What are Cryptocurrency Networks?

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With blockchain technology and cryptocurrencies becoming more prevalent, several companies and individuals have begun to adopt them in conducting payments. However, sending and receiving crypto is not as straightforward as traditional finance since there are several networks they can pass through. This guide will explore the basics of cryptocurrency networks so that any beginner can easily use them to send and receive crypto.

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Definition of cryptocurrency networks

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Before understanding cryptocurrency networks, let’s discuss the blockchain first. 

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A blockchain is a decentralized, distributed digital ledger that records transactions occurring within it by grouping them into a “chain of blocks.” It is handled by a network of computers known as nodes which regularly maintain the ledger by storing and validating transactions. Blockchains are secured by several methods such as by cryptographic techniques, its decentralized nature, being publicly viewable and the fact that it is very difficult to tamper with blocks once they are added to the blockchain.  

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Cryptocurrency networks are a specific type of blockchain that caters to digital currencies. They are decentralized ledgers that track crypto asset transactions within their network. 

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Think about how a coffee shop owner would record their shop’s earnings. They would need a physical notebook or a digital file containing all transaction details to monitor the success of their business correctly. Cryptocurrency networks are similar to these in that they are used to store and monitor transactions. 

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Importance of understanding networks in cryptocurrency

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It is essential to understand cryptocurrency networks because they are the means through which your crypto funds are sent, received, and properly recorded. There are also many different cryptocurrency networks, each with its own native coins and use cases. Each network also has its own rules and consensus mechanisms that govern how transactions are processed. Understanding cryptocurrency networks also allows you to minimize mistakes and avoid losing your assets. 

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Examples of networks in cryptocurrency

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Here are some examples of different cryptocurrency networks 

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• Bitcoin network - The Bitcoin network is a decentralized, peer-to-peer network that allows users to send and receive Bitcoin, the world’s first and most recognizable cryptocurrency. It uses a Proof-of-Work consensus mechanism which means nodes verify transactions through a process known as mining. This consists of solving complex mathematical equations to add new blocks to the blockchain. The Bitcoin network’s native cryptocurrency is “BTC,” which has a set supply of 21 million coins. 
• Ethereum network - The Ethereum network is a decentralized open-source network that allows developers to use smart contracts to build various decentralized applications (dApps). The network used to operate on a Proof-of-Work consensus mechanism but has recently transitioned to a Proof-of-Stake consensus mechanism. This means transactions are verified by validators chosen by “staking” or locking up a certain amount of their holdings as collateral. Its native cryptocurrency is “ETH.” Several other use cases for cryptocurrency, such as decentralized finance and non-fungible tokens, also emerged on this network. 
• BNB Smart Chain network - The BNB Smart Chain network, formerly known as the Binance Smart Chain network, was developed by Binance, the world’s largest cryptocurrency exchange. It was designed to be compatible with the Ethereum Virtual Machine (EVM) - which means the BNB network can run code written for Ethereum. It uses a Proof-of-Stake consensus mechanism. Like the Ethereum network, it was also made to support the development of decentralized applications (dApps) and smart contracts but with lower gas fees and faster confirmation time. Its native cryptocurrency coin is “BNB.” 

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Use cases of cryptocurrency networks 

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Cryptocurrency networks have significantly contributed to redefining finance and various other industries. Here are some examples of their use cases: 

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• Peer-to-peer payments: Cryptocurrencies allow individuals to make direct payments to each other without the need for intermediaries. 
• Remittances: Cryptocurrency networks enable low-cost and fast cross-border payments, making it more convenient to send money abroad. 
• Decentralized Finance (DeFi): Cryptocurrency networks made way for the creation of decentralized financial applications that offer a range of financial services, such as lending and borrowing.
• Tokenization: Cryptocurrency networks allow assets such as real estate, commodities, or even fiat currencies to be represented as digital tokens on a blockchain. Specific examples would be Paxos Gold (PAXG) which tokenizes gold and USD Coin (USDC) which tokenizes the US dollar. Tokenization makes it easier to trade and transfer ownership of these assets.
• Supply chain management: Blockchain technology and cryptocurrency networks can be used to create a more transparent and secure supply chain. This can allow companies to track products and materials more effectively to prevent counterfeiting. 

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Using networks effectively 

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As more people and businesses recognize the benefits of these networks, it's crucial to understand their practical use cases and how to handle them safely and efficiently. One of the most important aspects of using cryptocurrencies is knowing how to send and receive them properly. You need to be aware of several factors when using different cryptocurrency networks to send and receive cryptocurrency. 

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• Network Compatibility: Different cryptocurrencies and tokens are supported by different networks. For example, you send/receive BTC on the Bitcoin network while you send/receive ETH on the Ethereum network. Before sending/receiving cryptocurrency, ensure you are using the correct network. If you send BTC to an Ethereum address, you may lose your funds due to you sending to an incompatible network. 
• Address Compatibility: While you may be sending/receiving on the correct network, you may still lose your funds if you send it to the wrong type of address. There are many types of addresses to provide flexibility in how one uses a network (enhanced security, faster transaction speed, etc.) though they are not all compatible with each other. For example, there are many types of Bitcoin addresses, such as “Legacy,” and “SegWit”. Legacy addresses are not compatible with SegWit addresses meaning these addresses cannot receive Bitcoin native to SegWit. Aside from checking the network compatibility, ensure both the sender and receiver are using compatible addresses.
• Fees: Cryptocurrency networks charge transaction fees in order to power the network. Understanding how these fees are calculated can help maximize user experience significantly. For example, fees tend to rise rapidly when a network is congested meaning there are a lot of ongoing transactions which the network cannot process right away. When a network is congested, waiting a bit before confirming your transaction can reduce your costs. You can check for network congestion and average transaction fees for a network at any time by going to a block explorer like blockchain.com or etherscan.io. If the coin/token you are sending/receiving is also compatible with several networks, you also have the option to choose the network with the lower gas fee. 
• Confirmation times: Cryptocurrency networks have different confirmation times, which can affect the transaction processing speed. A confirmation time is the amount of time passed from when a transaction is made to when it is recorded on the blockchain. Knowing the confirmation times of different networks allows you to choose which network to use, assuming you have timely needs. You can find out the average confirmation time of different blockchains by doing a quick Google search. 

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Now that you understand cryptocurrency networks, you now know how you can properly send and receive crypto. There are many more uses for blockchain and cryptocurrency networks than cash transfers, so be sure to explore them as well!

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