Glossary: All Cryptocurrency Terms to Know (Part 1)
As the utility of cryptocurrencies in everyday life becomes more apparent, the buzz around the industry has grown. Now, beyond crypto enthusiasts, more people have shown interests in cryptocurrencies as they seek to adopt it to gain financial freedom.
But as cryptocurrency became popular amongst devout followers, some of the popular terms in the crypto world have left outsiders lost. Not to worry, we are here to simplify every crypto term you will need in the crypto world.
Address is a string of 26-35 alphanumeric characters. When Bitcoin is sent or received, for instance, an address is the identifier that denotes the origin or destination of the payment. It is not permanent, but a token used for a single transaction.
Altcoin (ALT) is a term used to refer to any cryptocurrency that is not Bitcoin. This is because they present themselves as alternatives to Bitcoin.
Blockchain is the technology on which Bitcoin and many other cryptocurrencies are built. It is an open ledger that records every transaction carried out on the Bitcoin network. It is both public and transparent, and private for individuals on the network, and it has no central authority.. The Blockchain cannot be changed, and is a true historical log of everything that has ever happened on the network, an almost perfect accounting system.
Blocks are like pages of a ledger. A block is made up of data from Bitcoin transactions that have not been recorded on a prior block. Each block is unchangeable, and a permanent record of all sorts of details, including the version number of the software, the hash of the previous block, the Merkle root, timestamp etc.
Block Explorer is an online tool through which all transactions of a cryptocurrency can be viewed - both past and current. The block explorer shows the contents of individual blocks, including transaction histories and balances of addresses involved in transactions recorded in those blocks. While all transactions are visible, their owners’ identity is cryptographically protected.
Central Ledger or General Ledger is a form of ledger where all transactions are stored in a central location. This is the ledger system used by traditional banks unlike the decentralised ledger (i.e. blockchain) used by Bitcoin.
Consensus algorithm is a mechanism used to protect the integrity of a cryptocurrency’s ledger. The consensus algorithm ensures that an agreement is gotten from all participants within a distributed system to validate a transaction.
Decentralised Applications are applications built on smart contract blockchains like Ethereum. This means the applications are not controlled or owned by a person or a single entity but operates on the decentralised network of the blockchain. These sorts of applications require no central permissions structure, and so are highly censorship resistant.
Decentralised Finance is a term used to describe digital assets, dApps, smart contracts and protocols that operate on smart contract blockchain, particularly Ehtereum. DeFi is a movement that aims to actualise financial inclusion for anyone anywhere in the world without a need for middlemen like banks. DeFi leverages smart contracts and the blockchain technology to ensure that middlemen are not required and terms of contracts and deals are still honoured.
Digital Asset is a collection of electronic data that is deemed to have value. Cryptocurrencies are considered to be digital assets because they aid peer-to-peer financial transactions and are data available only in a digital format. They share many of the same characteristics as commodity money, like Gold Coins, where there is a fixed supply and a generally accepted recognition of value.
Double Spend is used to refer to a case where a single token of a digital currency is used for two separate transactions simultaneously. A simple illustration is when you duplicate a digital file (e.g. jpeg or mp3 file) and send it to two different locations.
For music files, this may not be an issue but for a digital currency, it is a huge problem as it compromises the integrity of the system. It is this issue that checks such as PoW and PoS solve.
Encryption is basically the process of converting data into a code as a form of protecting the data. Cryptography, the science of ‘making and breaking codes’ on which cryptocurrency is based is a form of encryption.
Escrow is a form of financial agreement in which a third party is entrusted with holding and disbursing an asset involved in a transaction between two parties. The escrow serves as a security that ensures that a deal is honoured.
Exchange is a platform that allows you to exchange a cryptocurrency for fiat currency or another cryptocurrency.
Fiat currency is a currency issued by a government or central bank of a country such as the US dollar, Yen, Naira, Kenyan Shilling, CFA franc, Rand, etc. These currencies are issued from Central Banks to Commercial Banks through a process known as Fractional Reserve Banking.
Fork is a change in a blockchain’s protocol. This usually occurs when there is disagreement within the community on a major issue regarding how a cryptocurrency operates with one faction going another way from how the cryptocurrency currently works (e.g. bitcoin and bitcoin cash). A fork could also happen as the result of a major attack on the blockchain of a cryptocurrency; a fork allows the blockchain to be strengthened and protected against vulnerability and the impact of the previous attack (such as with ethereum classic and ethereum).
Genesis Block is the first block of a cryptocurrency ever mined. Embedded in the coinbase of the Genesis block of Bitcoin, Satoshi Nakamoto wrote “"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" - a reference to the Global Economic Crisis that motivated Bitcoin’s release.
Halving refers to when the reward miners receive for adding new blocks of transactions to the blockchain is cut in half. This happens at regular intervals and ensures that, despite growing adoption and use of BTC, there is an ever-diminishing but consistent supply.
Hash in the context of cryptocurrencies is a function that converts an input into a string through encryption.
Initial Coin Offering
Initial Coin Offering (ICO) refers to a way companies raise funds to create a new coin. It is the crypto industry’s equivalent of an Initial Public Offering (IPO).
Initial Token Offering
Initial Token Offering is another term for Initial Coin Offering (ICO).
Mining is the process of creating a new cryptocurrency. This is popular with Bitcoin. In the real sense, mining is the process of adding new transactions to the blockchain. This is done by “miners” who use computers with very high processing power to prove that transactions on the network are real. The outcome of their effort is the creation of new Bitcoins, which is referred to as mining.
Multi-sig means multiple-signature and it refers to a type of digital signature that requires two or more signatures in order to authorise a transaction. A number of cryptocurrency wallets use multi-sig as an extra layer of security. It can be illustrated as a safe that requires 2 or more keys before it can be unlocked.
Peer-to-Peer (P2P) is a distributed network in which each peer (referred to as a node) serves as both client and server. Some cryptocurrency exchanges use P2P networks, where users can buy or sell cryptocurrency to other users directly. The decentralized nature of this system serves a form of protection against cyber attacks since funds are not pooled to a central “location”.
Private key is like a PIN to your bank account. It grants a user access to the cryptocurrency in their wallet. A Private and Public Key work together - one as an external address to send to a wallet, the other as the personal key to unlocking that wallet.
Proof of Authority
Proof of Authority is a consensus algorithm that grants just a number of validators the power to validate transactions and add blocks to the blockchain -- this is based mainly on the validator’s reputation. This requires almost no computing power and ensures that the blockchain can be updated more frequently at close to no processing fee.
Proof of Burn
Proof of Burn is a consensus algorithm that is presented as an alternative to Proof of Work. It works basically on the same principle as PoW but without as much energy consumption required in PoW. Proof of Burn allows miners to “burn” or destroy tokens of a cryptocurrency by sending it to an “eater address” where it cannot be spent. The miner is then rewarded based on the number of coins burned and then stands a chance to add the next block to the chain.
Proof of Stake
Proof of Stake is a consensus algorithm presented as an alternative to Proof of Work. For Proof of Stake, a miner (actually referred to as a forger in PoS) is selected to validate a block based on their stake - that is, the amount of that cryptocurrency they own. Rather than rewarding miners with newly created cryptocurrency as in PoW, forgers are rewarded with transaction fees in PoS.
Proof of Work
Proof of Work is the original consensus algorithm used to deter attacks (such as a Denial of Service, DoS) on the ledger of a cryptocurrency such as Bitcoin.
What this means is that before a block is added to the chain, miners are given a puzzle that requires a lot of computational power to solve. Once the puzzle is solved, the block is added to the chain and the miner that solves the puzzle first is rewarded. This way, problems such as double-spend and adding invalid blocks to the chain are prevented.
Public key is often likened to a bank account number. It is a cryptographic code that makes it possible to receive cryptocurrency sent to your wallet.
Smart contract is a computer protocol that ensures that a contract between a buyer and seller is verified and enforced without the need for or intervention of a third-party. The use of smart contracts is more popular with Ethereum in the cryptocurrency world.