possible attacks on the computer.
Mobile Wallets: You can manage your cryptocurrencies through applications downloaded to your smartphone. These wallets are optimized for use on mobile devices and provide convenience with QR codes. Mobile wallets are preferred more due to their ease of use and accessibility anywhere. They are similar to desktop wallets in terms of theft and attack risks.
Web Wallets: These are browser-based wallets that can be used from any internet-connected device. These types of wallets are usually offered by third-party service providers. They provide easy access and use like mobile wallets, but private keys are usually stored on the third-party service provider's servers, which can increase security risks.
2. COLD WALLETS
Cold wallets are wallets that are not connected to the internet, which makes them more secure. They are the safest way to store your crypto assets for long periods of time and protect them from potential cyberattacks. Cold wallets are usually used for larger amounts of assets.
Hardware Wallets: These are wallets built on physical devices (usually USB-like). Private keys are kept inside this device and are never connected to the internet. Their biggest advantage is that they are not connected to the internet, so security is at the highest level. However, these hardware are quite expensive and there is a possibility of physical loss.
Paper Wallets: Private key and public key information are stored on paper or in printed form. It can be printed with a QR code and transactions can be made with it.
3. OTHER TYPES OF WALLETS
Some wallets offer different features in terms of ease of use, security, and anonymity.
Multi-Signature Wallets: These types of wallets require the use of more than one signature (private key) to perform a transaction. They are used for joint accounts or fund management. They provide more security, but the transaction process is much more complex.
Deterministic Wallets (Hierarchical Deterministic Wallets – HD Wallets): These wallets can generate multiple private keys derived from a single master key. This means that a different address can be generated for each transaction in a wallet.
Key Components of the Wallet
Private Key: This is the most critical component of your wallet. This key allows you to spend cryptocurrencies from your wallet. In a sense, it is a digital signature that verifies that you own the funds in your wallet.
Public Key: This is the address that others use to send you cryptocurrencies. The public key is derived from the private key, but the private key is protected so that it cannot be reversed.
Address: It is a compressed and hashed version of a public key. It is the publicly shared information used to send or receive cryptocurrencies.
Things to Consider When Choosing a Wallet
Security: The security of the wallet is the most important factor. You should choose a wallet where you can store your private key safely.
Ease of Use: A simple interface and ease of use can be important, especially for new users.
Backup and Restore: The wallet offers backup and restore options, which is a significant advantage in case of data loss or device loss.
Platform Compatibility: You can choose between wallets that can work on different platforms as desktop, mobile or hardware wallets.
PROOFS
In cryptocurrency and blockchain systems, various “proof” mechanisms are used to verify and secure transactions on the network. We have already explained the mechanism used by BTC above. These mechanisms play an important role in the consensus process of the network and decide which transactions are valid. Here are the most common types of proof (Consensus):
1. PROOF OF WORK
It is the first consensus mechanism used by Bitcoin and many other cryptocurrencies. In proof of work, miners use their computing power to solve mathematical challenges. When these challenges are solved, a new block is added to the blockchain and the miner is rewarded for verifying the transactions in this block, but there is a problem here, which is energy consumption. It is a fact that environmentalists are very angry with BTC today and do not look favorably on it just because of this high energy consumption. The most advantageous aspect is the elimination of the central structure.
2. PROOF OF STAKE
Proof of stake is one of the most widely used proofs of work after mining. The most famous of the crypto assets born after BTC, Ethereum, was first released with a proof of work mechanism, but it switched to proof of stake with an update made on September 15, 2022. So how does proof of stake work? It is a system that relies on the amount of cryptocurrency (stake) that users have, rather than mining, to verify transactions. Blocks are verified and rewarded accordingly to users who own more coins. Although proof of stake has a much lower energy consumption than proof of work, it has the disadvantage of having a mechanism that makes the rich richer by giving more rewards to those who own more assets.
3. DELEGATED PROOF OF STAKE
It is a variation of proof of stake. Those who hold crypto assets, namely coin holders, elect validators, and these validators are called delegates. These validators confirm transactions on the network and produce blocks. This structure is strikingly similar to the democratic governance in most countries today. The biggest disadvantage is that delegates can lead to centralization.
4. PROOF OF HISTORY
This proof is a proof mechanism used to verify the timeliness of transactions on the network. It is used in Solana, one of Ethereum's biggest competitors. This proof is ideal for high-performance blockchains. It proves the order of transactions and quickly verifies them. It enables very high transaction speeds and is a godsend for scalability. However, this proof mechanism alone may be insufficient and may require the support of other mechanisms.
5. PROOF OF AUTHORITY
Authorized proof is a system in which specific and trusted nodes verify transactions. It is often used in private blockchains and more centralized systems. Since the system is centralized, it is a type of proof that stands out with its high transaction speeds and low energy costs.
6. PROOF OF CAPACITY
Proof is what allows miners to verify transactions on the network using disk storage. Miners perform certain mathematical calculations and store the solutions on their hard drives. Although these miners consume less energy, they require very large storage areas.
7. PROOF OF BURN
In burnt proof of stake, users have to “burn” (permanently destroy) their coins to verify the network’s transactions. Miners are rewarded based on the amount of coins burned. This proof is energy efficient and more sustainable than proof of work. The only downside is that the coins are permanently lost.
8. PROOF OF ELAPSED TIME
In short, PoET is a mechanism developed especially by Intel. In this system, nodes wait for a random period of time and the node that waits the shortest time wins the right to create a new block. It provides energy efficiency but has problems in terms of security and decentralization.
9. PROOF OF STORAGE/SPACE
This mechanism involves miners providing hard disk space to verify transactions on the blockchain. Mining capacity is based on hard disk space. Of course, it requires high storage power, while energy consumption is low.
10. PROOF OF REPUTATION
Proof of Reputation is a consensus mechanism where validators are selected based on their previous behavior and reputation. This mechanism is typically used in private networks that require trusted validators. While fast and efficient, selecting trusted validators is a factor that increases the risk of centralization.
Types of Cryptocurrencies
Cryptocurrencies are divided into various types with different uses and functions. Here are the most common types of cryptocurrencies:
1. Bitcoin (BTC)
Bitcoin, the first cryptocurrency, was designed as a decentralized digital currency. Its purpose is to be a reliable, limited, digital store of value.
2. Altcoins
All cryptocurrencies other than Bitcoin are called "altcoins". They are designed for various purposes and projects, and each has its own unique features. Here are some examples: Ethereum (ETH), Litecoin (LTC), Ripple (XRP), Cardano (ADA).
3. Stablecoins
A type of cryptocurrency whose value is tied to a fiat currency or asset, such as the US dollar. It minimizes price fluctuations.
Area of Use: Provides storage of value, ease of transfer, and protection against crypto market fluctuations.
Örnekler: Tether (USDT), USD Coin (USDC), Binance USD (BUSD).
4. Tokens
They are digital assets that belong to a specific project or platform. Tokens are created on a specific blockchain (most often Ethereum) and provide specific functions within the project.
Use Case: Project-based transactions, voting rights, rewards, and decentralized finance (DeFi) applications.
Örnekler: Chainlink (LINK), Uniswap (UNI), Aave (AAVE).
5. Decentralized Finance (DeFi) Tokens
They are tokens used in the decentralized finance ecosystem. DeFi tokens are used for financial transactions such as lending, borrowing, swapping, and earning interest.
Area of Use: Decentralizes financial services on blockchains and carries out transactions without the need for banks.
Examples: Maker (MKR), Compound (COMP), SushiSwap (SUSHI).
6. Utility Tokens
They are tokens used to perform certain operations on a particular platform or service.
Use Case: Used to provide in-platform services, voting rights or special access.
Examples: Basic Attention Token (BAT), Filecoin (FIL).
7. Governance Tokens
It allows users to have the right to vote on changes or decision-making processes in a particular project.
Use Case: Allows users to vote on project developments and changes.
Örnekler: Yearn Finance (YFI), Uniswap (UNI), Compound (COMP).
8. Decentralized Application (dApp) Tokens
They are tokens specific to the blockchains on which dApps run and are used to perform transactions in specific applications.
Area of Use: Enables transactions in decentralized applications in areas such as games, art, and entertainment.
Examples: Decentraland (MANA), Axie Infinity (AXS).
9. NFT'ler (Non-Fungible Tokens)
Tokens represent non-fungible and unique digital assets. Each NFT represents a unique digital object.
Use Case: Used to represent unique assets such as art, collectibles, games, digital property.
Örnekler: CryptoPunks, Bored Ape Yacht Club (BAYC), NBA Top Shot.
10. Meme Coin'ler
Cryptocurrencies that originate as a joke or internet humor. They usually become popular through community support.
Examples: Dogecoin (DOGE), Shiba Inu (SHIB), SafeMoon.
11. Exchange Tokens
These are tokens issued by cryptocurrency exchanges for their own platforms. They provide users with advantages such as transaction discounts and rewards.
Area of Use: Reducing transaction fees on exchanges, earning rewards, and providing access to certain platform features.
Examples: Binance Coin (BNB), FTX Token (FTT), Huobi Token (HT).
In the cryptocurrency ecosystem, each type has its own characteristics and areas of use. This diversity makes the cryptocurrency ecosystem a more comprehensive area that offers different functions.
Up to this point, we have introduced cryptocurrencies and Bitcoin's architecture as a guide for those who are new to the crypto market, those who have heard of it but are not willing to research it. If you liked our article, don't forget to share it and inform your environment. Stay healthy.
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