A Beginner’s Guide
To grasp the foundations of cryptocurrencies, it's essential to dive into the fundamental components that shape their function. These components include networks, protocols, blockchains, and digital tokens. In this article, we will explore the relationships between networks, protocols, blockchains, and cryptocurrencies, uncovering the mechanics behind secure transactions and the role of digital tokens in this dynamic ecosystem.
To illustrate these concepts, let's draw parallels with the classic board game, Monopoly.
Imagine playing a game of Monopoly. Alone, you’re an individual, and you can’t play. For the game to commence, you require a group of people to play this with you; this is a network.
Now, similarly, in the world of cryptocurrencies, you need a group of computers talking to each other. These machines and their operators are collectively a network.
In Monopoly you talk, deal, joke and in some cases, even argue with each other. You interact.
Analogously, the Bitcoin network serves as the technical framework for transactions and consensus communications among participants.
Next, let’s consider the game rules in Monopoly. These rules act as protocols, ensuring that all players adhere to the same guidelines when buying properties, paying rent, and collecting money.
Likewise, in the cryptocurrency world, protocols define how transactions are created, verified, and added to the blockchain. In essence, these protocols ensure that every computer and their owner in the cryptocurrency network agrees on the validity of transactions. For instance, the Bitcoin protocol governs the rules for validating transactions and maintaining consensus within the Bitcoin network.
In Monopoly, imagine that all the transactions made during the game are recorded on a shared ledger. This ledger keeps track of each player's properties, money, and transactions.
Similarly, blockchain serves as a digital ledger in the world of cryptocurrencies. It securely records and stores all transactions made with cryptocurrencies, ensuring transparency and immutability. For example, the Ethereum blockchain maintains a comprehensive time stamped sequence of transactions executed within the Ethereum network.
Now, let's bring in cryptocurrencies themselves. In Monopoly, players use special tokens, such as Monopoly money, for transactions and value exchange. Cryptocurrencies function similarly by serving as digital tokens used for online transactions and value storage. Bitcoin and Ethereum are prime examples of cryptocurrencies that operate on their respective networks, allowing users to transfer and store value digitally.
The relationship between blockchain, cryptocurrencies, protocols and networks
Now, imagine playing a different game, like Scrabble, and trying to use Monopoly money to buy words or score points. It wouldn't work because each game has its own specific rules and currencies.
In the world of cryptocurrencies, the blockchain is the specific ledger for a particular game. It keeps track of all the transactions made using a specific cryptocurrency, such as Bitcoin or Ethereum. Just like you can't use Monopoly money in Scrabble, you can't (usually) use one cryptocurrency in another blockchain network.
Each blockchain has its own set of rules and protocols that define how transactions are created, verified, and recorded. In most cases, cryptocurrencies are tightly intertwined with their respective blockchains, and transactions can only occur within their designated networks. To understand the exceptions to this rule, we would suggest you have a look at our support article on coins, tokens and cryptocurrencies here.
- The network is a group of machines/computers and their operators that run software.
- This software, more importantly the rules within it, is the protocol. It dictates how each computer in this network can interact and transact.
- The units/objects that are transacted (sent to and from the computers and their owners) are cryptocurrencies.
- The ledger that keeps track and stores a history all of these transactions is known as the blockchain.
You made it!
While you may not be able to use Monopoly money to buy cryptocurrencies (trust us, we tried), we hope you've gained a better understanding of the intricate relationships between networks, protocols, blockchains, and digital tokens.
To see what networks the XGo Wallet ID supports click here.