As the world of cryptocurrency, blockchain, and Web3 continues to grow, it’s increasingly important to understand the essential components and terminology associated with these technologies. The purpose of this blog post is to provide a term and definition sheet for individuals seeking to delve deeper into these innovative fields. Armed with this knowledge, you will be better equipped to engage and participate in the evolution of the digital frontier.
Basics of Cryptocurrency and Blockchain
- Cryptocurrency: A digital or virtual form of currency that uses cryptography for security, making it difficult to counterfeit. Crypto – meaning hidden – is derived from the ability to send and receive encrypted transactions. Bitcoin, Ethereum, and Ripple are examples of cryptocurrencies.
- Blockchain: a digital network that uses technology to validate and record transactions on a public database that can be accessed on the web. Each transaction is assigned a unique string of characters (random numbers and letters), enabling the sending, and receiving of an encrypted digital exchange, known as “crypto currency.” Blockchains are secure and transparent, and have been developed to track anything of value, including money, data, and assets.
- Bitcoin (BTC): Built using blockchain technology, Bitcoin was the first decentralized cryptocurrency, proposed by an anonymous entity ‘Satoshi Nakamoto’ in 2008.
- Altcoin: Any cryptocurrency other than Bitcoin is referred to as an altcoin. Ethereum, Litecoin, and Ripple are examples of altcoins.
- Decentralized Finance (DeFi): A financial system built on blockchain technology that operates without a central authority, enabling peer-to-peer financial transactions.
- Web3 (Web 3.0): The third generation of internet services that utilizes blockchain-based decentralized networks, aiming for a web controlled by users rather than centralized authorities.
- Decentralized Application (DApp): An open-source application that runs on a blockchain network, outside the control and authority of a single entity.
- Smart Contracts: a contract, typically written in computer code, where the terms of the agreement are programmed to be conditional. Smart contracts run on a blockchain network and are executed without a 3rd party intermediary (Real world comparison: A vending machine).
Types of Cryptocurrencies:
- Coins: In cryptocurrency, coins refer to digital currencies that are built on their own blockchain. They can function independently and have their native platforms. Bitcoin, Litecoin, and Ethereum are all examples of coins.
- Tokens: Tokens are a type of cryptocurrency that do not have their own blockchain but live on another blockchain. They are created and managed by a smart contract and often represent assets or utilities on a blockchain.
- Utility Token: A type of cryptocurrency that provides users with future access to a product or service. These tokens often operate on their own native blockchain and can be used as a type of payment within the network they belong to.
- Non-Fungible Token (NFT): A type of digital asset created using blockchain technology that represents ownership or proof of authenticity of a unique item or piece of content. Unlike cryptocurrencies like Bitcoin or Ethereum, NFTs are not interchangeable, each carrying unique characteristics that set them apart.
- Security Token: A crypto token that derives its value from an external, tradable asset and is subject to federal laws that govern securities. They provide the holder with ownership rights in the issuing company.
- Meme Coin: A type of cryptocurrency that was originally started as a joke or for fun but may hold value and have a community behind it. Dogecoin is a well-known example of a meme coin.
Cryptocurrency Exchanges and Transactions
- Peer-to-Peer: A decentralized form of interaction between parties in a network, without the need for an intermediary. Transactions occur directly between participants. Bitcoin is an example of a peer-to-peer network.
- Address: In the context of cryptocurrencies, an address is a string of alphanumeric characters that represents the destination for a cryptocurrency transaction. In other words, it’s somewhat like a bank account number to which funds can be sent.
- Centralized Exchange (CEX): A type of cryptocurrency exchange where transactions are facilitated by a central authority (Examples: Coinbase, Binance, Crypto.com). CEXs typically have high liquidity, advanced trading features, and strong security measures, though they can be prone to hacking.
- Decentralized Exchange (DEX): A type of cryptocurrency exchange that operates without a central authority. Transactions on a DEX are facilitated directly between users through the use of smart contracts on a blockchain.
Blockchain Network Security
- Wallet: A software application that is used to store cryptocurrency. Wallets can be hot wallets or cold wallets. Hot wallets are connected to the internet (Example: MetaMask), while cold wallets are not (Example: Ledger Device).
- Keys: In cryptocurrency, keys refer to both public and private keys. A public key is a cryptographic code that allows users to receive cryptocurrencies into their accounts. The private key is a secret number that allows cryptocurrencies to be spent. Both are essential to the secure handling of cryptocurrencies, functioning together in a cryptographic algorithm to secure transactions.
- Seed Phrase: Also known as a mnemonic phrase or recovery phrase, a seed phrase is a list of words that store all the information needed to recover a cryptocurrency wallet. This phrase acts as a backup tool that can be used to restore wallet access if a user forgets their password or loses their device. The seed phrase should be kept secret and safe, as anyone who knows the phrase can access and spend the stored cryptocurrencies.
- Custodial Wallet: A type of cryptocurrency wallet where the private keys are held by a third party. The custodian is typically a company that specializes in secure storage of cryptocurrencies (Wallets on Centralized Exchanges such as Coinbase).
- Non-Custodial Wallet: A type of cryptocurrency wallet where the user holds the private keys. These wallets give full control of the account to the user, as there’s no dependence on a third party for security (Example: MetaMask or Ledger).
- Know Your Client (KYC): A standard procedure in the finance industry that ensures investment advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial position. It typically involves identity verification processes to prevent fraud and money laundering.
Blockchain Network Technologies and Concepts
- Decentralized Autonomous Organization (DAO): An organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government.
- Distributed Ledger: A ledger of any transactions or contracts maintained in decentralized form across different locations and people, eliminating the need of a central authority. Blockchain is an example of digital ledger technology (DLT).
- Consensus Algorithm: The method by which a blockchain network agrees on the contents of the blockchain. Examples include Proof of Work (PoW) and Proof of Stake (PoS).
- Node: Any computer that connects to the blockchain network is a node. It participates in the network and maintains a copy of the entire blockchain.
- Hashing: A function used in blockchain management that converts an input of letters and numbers into an encrypted output of a fixed length.
- PoW: A consensus algorithm used in many cryptocurrencies where miners solve complex mathematical problems to validate transactions and create new blocks. It is a very secure but energy-consuming method of achieving consensus.
- PoS: An alternative to the proof of work, the Proof of Stake consensus algorithm achieves network agreement by allowing users to ‘stake’ their coins to be chosen at random to validate transactions. It’s seen as less energy-intensive than Proof of Work.
- Mining: The process of validating and recording new transactions on a blockchain, often rewarded with new coins or transaction fees.
- Gas Fee or Gwei: In the Ethereum blockchain, “gas” refers to the computational effort required to execute operations. Gas fees are the transaction costs paid by users to compensate for this effort. “Gwei” is a denomination of Ether (ETH), and it’s often used to measure gas fees. 1 ETH equals 1 billion Gwei.
- Liquidity: In the context of cryptocurrencies, liquidity refers to the ability of a coin to be quickly converted into cash or other assets without affecting the market price. High liquidity in a market means that there are a large number of buyers and sellers, and the asset can be traded at stable prices.
- Yield Farming: Also referred to as liquidity mining, is a way to generate rewards with cryptocurrency holdings. It involves lending out cryptocurrencies via the DeFi (Decentralized Finance) ecosystem. In return for their service, participants are rewarded a fee, usually in the form of tokens.
- Staking: In the context of blockchain and cryptocurrencies, staking involves participating in a proof-of-stake (PoS) system or a network by contributing or ‘locking up’ a cryptocurrency in a wallet to support the network operations. In exchange for staking coins, participants may receive rewards, typically in the form of additional coins from the network.
The terminology of cryptocurrency, blockchain, and Web3 can seem intimidating at first glance, but with this guide, you now have a fundamental understanding of the key terms. As these technologies continue to evolve and intersect with our daily lives, having this foundational knowledge will empower you to engage with the crypto space in a meaningful way. As you continue your journey, remember, the crypto space is vast, and learning is an ongoing process.
Be curious, ask questions, and continue to educate yourself.
