Bitcoin and Ethereum have made headlines across industries and around the world. But blockchain technology can be challenging to wrap your head around, particularly if you’re new, as the underlying technology is shrouded in computing language and jargon that is very technical in nature. This can be an immense drawback to many who are interested in the space. This guide looks to address these concerns and help you better understand blockchain technology, tokens and participating in token ecosystems.
What is a Blockchain?
- In its simplest form, blockchain is a new technology in which digital records are recorded chronologically and publicly.
- The storage and access of data are distributed across participants of each particular blockchain, obviating the need for a single centralized authority.
- A ledger is a copy of all transactions that have occurred on the blockchain.
Here are two simple and informative videos explaining how the technology works:
What is Ethereum?
- The Ethereum blockchain is a public database that permits developers to build and deploy decentralized applications. Think of it as a tool to create any decentralized online service.
- Bitcoin is a way to store and move digital value, while Ethereum extends digital value to be programmable.
- Using advanced computation, Ethereum records its data in these “smart contracts,” or computer code that can facilitate the exchange of anything of value.
To access the official Ethereum whitepaper, click on the following link:
What is Ether?
- Ether is the native token of the Ethereum blockchain. It is the required medium of exchange for paying fees to complete protocol-level computations on the Ethereum network.
To learn more on how Ether works, check out the official Ethereum.org guide:
Where do I buy Ether?
- In many countries, Ether is most readily purchased and sold in online exchanges. Countries and jurisdictions have differing regulations, so it is important to consult with attorneys who are qualified under local laws.
How do I buy Ether on an online exchange?
- Most online exchanges have instructions and user onboarding screens to help with adoption. Users typically create accounts, present their credentials, undergo KYC and AML processes, then deposit fiat currency to purchase ETH on their accounts.
How do I safely store Ether?
- After purchasing any significant amount of Ether on an exchange, many people recommended withdrawing the Ether onto a hardware wallet. The typical rationale is that an online exchange represents a vulnerable single point of failure, which hackers could penetrate and steal assets from.
- With a hardware wallet you have the ability to keep your tokens in a secure and private place that only you have access to via a private key (explained later).
- Note, however, that storing digital assets such as ether on a hardware wallet can also create complications and risks such as losing private keys (explained later).
MyEtherWallet is a great start:
What is a wallet?
- A wallet is a secure software program that allows users to manage their tokens and control how they can send and receive them.
- These digital wallets act like safety deposit boxes and generate a cryptographic set of numbers (private key - explained later) that you control that allow you to interact with the blockchain.
Where do I get a Wallet?
- There are several types of wallets that provide different ways to store and access your tokens.
- You can find wallets via web browsers, smartphone app stores or for purchase in the form of hardware devices from online stores.
Are all Wallets the same?
- Wallets can be classified in several different ways, but three common categories are - cold wallets, hot wallets and exchange wallets.
- Hot wallets are usually always connected to the internet and are used for the everyday exchange of cryptocurrencies and tokens. For example: MyEtherWallet or MetaMask. All browser and smartphone wallets with an internet connection are hot wallets. These will allow you to maintain control of your private key.
- Cold wallets do not require an internet connection and are used for long-term storage of cryptocurrencies and tokens. For example: Ledger or Trezor. These are considered the most secure but require additional steps to access.
- Exchange wallets are controlled by the specific exchange you are using to purchase your tokens. With an exchange wallet, you do not control your private and public keys. For example: Gemini or Binance. These are considered the most convenient but allow the users the least amount of control over their tokens. Think of these wallets as IOUs from the exchange until you are ready to withdrawal.
What type of Wallet should I use?
- Before picking a wallet, you should consider how you intend to use it.
The best way to keep your tokens safe is to have control of your private keys, hence, we recommend either a hot or cold wallet depending on your use cases for longer term storage.
Here’s a great resource on the safest wallets to use:
Private vs. Public Keys
What is the difference between a public key and a private key?
- A private key is unique and confidential to its respective wallet and authorizes the user to carry out any transaction from the account.
- Anyone that has access to your private key can control your tokens.
- A public key is a unique digital signature made available to everyone via the publicly accessible blockchain ledger.
- The public key also acts as a receiving address for incoming transactions.
Anyone is able to send tokens to your public key at anytime.
To understand how private & public keys work with cryptography, you can read more here:
Why do I need a recovery phrase or "seed"?
- Currently, many hardware wallets such as Trezor or Ledger, use a recovery phrase, also known as 'seed,’ to recover your wallet account if you lose your private key.
- Please understand that should you lose your seed phrase and your private key, you will lose all your funds and tokens forever.
If you would like to learn more on why it’s important to make a wallet backup, read more here:
Where should I store my Private Key?
- It is critical to keep your Private key encrypted as a digital file or written down on a piece of paper that only you have access to.
Where should I store my recovery phrase/seed?
- We recommend writing down your backup phrase on a strong, durable sheet of paper with a quality pen and storing it in a safe and secure place that only you or trusted individuals can access.
What happens if I lose my private key or recovery phrase?
- If you lose your private key, you can retrieve it using your recovery phrase.
- If you lose both your private key and recovery phrase, you will lose all your funds, tokens and cryptocurrencies forever.
Here’s a step-by-step guide on how to recover your private key with a recovery phrase:
What happens if someone else finds out my private key or recovery phrase?
- If someone else finds your private key or recovery phrase they will have full control to your tokens and can do anything they like with them. It is critical to make sure only you can access your private key and seed phrase.
How do I send a transaction on Ethereum?
- In order to send a transaction on Ethereum, you must send Ether (ETH) and gas.
- Gas is the “fuel” for your transaction and gas is paid in Ether.
What is Gas?
- Gas is a unit of measurement that represents a certain amount of computation being done by a miner on the Ethereum blockchain.
- When you send tokens, interact with a contract, or send Ether (ETH), you must pay for that computation. This payment is calculated in “gas,” and gas itself has a market price set by the miners on the Ethereum blockchain.
Need to understand how Gas works? Read more here:
What are tokens?
- Tokens can digitally represent anything that is fungible and tradeable, from commodities to loyalty points and more. Thus far, there are three main categories of tokens - Coins/Cryptocurrencies, security tokens, and consumer tokens.
- Coins/Cryptocurrencies - The most widely known format, coins or cryptocurrencies deal with the infrastructure layer of the blockchain. They act as a medium of exchange.
- Security tokens - These tokens represent securities such as equity or debt instruments in token form.
- Consumer tokens - These tokens represent a unit of service in a business. They are the equivalent of consumer digital goods and the right to participate in an economy.
Do all tokens do the same thing?
- No, tokens are implemented as programmable smart contracts and can therefore be used for a variety of different use cases, offering different functionalities depending on their specific designs.
How do I purchase tokens?
- Tokens are created and distributed to the public through token launches.
Who picks the price of each token?
- Owners set the initial price of a token, and tokens get their value from supply and demand. Hence, the price of a token can fluctuate overtime.
What is a token sale?
- A token sale or token launch refers to the process of generating and selling new tokens.
- Consumer tokens do not confer any ownership rights into the company or entitle the owner to any sort of cash flow, such as dividends.
Are all token sales the same?
- All token sales are not the same as they can be structured differently from sale to sale.
- Tokens serve as units of trading or represent items used for specific purposes with vastly different types of marketplaces.
How do I participate in a token sale?
- In order to participate in a token sale on the Token Foundry platform, you must take an assessment test and verify your identity.
- We ask all new users complete a token questionnaire to make sure you’re properly informed and prepared to safely and effectively participate in the new token ecosystem.
Purchasing, Storing & Utilizing Tokens
How do I store the tokens I purchase?
- After purchasing your token, it is critical to store them in your digital wallet.
- You can refer to our wallets section above for more recommendations.
How do I use the tokens I purchase?
- Tokens are multi-faceted and can be used for various use cases depending on how the token model has been designed.
How do I sell the tokens I purchase?
- When you are ready to sell your tokens, the first step is to transfer your balance to a cryptocurrency exchange with a liquid market for your chosen trading pair.
- Now that your holdings are on an exchange, you can trade them for another currency.
- Remember to not store tokens for long periods of time on an exchange as you do not control your private keys.
Why must buyers be cautious when purchasing tokens?
- The token ecosystem is still very nascent, and unfortunately certain areas are rife with fraud and pyramid schemes. It’s important to understand what tokens will allow their purchasers to do, as the vast majority of tokens thus far do not confer rights such as voting, access to goods and services, or even usage. Therefore, market participants must carefully evaluate offerings to avoid bad actors.
- For this reason, we require that users complete token questionnaires to confirm understanding and intent to use tokens. We also vet projects to ensure that their teams have delivery capabilities and that the projects are feasible. We expect these precautions to vastly reduce the incidence of mismanaged expectations and ensure that users derive real benefits from their purchases.
How do I know what tokens are good to purchase and which ones aren’t?
- When purchasing a token, it is crucial to understand not only the purpose and usage of the token, but also the project team’s experience in the space, product applicability, advisors, traction and if you are able to contribute value to the network as a user. This is how you can differentiate between a good and a bad token.