The elimination of intermediaries allows cryptocurrency transactions to occur much faster than traditional banking methods, where the funds go through several intermediaries and approval processes before reaching the intended recipient’s address.
Cryptocurrency transactions don’t need to go through the same process. A peer-to-peer (P2P) network facilitates quick and efficient transactions at the tap of a button.
P2P networks enable transactions to travel directly from the sender to the receiver across the blockchain network. This removes much of the transaction and processing fees users normally pay through conventional methods.
Blockchains also allow borderless payments without transaction fees, so the sender can transfer coins to the receiver on the other side of the world without worrying about international processing fees and chargebacks. This is a large differentiator from fintech apps, such as Venmo and Paypal, which are more siloed.
Pseudonymity and anonymity aren’t identical, so don’t get confused! Anonymity occurs when you don’t know the person's identity and can’t trace their actions back to them. Pseudonymity, on the other hand, occurs when you don’t see the person’s identity but can associate actions with them.
Popular blockchains like Bitcoin (BTC) and Ethereum (ETH) are pseudonymous. Each user has an address (which we'll circle back to in a bit) that links to the corresponding owner's private key. Even if you don't know the user's name or appearance, you can trace every activity taken with their address back to them.
Addresses and private keys allow users to maintain their privacy significantly. Blockchain transactions are public and available for all to see. However, users themselves don’t need to reveal their identities to participate in crypto trading.
Blockchains are censorship-resistant. Decentralization makes it impossible for any individual or entity to modify a blockchain's source code. This means that users can make crypto transactions and other blockchain activities without authorization from a third party.
Crypto transactions are permissionless and trustless, enabling anyone who wishes to participate in the blockchain without permission from a regulatory body. As long as a user acts according to the blockchain’s guidelines and protocols, they can participate freely.
Potential con: Permanent transactions
With so many features, cryptocurrency transactions seem quite advantageous. However, it’s important to note that once you make a crypto transaction, it remains on the blockchain forever.
Cryptocurrency transactions can’t be altered or reversed. If you send your coins to the wrong person, you’ll likely not get them back unless they send them back to you. Although pseudonymous profiles will let you trace a transaction back to a user, you won’t be able to make contact with them.
Since blockchains are decentralized, there are no regulatory bodies when you have an issue to resolve. As a result, it’s essential to be careful with your funds in the first place. It’s best to do this with an address and a crypto wallet.
How to protect against sending an incorrect transaction
A single digit or letter can result in an incorrect transaction. Without a regulatory body to back you up, it’s essential to protect yourself and check the following before sending funds:
- Address: Ensure that you have the right address. Double check the recipient’s name and save them as a beneficiary if you’ll send them future payments. Services like Ethereum Name Service (ENS) make transactions easier by simplifying complex, machine-readable data like speed phrases into easy-to-read addresses and vice versa.
- Amount: Some cryptocurrencies can be expensive, so you want to ensure you’re sending the exact amount you intend to. Check the amount a few times before sending just to be extra sure.
- Cryptocurrency: Make sure you’re sending the recipient the correct cryptocurrency. If you hold multiple coins and tokens, you might mix up one with the other and end up sending the wrong digital currency.
How to send crypto: First get a crypto wallet
Cryptocurrency wallets function similarly to physical wallets. However, instead of keeping hard cash and debit cards, crypto wallets are used to store cryptocurrency. The interface offered by crypto wallets allows users to send and receive coins via a blockchain. They’re the first step to sending, receiving, and storing cryptocurrencies. There are a few factors to consider when choosing a good crypto wallet, including:
- Cost: Most crypto wallets are free; you only need to sign up on a crypto exchange and use a native wallet. However, you may need to invest a little money if you want a hardware wallet, which are physical wallets that you can keep possession of.
- Security: Digital assets aren't cheap, which is why you want to ensure your wallet is secure and reliable. Hardware and paper wallets are the safest, as they aren't accessible remotely.
- Portability: Software wallets are the most popular option for those looking for portability. You can carry software wallets around and access their contents as long as you're connected to the internet.
- Compatibility: Certain wallets can store specific cryptocurrencies. In fact, you can browse through different cryptocurrency exchanges to see which ones support which cryptocurrencies. A few examples of crypto exchanges include:
What are addresses?
Once you’ve set up a crypto wallet, you’ll need an address. A cryptocurrency address is a sequence of random characters that link to a crypto wallet. Some crypto addresses also take the form of QR codes. A crypto address resembles a physical address, email, or phone number, making it pseudonymous. Each crypto address is unique and shows a wallet's location on the network.
Since crypto addresses often comprise lengthy, random sequences of characters and numbers, it becomes challenging for human perception. However, this makes them unique and perceptible for blockchains and algorithms. A sender’s wallet address needs to be compatible with a receiver’s address. For example, you can send bitcoins to a user with an Ethereum address.
Crypto addresses are shortened versions of public keys. Both are public addresses you can publicly share, like a bank account number if you wish to receive coins. However, never share your private key. Private keys are like passwords or PINs. Only you should have access to your own private key. All public keys link to private keys. A public key—or address—allows you to receive crypto, while a private key proves you own your public key.
Since central authorities don't regulate cryptocurrencies, nodes help validate blockchain transactions between two parties. However, the blockchain must record the transaction somewhere. As a result, users must pay network fees, also called transaction fees, to cover the costs of the time and effort required for transaction validations.
Think of network fees as a kind of “tax” charged for crypto transactions. These taxes help fund the blockchain and its security to facilitate its smooth functioning.
You can also find lower network fees on centralized crypto exchanges, which don’t interact with the blockchain, so you won’t have to pay for the resources required to validate your transactions. Crypto exchanges can impose charges that range from 0% to 1.5% per transaction. But because centralized exchanges are run by a company that sets fees at their discretion, network fees are potentially higher. It depends on the crypto exchange and its services.
Gas fees are network fees exclusive to the Ethereum blockchain. Ethereum uses its native cryptocurrency, ether, to run. Ether is essentially the fuel that powers Ethereum and all the activities on its network.
Users pay gas fees to the nodes that generate new blocks and validate cryptocurrency transactions. These nodes are called miners, who use advanced hardware, electricity, and sophisticated computational power to validate blocks on Ethereum's blockchain. Miners receive gas fees in the form of ether.
This process occurs due to Ethereum’s consensus mechanism called proof-of-work (PoW). However, Ethereum will soon transition to Ethereum 2.0 and use a proof-of-stake (PoS) protocol, which will reduce network fees and boost the number of transactions per second.
Sending cryptocurrency can be easy if done correctly. This means researching, identifying a crypto exchange, creating a crypto wallet, and protecting your address.
Participating in cryptocurrency transactions on trustworthy crypto exchanges with a positive record is essential. And remember, never share your private key!
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