Tezos for Rookies: All You Have to Know About Blockchain, Wallets, and Tokens
We often see newbies asking about simple things: blockchain principles, types of tokens, smart contracts, NFT collections, and applications. So we decided to make a series of features with answers to the most common questions.
We won’t go into details, as a full technical explanation of the rules of block creation or consensus building takes several pages. We just want to help newcomers understand the basics and prove that it’s not that hard.
Blockchain is a decentralized database in which records cannot be deleted or modified. It is secure: people buy millions of dollars worth of tokens and are more afraid of a price drop than of someone stealing their coins.
Blockchain requires a wallet, which is an application that stores a private key from an address, signs transactions with it, and shows which tokens the address owns.
There are several types of tokens, and all have their own purposes: native tokens pay transaction fees, stabelcoins do not fluctuate in price, governance tokens give access to voting, and utility tokens give access to application functionality.
How Does Blockchain Work?
What is a blockchain? It is a database that consists of blocks. Yet, the term often refers to the entire ecosystem: the protocol, the consensus algorithm, and the virtual machine.
What is a block in blockchain? It is a container of data: details of transactions, the hash sum of transactions, and the hash sum of the previous block.
What is a hash sum? It is the result of data conversion using a special formula. The process of converting data into a hash sum is called hashing. Hashing different data produces unique hash sums, but if you hash the same data twice, you get the same hash sum.
What is a node in a blockchain? It is a computer that keeps a copy of the blockchain and constantly checks it against copies of other nodes. Nodes are needed for decentralization: if you disable some of the nodes, the blockchain will still work.
What is a validator in blockchain? It is a node that has the right to process transactions of network participants, create new blocks and add them to the blockchain. In Tezos, validators are called bakers. You can find out more about baking from our special project about Tezos Baking.
What is blockchain protocol? It is a set of rules by which nodes and validators work.
What is the consensus algorithm in blockchain? It is a mechanism that coordinates the actions of nodes and blockchain users and determines who creates the next block. Tezos uses the Liquid Proof-of-Stake consensus algorithm.
How does blockchain work? Validators receive the transactions that network participants want to perform. The protocol selects a random validator to package all the transactions received into a block and add it to its copy of the blockchain. Other validators and nodes make sure there were no errors and then add the block to their copy of the blockchain. Once a majority of nodes have written a new block into their copy of the blockchain, the transactions in the blockchain are considered done and irreversible.
See “How Blockchain Works in General” for more details.
Why is blockchain safe to use? Blocks contain hash sums of themselves and the previous block. No node can change the data in the old block and tamper with any operation because the hash sums will change. Other nodes will realize that they are being messed with and will not include the changed block in their blockchain.
What Are Address and Wallet on Blockchain?
What is a blockchain address? An address is essentially a unique user name in blockchain.
What is a blockchain wallet? It is an application for managing an address and the funds on it. Colloquially, however, wallet means the address itself. “What’s your wallet?” often means “what’s your address?” but not “Which wallet app do you use?”
There are four types of wallets:
- Web wallets run in a browser;
- Hardware wallets are separate devices;
- Mobile wallets are apps for smartphones;
- Desktop wallets are applications for desktops and laptops;
What is a private key in blockchain? A private key is a password for managing an address. It cannot be shown to anyone or stored in places that could, in theory, be accessed by outsiders. If you lose your private key, you’ll lose access to the corresponding address and all tokens on it.
What is a mnemonic phrase? It is a set of words from which a private key can be obtained using a certain algorithm. Just like a key, a mnemonic phrase should not be shown to unauthorized people or kept in a non-secure place.
What is a wallet backup? It is a backup copy of a private key or mnemonic phrase. If the user’s device with the wallet application breaks down, or he reinstalls the operating system, or accidentally deletes the wallet, then with the help of a backup copy he will be able to access his address again. There can never be too many backups!
What does “import wallet” mean? A user can create an address using a desktop wallet, export the private key of that address. Then he can install a different wallet on his smartphone, import that private key in it and manage his old address on new device.
What Are Tokens and Transactions on Blockchain?
What are tokens? Tokens (also called “coins”) are digital assets that exist in the blockchain. They can be bought, sold, and transferred to other users. Tokens are stored at the user’s address. Often the word “cryptocurrency” refers to the native token of a blockchain.
What is a transaction in blockchain? It is the transfer of tokens from one address to another.
What is an operation in blockchain? It is any operation that is stored in blockchain: transaction, delegation, smart contract call, etc.
What is a native token? It is a token that is needed to use the basic functions of the blockchain. For example, tez (XTZ) is the native token of the Tezos blockchain. The protocol calculates validator stakes in it, validators get rewarded in it for block creation and validation, and users pay transaction fees in it.
What are utility tokens? They are needed to use some of the application’s features. For example, Unobtanium (UNO) is needed to create new land blocks in the game Tezotopia.
What is a governance token? They give you a say in the management of the application. For example, Kolibri DAO token (kDAO) holders can vote for or against proposals to add features and change commissions, as well as the distribution of rewards and the app budget allocation. Three examples of governance tokens on Tezos.
What is a stablecoin? It is a token whose price is pegged to the value of a dollar, euro, or other currency. The pegging is achieved through collateral: the owner of a stablecoin can exchange it for an actual dollar or other assets of same value at any time. Here are three examples of stabelcoins.
What are synthetic assets? They are tokens whose price is tied to the value of other tokens or marketable assets. For example, tzBTC is pegged to the price of bitcoin, and the owner of tzBTC can exchange them for regular BTC.
What is NFT? An NFT is a token to which some object is pegged: image, video, music, text. The value of any particular NFT is determined by market demand: it could be anything from zero to millions of dollars.
What is a ticker? This is a short name for a token; it looks like a collection of letters: XTZ, QUIPU, ctez, YOU. The ticker may be different from the common name of a token.
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