Understanding the blockchain network

When making a transaction, there is information that must be entered correctly. One is the address of the transfer destination, and the other is network information.

Assets can be lost if you choose the wrong address or network, you must make sure to check the two pieces of information before making a transaction. Fortunately, for those who are familiar with banking systems such as Internet banking, an address is a concept similar to an account number. The mistake of using the wrong address can be easily avoided by simply double checking the address you’ve entered. On the other hand, the selection of networks requires prior knowledge. Let's take a closer look at this.

※ Please refer to the relevant section for the detailed concept of address.

What is a hash function? (2)

Why are the networks different?

Blockchain is operated by a decentralized network. Since there is no single entity that can control the decentralized network, anyone can access it, and the possibility of participating in the operation and receiving rewards is open. Conversely, this also means that when an incident occurs, there is no manager to solve it.

In the Internet environment, it is not difficult to connect different banks because all banks use the same Internet. For blockchain however, it is not easy to connect with each other because various cryptocurrency systems are not operated on the same network. Although inconvenient, it is also a limitation of the current blockchain and cryptocurrency ecosystem. These issues are called interoperability issues.

Decentralized networks that started with Bitcoin are maintained by participants. It consists of a form in which a well-known miner contributes to the security necessary to operate the network and receives coins as a reward. Since the network is operated by participants, functional expansion is also slow because it has to collect opinions and go through a review process to come to a consensus.

Blockchain has been evolving as a way to create new networks for better functional expansion. It is for this reason that the Ethereum network was born rather than updating the smart contract function on Bitcoin. New cryptocurrencies are required because new networks need new participants and rewards for them.

For this reason, in the cryptocurrency ecosystem, different networks are created and new currencies are born, so different decentralized networks have been formed. A network operated with currency that actually has value is called Mainnet, and various mainnets are currently in operation. Currently, various mainnets exist and are operated with their own strengths that are distinct from each other.

Some mainnets are very fast, while others have very low fees. Or there are mainnets with privacy protection features that make it impossible to track funds. These are separate networks run by different participants.

What is the difference between a coin and a token?

Not all projects have to run their own networks. Typically, it is not necessary to create an independent network to operate decentralized finance or NFT projects. A network is not required, but when you want to form a decentralized ecosystem with the security of blockchain, you can choose to issue tokens with a smart contract.

For example, Uniswap, the largest decentralized exchange, operates on the Ethereum network. In decentralized exchanges, the main task is to secure sufficient liquidity to enable immediate token exchange. To solve this problem, Uniswap issues UNI tokens and provides liquidity to reward participants who contribute to the operation of a decentralized exchange.

A coin can be said to be a currency issued to maintain a single network. Most representatively, Bitcoin is the currency in which miners receive rewards and transactions in the Bitcoin network. Similarly, in the Ethereum network, miners are rewarded in Ether, and in transactions they send and receive Ether.

A token is a currency that can be created by smart contracts. For example, various tokens can be issued on Ethereum, a representative smart contract platform. It was explained in the past article that a smart contract is a program implemented on a blockchain. If you write the issuance amount and currency unit with a smart contract and register it on the blockchain, money is distributed according to the set program. The smart contract issues money as written in the contract, just like a bank.

In short:

Coin: The currency used on the platform where the mainnet is operated

Token: A currency system issued through smart contract, no mainnet

In summary, in the cryptocurrency ecosystem, there are two currency systems: coins required to operate the mainnet and tokens used to build decentralized applications. Unlike coins, tokens can be issued in a number of ways on a single network. If they are issued in different forms, there may be problems with transactions or exchanges. We come to a point where a token standard is needed such as ERC-20, which we will discuss in details in the next article.