As of this writing, crypto markets appear to be on fire by most newcomers to the crypto space. The news appears bizarre: Elon Musk is causing massive market movements with every tweet.
El Salvador is using volcanoes to produce Bitcoin. China and India are allegedly “banning” cryptocurrencies. It’s like one gigantic, multi-trillion-dollar joke fueled by billionaires and TikTok stock pickers alike.
It can be overwhelming when you’re just starting, and you may not know where to begin.
Before jumping onto YouTube to watch influencers shill you their flavor of the week, we highly recommend, for your sanity and your finances, to brush up on the basics first.
That’s right. It’s time for a quick run-down of the cryptocurrency terms you need to know. Maybe you want to know everything, but that will split your brain in two, and it’ll leave you thinking, “I don’t want to know, just tell me what to buy or what to do.”
Unfortunately, to be successful in the crypto space, you’ll need to do a little bit of homework first. We’ve all gone through it, and you’ll feel much better once you understand the barebone basics.
So without further rambling, let’s dive in. Here are the top cryptocurrency terms you need to know!
The Top Cryptocurrency Terms to Know — Index
Cryptocurrency or “crypto.”
Cryptocurrency is a “digital” or “virtual” currency secured by cryptography, making it difficult to counterfeit or double-spend. Crypto has been around for more than a decade and has grown in popularity due to its decentralized nature. No banks are controlling the flow of cryptocurrencies, which makes them immune from government interference or manipulation.
Many cryptocurrencies are decentralized networks built with blockchain technology, a distributed ledger across many computers.
A blockchain is a system of recording information so that it becomes difficult or impossible to change, hack, or cheat the system. It is essentially an online ledger, where every record added creates another “block” on the “chain.”
These blocks are all linked and secured by cryptography, duplicated, and distributed across every computer on the network. Each block has records for any number of transactions and activity on the database.
Blockchains such as Bitcoin and Ethereum are constantly growing, which significantly the security of their ledgers over time.
Digital currency refers to any currency available solely in electronic form. Electronic variants of currency already dominate most of the world’s financial systems.
Plenty of benefits draw people to digital currencies. These include fast transactions, 24-7 access, cheaper international transfers, more accessibility for the “unbanked” (think people living in rural areas of underdeveloped countries), and efficient government payments.
Digital currencies such as Bitcoin and Ethereum have brought significant improvements and new use-cases. We are likely to see central banks and governments progressively adapt and improve upon similar versions of the technology.
Distributed Ledger Technology (DLT)
Distributed Ledger Technology, more commonly known as blockchain technology, is the technological infrastructure that supports the “decentralized” networks made popular by tech such as Bitcoin.
DLTs are a massive shift away from the traditional “centralized” systems most sectors have relied on for decades. DLTs promise to drastically reduce reliance on trusted third parties, such as multinational banks.
A cryptocurrency public ledger refers to the modern, digital form of conventional record-keeping systems. Public ledgers are available for anyone to view, meaning anyone can verify transactions using the ledger.
Cryptocurrencies and blockchain systems use public ledgers to keep participants’ identities and cryptocurrency balances anonymous while also recording all official transactions executed between network participants.
Bitcoin is the world’s first decentralized digital currency, created back in 2009. It follows a mysterious and anonymous mathematician who wrote an encrypted paper outlining its design called Satoshi Nakamoto. The identity of this brilliant thinker has remained unknown to date.
Unlike traditional online payment mechanisms like credit cards, Bitcoin offers lower transaction fees without compromising safety or convenience since it doesn’t deal with banks or governments.
Satoshi Nakamoto is a pseudonym used by the person or persons who developed Bitcoin. In 2008, he also conceived of blockchain technology which would become integral to all cryptocurrencies in existence today.
They were last seen around 2010. Many speculate that we will never find out their identity due to how secretive they had been throughout the early history of blockchain and Bitcoin.
Ethereum is a blockchain network with a proprietary cryptocurrency and programming language. The Ethereum platform allows users to create decentralized applications called “dApps” which users can also monetize.
The Ethereum network is the second-largest next to Bitcoin in developer activity and market value. Ethereum boasts an enormous developer community with countless projects built on top of its software.
Decentralized Apps (dApps)
Decentralized applications are digital applications or programs that live and operate on a blockchain or P2P network of computers.
A typical web app, such as Tinder or WhatsApp, operates on a computer system owned and operated by a centralized organization. By comparison, dApps can operate on P2P networks where multiple participants may consume content and support the network by various functions.
Classic examples of distributed P2P networks include BitTorrent and Tor, though blockchain networks push what dApps can do further. Cryptocurrency dApps utilize blockchain networks that are public, open-source, and decentralized. Such technology protects the network from any single authority tempering with or taking control of it.
Gas is the fee required to transact or execute a contract on the Ethereum blockchain. Priced in small fractions of ether (ETH), or “gwei,” gas powers “smart contracts” securely while maintaining the decentralized nature of the network.
Gas prices fluctuate based on supply and demand among the network’s participants. “Miners” choose to process transactions based on current gas prices. At the same time, other network participants utilize the network’s processing power, shifting demand.
Smart contracts are “self-executing” contracts with the terms of the agreement between buyer and seller directly written into the contract’s code. The code and contract agreement exists in a distributed, decentralized blockchain network.
People are understandably excited about smart contracts, as this tech has the potential to revolutionize business and economics by making transactions immutable. Smart contracts can solve a couple of problems, including identity theft or getting your money back from an untrustworthy vendor.
Smart contracts allow disparate, anonymous parties who may not necessarily trust one another to complete trusted transactions and make agreements without the necessity of a central authority.
Click here for a good video explaining how smart contracts work.
Cryptocurrency “mining” is the process of some network participants who operate “nodes” to verify transactions between users while also introducing new coins into the circulating supply of the crypto in question. It is a system that supports the cryptocurrency’s decentralized network without the need for an outside central authority.
Mining can be a rewarding venture for people who know what they’re doing, but it’s not usually easy. Once you dive down the rabbit hole, you’ll find many crypto mining methods unique to each project in the crypto ecosystem.
Some of these systems are simple, and others require expensive machinery. At the same time, some cryptocurrencies do not incorporate mining at all.
Read Binance’s article on mining for a more in-depth understanding of how all this works.
Proof of Work (PoW)
Proof of work (PoW) is a decentralized consensus mechanism that requires network participants to use significant computing power to solve mathematical puzzles. Such a system prevents malicious attacks or cheating of the system.
It is a widely applied system in cryptocurrency mining, preferred by many for validating transactions and producing new tokens into the crypto ecosystem.
First popularized by Bitcoin, PoW allows for secure peer-to-peer transactions without the need for a trusted third party (I’m sure you’re noticing a trend by now). The downside of PoW is that it requires enormous amounts of energy and infrastructure at scale (El Salvador using volcanoes to mine Bitcoin was not an exaggeration).
Proof of Stake (PoS)
Proof of Stake (PoS) is a system where participants can mine or validate block transactions based on the number of coins they possess. The more coins a miner holds, the greater their mining power.
PoS is a viable alternative to Proof of Work, though visceral debate rages over the most secure system. Ethereum is in a multi-year process of switching its system from PoW to PoS. You’re likely to hear all about it if you stick around the crypto community long enough.
A crypto address is a string of characters representing a wallet that can send and receive cryptocurrency. Like a physical address, email or website, every crypto address is unique. It signifies a wallet’s location on a blockchain.
Blockchain addresses are typically not easy to read, represented as long random character strings. Your computer, however, will have no trouble reading these addresses.
Because these addresses are public, you can use a “blockchain explorer” to track any transactions entering or leaving from an address. Other than a few privacy-based blockchains, you can also identify the number of assets within an address.
A private key is a complex cryptographic string of characters, similar to a password, enabling access to an associated cryptocurrency.
When you “seed” a new cryptocurrency wallet, you typically receive a public address and private key for sending and receiving your crypto. Other users can deposit to your wallet using the public address. However, they cannot withdraw anything without access to the private key.
While this system protects users from theft, it is also a much larger element of responsibility when compared to traditional banking systems. A common analogy of losing your private key entails losing your physical wallet on the street.
A public key is a cryptographic code that allows you to receive cryptocurrencies into your wallet or account.
Digital wallets are software-based tools for securely storing payment information and passwords for various payment methods and websites. They allow for fast and simple payments and more secure passwords and are the de-facto method of using cryptocurrencies.
These software applications are frequently used alongside mobile payment systems, permitting people to purchase directly from their smartphones. Today these wallets handle everything from crypto transactions to digital coupons.
The tech is not unique to cryptocurrencies. Many modern banks and companies such as Venmo and Paypal offer digital wallets, though not all of them incorporate blockchain or cryptographic tech to boost their security and functionality (yet).
A seed phrase, mnemonic phrase, or mnemonic seed, is a group of words that enable access to a cryptocurrency wallet. It is also called a “recovery phrase” or “backup phrase.” Do not lose your seed, as it’s the only way you can recover access to your wallet!
Altcoins are any cryptocurrency that is not Bitcoin.
Thousands of altcoins exist today, and the number is climbing. They now account for over 40% of the total cryptocurrency market. It’s safe to say that the crypto ecosystem has evolved and diversified significantly since Bitcoin’s inception. Currently, Ethereum is the largest and most used altcoin.
Fiat currency is a government-issued currency unbacked by any commodity such as gold. Fiat enables central banks like the United States Federal Reserve to possess significant control over the economy since they can regulate currency supply in the financial system.
The vast majority of modern paper currencies, like the U.S. dollar, are fiat currencies, typically with a dominant representation as a digital currency. Most cryptocurrency advocates believe that crypto is a strong alternative to fiat currencies. They pose a defense against common concerns around fiat, such as hyperinflation.
Decentralized finance (DeFi)
Decentralized finance (DeFi) is a movement as much as it is a sector or technology stack. Proponents of DeFi aim to disintermediate finance, allowing for peer-to-peer transactions without the need for trusted third parties or centralized authorities.
Know Your Customer (KYC)
Know Your Customer (KYC) is a set of standards used within the financial sector to verify a customers’ identity and risk profile. The SEC mandates that new customers provide details about their finances before opening an account.
Many cryptocurrency-related services do not have an established set of rules regarding KYC (though that is rapidly changing).
Non-fungible tokens (NFTs)
Non-fungible tokens (NFTs) are data blocks stored on a blockchain, meaning you can easily certify the uniqueness of a digital asset. For that reason, NFTs are not interchangeable. They can represent assets like photos, videos, audio, and other digital files such as in-game video game items and concert tickets.
A “whale” refers to an individual or entity that holds a significant portion of a cryptocurrency. Whales are investors or traders with crypto holdings large enough to cause concern or intrigue. Their decisions have enough weight to sway market conditions and public sentiment around a crypto project.
I believe this article provides sufficient information for anyone just getting started in cryptocurrencies to understand the local dialect and have a meaningful conversation.
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