If you’re new to the world of blockchain and cryptocurrency, there must be a lot of concepts you’re not yet aware of. To help you build a better understanding of cryptocurrency and its related technologies, here are some of the most common terms to know.
It’s a digital currency that exists on the blockchain and acts as an alternative method of payment. Tokens of a cryptocurrency are produced or mined by solving complex computational puzzles. Cryptocurrencies use encryption technology, which makes them a currency as well as a digital accounting system.
This is a distributed ledger that exists across multiple computers (or nodes) of a single network. The blockchain database stores information in a digital format. Most commonly, they’re used in cryptocurrency systems like Bitcoin, as they help maintain a decentralized record of transactions.
This financial technology is based on a secure system of distributed ledgers. Traditional financial institutions like banks are centralized because they follow rules defined by the US Federal Reserve. In decentralized finance, no single source holds all the power. Instead, it empowers individual consumers through P2P digital exchanges.
With decentralized finance, users are also able to avoid paying hefty fees that institutions such as banks charge for their services. Users can store their money in a secure wallet, transfer funds instantaneously, and they won’t be restricted by borders.
On the other hand, centralized finance is a system in which the money is held by third parties that facilitate transactions between parties. In the process, they charge fees for the use of their services.
Centralized Crypto Exchange
When you want to purchase a cryptocurrency, one of the most common ways to do that is through a crypto exchange. There are two types of exchanges, centralized and decentralized.
Centralized exchanges act as an intermediary between the buying and selling parties. It makes money through commissions and fees. In a lot of ways, it’s like a stock exchange, but for digital assets.
Some of the most popular examples of crypto exchanges include Kraken, Coinbase, and Binance. Just like stock trading applications and websites, these platforms allow crypto investors to purchase and sell their digital assets at the current price. They can even leave orders that are executed when the cryptocurrency reaches the investor’s desired price.
Decentralized Crypto Exchange
In comparison, a decentralized exchange allows peer-to-peer transactions directly from one’s wallet without going through an intermediary. Some common examples of such exchanges include PancakeSwap and Uniswap.
A decentralized exchange is dependent on smart contracts. These are pieces of code on a blockchain that execute themselves. Such smart contracts ensure greater privacy and fewer transaction costs than at a centralized crypto exchange.
However, it may be difficult for a new crypto investor to navigate through a decentralized exchange. Therefore, such exchanges are well-suited for more sophisticated investors.
In cryptocurrency transactions, the private key acts as the user’s digital signature, which helps prove ownership of the tokens in the account. The public key is needed by the user sending the cryptocurrency, and so it’s visible to everyone.
However, the private key is needed to access the cryptocurrency. It basically acts as your password and proves that you’re the owner of the crypto that has been received.
A crypto wallet is essentially your private key – it’s the password that allows you to access your cryptocurrencies. While the concept of a wallet may sound like it actually holds your cryptocurrency, this isn’t the case. Your tokens will still remain on the blockchain, but you need the keys to prove that you own the money.
Keep in mind that if you lose your private keys, you can lose access to your cryptocurrencies. That’s why it’s crucial to keep your hardware wallet in a safe location or use a reliable digital wallet.
The world of crypto investment can seem intimidating with various aspects and concepts. Nevertheless, once you begin to understand them, you’ll be able to make investment decisions with confidence.
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