The Layers Of Bitcoin

in LeoFinance7 months ago

Hey JessCoiners

The rabbit hole that is bitcoin is as deep as it is wide and as it continues mature, improve and grows so too does its complexity. Each year more people hear about Bitcoin and plan to own some and with the user base and the demand for it, growing there are now several layers of Bitcoin available to support users journey into the unknown.

Each layer of Bitcoin serves a different purpose and each use cases and has its own pros and cons. Yes, I know this seems weird, but all money has layers.

Yes, I've said Bitcoin is fungible like all money. All Bitcoin is the same, and to an extent, yes that is true. Bitcoin is fungible, and any UTX's can be combined in various ways to form an amount of Bitcoin.

In the fiat money world, for example, we have physical cash, we have bank deposits, credit, loans/bonds, equity/shares, financial derivatives and more. There are so many levels to many in the fiat system that all move in and out of the base layer; the most liquid form wish is cash.


How Bitcoin is layered

Bitcoin also has its own layers, and the types of Bitcoin depends on how close or how far you are to the base layer, or as we refer to as on-chain transactions.

As if Bitcoin wasn't complicated enough, right?

I know, you're just learning, but I think it's important to start to make the distinction.

The more people get into Bitcoin, the more they need to learn about the variations. Since they may choose a certain layer of Bitcoin, one that may not exactly be suited to their need or use for Bitcoin.

Bitcoin means different things to different people, and in my case, I hold Bitcoin deposits in different places for different uses.

As a Bitcoin holder, you need to know what layer you're in and why and how much Bitcoin you'd like to keep at each layer.

Baselayer Bitcoin

This is the OG, the REAL Bitcoin if you will, this will be any Bitcoin that YOU own in a wallet where only you have access to the private keys. Base layer Bitcoin is a transaction that is settled on-chain and has been confirmed by the network to be in your wallets possession.

Base layer Bitcoin is ideal for the long term HODL and for those who want to take physical ownership of their Bitcoin. I personally would recommend keeping most of your Bitcoin in a base layer transaction, this can be within a hot wallet or cold storage depending on the amount of Bitcoin or how long you plan to store it.

I personally hold most of my Bitcoin in offline cold storage.

Second layer Bitcoin

Bitcoin's scalability has come under question over the last few years as we reach more users and with more users comes more transactions and with more transactions means a slower network.

To help remove some of the load on the base chain layer second layer solutions like the Liquid Network and Lightning Network have been created to solve the problem of using Bitcoin at scale.

This is not on-chain Bitcoin, but Bitcoin that is locked into a payment channel and then used on a side-chain. This is great for quick and small transactions and its always good to keep a Lightning Network-enabled wallet on hand to make a quick payment, tip a friend or send out an invoice to be paid in Bitcoin.

Second layer Bitcoin can always be converted back into the main chain at any time. You simply close the channel and send the Bitcoin to a wallet that you own on the base layer.

Representative Bitcoin

Reprensetive Bitcoin is Bitcoin that is locked into a Smart Contract to be used on another blockchain like Ethereum. It is commonly also known as wrapped Bitcoin or wBTC. This allows you to send Bitcoin to a smart contract and have the contract mint a token that represents the amount of Bitcoin you locked into the contract.

You can then use that wrapped token on any dapps built on the chain such as Ethereum and when you're done, you simply close the contract and claim your Bitcoin to be sent back to the base layer.

This type of Bitcoin is great for those who want to speculate in the DE-FI market and want to earn an income using their Bitcoin or tap into the vast array of dapps built on Ethereum.

Deposited/Custodial Bitcoin

As the saying goes in crypto

Not your keys, not your crypto

Bitcoin sent to exchanges don't belong to you, they are in the custody of a third party, and all you see is a claim cheque or representation of the Bitcoin you sent. In fact, the Bitcoin you sent could be long gone and pulled off the exchange by another user, and you will get another Bitcoin another user has deposited into the exchanges pool of funds.

Custodial Bitcoin is not confirmed on the chain, and you are trusting a third party to be able to pay the claim you have in your wallet. This can lead to things like rehypothecation, and fractional reserve Bitcoin and exchanges can even lock down their service should they dip below their reserve requirements.

I would never recommend leaving Bitcoin on an exchange unless you're going to trade it and once you're done, I would say remove it off the site and make sure you take physical ownership of your Bitcoin.

Paper Bitcoin

Paper Bitcoin are things like CME futures, or GBTC the grayscale fund; you buy into contracts or funds that bet on top of Bitcoin. You never actually hold the real Bitcoin you're simply getting exposure to the market via a 3rd party service.

They buy and hold the Bitcoin, and you have a contract that claims that of their Bitcoin some belongs to you. This is more for institutional investors who would rather offload regulation to a 3rd party or for those who want to have the backing of a custodial service but have exposure to Bitcoin.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."

Let's connect

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I have about 95% of my BTC in cold storage and the rest is deposited to Luno and Celsius just as a bit of cheeky interest earning. Waiting until ledger roll out DeFi or staking with the BTC then I'll go full hog with it.

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Any BTC not in cold storage needs to get out there and earn its keep you lazy bum, you could have been a contender, wheres my rent?? If it's not stuck in a buy order it's bringing me interest

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It's just a question of how much BTC I leave out of cold storage earning interest... tempted to go 90% in Celsius now we're getting less sats on the daily buys... put these lazy bums to a bit more work!

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I'm also thinking about it but I don't want to risk it, I will try not to be greedy I feel like I have enough as I am willing to put in those apps, but if they ant to give me bonuses I could consider adding more but for now, I want a nice offline amount

Yeah that's what's holding me back is the risky side of it, would feel like I'm handing that over and trust in the Gods really - at least what's in the ledger is mine! I'll be keeping a look out for the next bonuses though for sure, not going to turn down an extra $20 of BTC for free!

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its amazing covering about BTC in one Post

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Thank you, really appreciate it, when you're as fascinated as I am about Bitcoin, you're happy to share your learnings

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yes i am also.. but i have to too much words to covering about BTC

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Things keep getting more complex - I keep all my cryptos in my own wallets offline and wouldn't leave anything on an exchange or anywhere else - sounds dodgy

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I am the same, well when it comes to my Bitcoin, altcoins I am either staking in a native wallet or left on an exchange in a sell order I am waiting to have filled and then ill pull that sweet BTC gains off the exchange :P

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When I read your post I understand that I don't understand anything, how much I have to learn. Thanks for what I'm learning from you now.
Do I understand that can be a reliable wallet?
I'm amused by the statement (which, moreover, is absolutely true and common sense)...

I personally would recommend keeping most of your Bitcoin in a base layer transaction, this can be within a hot wallet or cold storage depending on the amount of Bitcoin or how long you plan to store it.

It's hard for me to believe (but probably because I'm referring to myself) that there are many (ordinary) people who have a lot of Bitcoin.

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LOL Don't worry I am right there with you my blogs are just me learning and thinking out loud and looking for feedback, so we learn together.

I wouldn't say the app is a reliable wallet since its a custodial service, they do have their own non-custodial hot wallet you can use and connect to the app if you want that added level of safety I recommend, but I always encourage people to have cold storage like a ledger or a trezor.

I'd say there probably a few thousand people with a large amount of BTC and the rest of us fight over the scraps lol and I'm picking up every satoshi I can

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I understand thank you! I try to document myself from several places and I will follow your blog, of course. Thanks for the wallet recommendations.

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Oh regarding the cold storage physical wallets always try to purchase it from an authorised dealer and check if its authentic before using there are also hardware wallet scams out there so be very careful with your crypto

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Thank you!

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i really enjoy watching some BTC Atms around the town (not that we got many, 2-3 in total i think :P) but it's a start

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I think we have 2 in Cape Town, but they're pretty far away from my home, I have been meaning to check them out not that I would withdraw, only deposit because I'm all about stacking them sats

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I'm a Jessie 🙄🤔😒

What I can understand is that bitcoin has layers just as onions have layers so does bitcoin have layers just like ogres and so we all have layers.

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LOL yes and Bitcoin might be an ugly Shrek to the rest of the world but we love it all the same because we know deep down it has a good heart and intentions

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Of course, he means well, but sometimes we don't understand him and misjudge him.

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I learned something new today. I never knew there were layers. I always thought that BTC being traded on exchanges weren't really recorded on chain per transaction and only when you take them out from the exchange do these trades register on chain. So I was more familiar with the Deposited and BTC on cold storage. Thanks for the interesting read!

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Glad I could be your fun crypto fact of the day :), but yeah BTC as it grows it will continue to add new layers, all money has layers we had fiat, cash, deposits, cheques, credit cards, debit cards, laons and so it goes on

I prefer the safest form of BTC on my good old cold storage

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I don't have my money on BTC but will consider that when I try to accumulate more of those. Thanks a lot, something to teach to people new to crypto. I'm still trying to get my friends to be interested.

Well you're earning crypto here aren't you? You can always pick up small bits of swap.BTC and when you have a few Satoshis you can store it on-chain somewhere safe that you own

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I do and it's more than what I expect to earn while treating the whole platform as a hobby (just cents, because I have yet to make a good art piece to showcase at the art groups, I got a digital learning journey to do which made me started blogging on the first place but learned to be interested in cryptofinance because of how it's in the perfect time of my life to explore investing options).

After I stopped looking at the rewards on my posts and started caring more about interaction (mostly at discord), the opposite effect happened, I get blessed by the community.

BTC is on the list of coins to accumulate once I get more cash flow to invest. But I'm more inclined to put more money on Hive/Leo than other coins. Sort of having faith that the platform was the first place that exposed me in depth about crypto.

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If you make art you should check out platforms that tokenise art and you can sell some of your art for crypto

I made the same conclusion when I started when I stopped caring and just posted what I wanted to talk about, people came, commented and gave me rewards and I did the same for them, that's the fun part, the money to me is cool but I don't care that much about it

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Thanks! had it bookmarked now. I'm familiar with the two options listed. I thought about doing that but I'm learning the digital art because that's more suited for cryptoart than traditional media, just my opinion.

If I use a pen or pencil on paper, the illustrations just come naturally but when I started transitioning to digital art, the device and software had their own learning curves to get used to. I'll dwell into that once I can create some digital art people would be really interested in buying.

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I learnt a lot reading this. Thanks for sharing, man.

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Sweet, I'm glad you found it insightful, Bitcoin is quite the rabbit hole and its changing all the time

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You can say that again. I've really learnt a lot, and continue to learn, over the past few years. Up and down, but the eyes are not off the goal.

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I feel the same way and just when I think I know a lot I find out there's more too this bitcoin and crypto space and I feel silly for thinking I knew it all lol

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Hahahaha I can't stop laughing. We just have to keep learning and perhaps unlearning too.

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God Morning and Thanks Today post.
In Sweden it is a lot People owning contracts (papper coin) so Maybe it is different from different country.
With paper I get a much lower tax.

Good morning looks like someone had their coffee today. So how do they buy and trade these contracts? Is there an exchange where you buy and sell them?

Why care about tax? You can't get taxed if you never sell :P, HODL till we die

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You can buy/sell contract in BTC and ETH in our biggest stock-exchanges. It takes 2 minutes to register and you can trade them in a speciall low-tax account. Every year you pay 0,8% of the total value. It doesnot matter if you sell or not. This is the most common way because it is so easy, "secure" and low tax.

You can also buy CFD - that is pretty common too. Without leverage it is pretty same value like real Btc. Here I have 15 different coins to select. I have to pay 30% tax when selling IF I make profit. This can be automatcly calculated and report to taxdepartment- Also a EASY way.

I have both - but most real crypto because I think it fun to test out a lot of things.

Sounds like it defeats the purpose of investing in crypto to me and you might as well buy stocks, but hey to each their own. Easy and secure lol yeah right what's more secure than the blockchain?

I get the need for Stockholm syndrome investors, as they keep value in the system, but its fighting a losing battle, or so I hope

I'll store my own crypto thank you very much and ill wait for the rest of the world to catch up and make me stupidly rich

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Each layer of Bitcoin serves a different purpose and each use cases and has its own pros and cons. Yes, I know this seems weird, but all money has layers.

I think many people need to understand this.

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Absolutely, not all money is created equal but they are all useful in certain situations and you need to rebalance your ownership of the various layers to get the most out of your money

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For me Bitcoin is a Bitcoin - before reading this post...
What is Hot and cold storage - in simple language please..

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A hot wallet is a piece of software you download either on your computer or mobile phone that allows you to interact with the blockchain via their node/service. So like the wallet Jaxx, So you can create a wallet and have ownership of the keys and can move that wallet to any device and only you have access to the keys, but you're still using a device that can be hacked like a computer of a phone

A cold wallet is a device that is ONLY used to store cryptocurrency like a ledger hardware wallet or Trezor wallets. These small flash drive looking wallets allow for an additional level of safety since their software and hardware is only designed to store crypto that's it