The essential terms you need to know before diving into the world of cryptocurrency!
There is no denial that cryptocurrency is the money of the future. However, to navigate the world of cryptocurrencies, one should acknowledge the terminologies most often thrown around in discussions. Whether you are a new investor or just want to know more about this highly complicated world, you will definitely find this brief explanation of some of the most commonly found terminologies highly useful.
Digital currency is a broader term referring to all money that exists in electronic form, which also includes cryptocurrency. Therefore, all cryptocurrencies are digital currencies but not all digital currencies are cryptocurrencies.
Cryptocurrency is a digital currency that uses cryptography to secure transactions. A vast majority of cryptocurrencies are decentralized, which means they are not regulated by any central authority. Instead, cryptocurrencies are governed by a peer-to-peer network called a blockchain.
Blockchains are the most essential component of the creation of cryptocurrencies. It is a database that is distributed among a computer network. With blockchain technology, data is collected in a structure called a “block”. When a block fills up, it closes and links to the previous blocks, forming a “blockchain”. When a block is recorded, it can’t be undone, which is key in maintaining a secured and decentralized record of transactions.
Proof of Work (PoW)
Proof of Work is a consensus mechanism that was first used by the Bitcoin cryptocurrency. The terms Proof of Work and mining are closely related to one another. Proof of Stake requires computers in the network to solve a mathematical puzzle for the blockchain, the winner updates the blockchain with the latest verified transactions while the network rewards it with a set amount of cryptocurrency. However, for the whole PoW process to take place, a lot of computer power is used.
Proof of Stake (PoS)
Proof of Stake is a consensus mechanism that differs from Proof of Work in that it is not as energy-intensive. In Proof of Stake, a user can stake their coins to gain the right to verify transactions. After that, a stakeholder will be chosen at random to validate the transactions. If the transactions in the block are correct, the block gets added to the blockchain and the validator gets rewarded for their effort. If the validator proposes the addition of a block with inaccurate information, they lose some of their stakes as a penalty.
Private keys are a form of cryptography, which function as passwords to allow crypto owners access to their coins. A crypto wallet consists of two main parts: a public address to receive assets, and a private key to withdraw funds. A private key is composed of alphanumeric characters which typically look like this: asf5489rgs3h1s86s8hrs6xnm66hrmk4i6qq3q1q.....
Altcoins are formed from words “Alternative” and “coin”, which refers to all coins that came out after Bitcoin, the first cryptocurrency.
Crypto Slangs: HODL, MOON, DIP, FUD, and WHALE
HODL: Often mistaken for the mispronunciation of the word “Hold”, HODL is actually an acronym for “Hold On For Dear Life”. Due to the volatility of cryptocurrency, HODL is used generally as a rallying call for others not to sell their coins.
MOON: A term that is often used in the form of the verb “mooning”, MOON describes a particular phase when a cryptocurrency is expected to rise significantly in trading value.
DIP: Describes a drop in a coin’s trading value. On the price chart, a DIP is visually presented by a “valley”.
FUD: Stands for Fear, Uncertainty, and Doubt. A pessimistic view with little confirmation is used to spread fear and misinformation in the crypto community about the uncertain future of a cryptocurrency in order to drive its price down.
WHALE: Refers to individuals or institutions who hold a large amount of a coin or a specific cryptocurrency.
Hard Fork and Soft Fork
A Hard Fork refers to a big change in the protocol of a blockchain network. Hard forks result in the validation of previously invalid blocks and transactions, or vice versa, by splitting a single cryptocurrency into two.
On the other hand, a Soft Fork is a change to the software protocol in which only previously valid blocks become invalid. A soft fork is backward-compatible since old nodes will recognize the new blocks as valid.
Pump and Dump
Pump and Dump is an illegal scheme where conspirators use misinformation to manipulate the market and “pump” the price of a cryptocurrency up. After which they sell at a higher price, therefore “dumping” it.
Rug Pull is a hostile move by cryptocurrency developers who develop the trust of investors and then immediately abandon the project and run away with investors’ funds. Rug Pull is the second most common crypto scam, right behind crypto hacks.
NFT stands for Non-Fungible Token and as the name suggests, each NFT is unique and cannot be replaced. The ownership of NFT is recorded on a blockchain and can be transferred by the owner, therefore, they can be traded.
A hypothetical attack on a blockchain, such as Bitcoin, whereas an individual or a group of people owns 51% of that blockchain’s computing power is known as a 51% Attack. In this scenario, the attackers will be able to damage a blockchain or reverse transactions that happen during their time in control, effectively double-spending the coins.
Initial Coin Offering (ICO)
Similar to Initial Public Offering (IPO), Initial Coin Offering (ICO) is used as a fundraising method by companies when they want to introduce a new coin, app, or service. Investors can buy into an initial coin offering in exchange for the company’s cryptocurrency token, which may have some utility purposes in the future or is just a representation of a stake.
Smart contracts are self-executing contracts in which the terms of the agreement between buyer and seller are directly written into lines of code. As a result, transactions can take place in a secure, transparent, traceable, irreversible manner without relying on external law enforcement systems or central authorities.
The world of cryptocurrency is vast and never stops growing. These terminologies can serve as a solid foundation for starters to build more advanced crypto knowledge. Knowing this information won’t make one an expert in cryptocurrency, but it should help new investors see their way clearer in the crypto journey.