By Larry Wright
Cryptocurrency has been widely accepted worldwide. Due to its rising popularity, it has become a tremendous source of attraction for many investors. But before stepping into the world of crypto, one should know the basic terminologies and what they mean. Adding the following vocabulary will help survive the investor in the crypto world. So, let’s get started!
Address
A crypto address represents a wallet owned by a crypto user and is used to make transactions. An address serves as a unique identification of the cryptocurrency user on the blockchain network. An email address or bank account can be an excellent daily life example.
Each address is generated by a private key, which can be used to send or receive data from another address via wallet. Every address is different and distinctive, consisting of 6-35 alphanumeric characters. It somewhat looks like this “17VZPX1SN5NtKa8UQFxwQbFeFc3iqRYhem.”
The way an address functions in different networks, however, also varies. For instance, bitcoin changes its address for every transaction, which means it can be used once. Better security is therefore guaranteed. In contrast, Ethereum used one address for all its transactions.
Most addresses have public nature, which means anyone anywhere can see its digital assets. Still, the point is that they are mostly anonymous. On the other hand, it also puts it in the excellent hand of tackers, which can quickly get hold of the user’s wallet and track all the activities. An exception to this is a private blockchain such as monero and grin.
Altcoins
“Altcoin” or “alternative coin” is a term for coins other than bitcoins. Ethereum is the most popular one. As per coinmarketcap- a tracking website, altcoins occupy roughly 40% of the market. Numerous altcoins are employed within their blockchain to carry out various tasks—for instance, Ether, which is used in Ethereum to pay transaction fees.
Various Bitcoin developers have even forked the cryptocurrency and then resurfaced with forks like Bitcoin Cash in an effort to rival Bitcoin as a payment option. Altcoin comes in a variety of types. Let’s have a look at currently existing ones.
Mining-based coins: These coins solve complex mathematical problems that consume energy.
Payment Token – intended for usage like money.
Stablecoins – attempt to maintain a coin price equal to the value of the underlying item.
Meme coins – alternative currency whose value is mainly determined by community support.
Governance Tokens – holder of this type has particular privilege let’s say, participate in the decision-making of a decentralized autonomous organization (DAO).
The market offers investors a wide range of cryptocurrencies to choose from, complicating and confounding the decision-making process. Despite this, no cryptocurrency was as popular in the market as bitcoin.
Blockchain
Blockchain is a system that holds data electronically and digitally. Stuart Haber, a computer scientist, and W. Scott Stornetta, a physicist, introduced it in the early 1900s. It is more known for its role in cryptocurrency since it provides a decentralized transaction record and security. Several networks are protected by blockchain, including Bitcoin, Ethereum, and Bitcoin Cash. How does it function?
Once the transaction has been made, all the relevant information goes through a peer-to-peer network of the globally connected computer system. This system analyses every aspect of it and verifies the transaction made. After confirming, all the information is filled in a block and chained together in a chronological sequence, permanently preserving it.
Additionally, each block has a distinct hash that includes the hash of the block preceding it. Hash codes are a combination of letters and digits. Therefore, if the data is altered in any manner, the hash code automatically changes. Hence, if anyone tries to alter one block, he has to redo all blocks, which requires a significant number of resources and money.
Thanks to the development of blockchain technology, transactions are now more affordable, quick, and secure. Additionally, its technology can also be implemented in other activities as well such as healthcare and insurance.
Cryptography
Cryptography is the study of maintaining information security and safety between two parties. It allows safe, anonymous transactions without the involvement of a third party. Fundamentally, there are primarily three methods for executing cryptographic algorithms.
Symmetric-Key Cryptography: also called secret-key cryptography. This encryption technique has just one essential common between the sender and receiver. The issue here is how to transfer the key between the two parties safely. It is mainly a problem if the two communicating parties have a great distance between them. Sharing across a network exposes the key to interception by an attacker.
Asymmetric-Key Cryptography: sometimes known as Public-Key Cryptography. Two keys are used in this method: a private key and a public key. The private key must be kept hidden, while the public key can be given to anyone who utilizes the system. Only the corresponding public key can decode a message encrypted with a private key and vice versa.
Hash Function: instead of keys, this system uses a hash. A message can only be identified by its hash, a combination of characters. A change of even one character can change the whole hash and, in turn, the whole message.
As of now, blockchain uses a hash function and asymmetric cryptography, and both are impenetrable.
Decentralized Apps (dApps)
Decentralized apps (dApps) operate on a blockchain or peer-to-peer (P2P) network of computers instead of only one computer. Three excellent examples of decentralized applications that run on computers linked to a P2P network are BitTorrent, Twitter, and Popcorn Time. in cryptocurrencies, dApps work on a blockchain network free from intervention from any entity.
Like every other software, dApps have benefits and drawbacks. Firstly, the users don’t need to submit their personal information safeguarding the user privacy. Secondly, the data stored is in Blockchain consensus algorithms, making it resistant to modification, at the same time, irreversible and safe. Due to its decentralized network and use of blockchain technology, it is implausible that an attacker will be able to compromise the system, making it secure.
Additionally, decentralized apps also suffer from some flaws. Maintenance of the app is one of the challenges faced on an everyday basis, as any fixes in the blockchain-based network require the agreement of all peers. Network congestion and code modification are other limitations of the dApps.
Distributed Ledger Technology (DLT)
In a distributed ledger, transactions are recorded and kept in a ledger as a blockchain that all network participants can trust. It is a decentralized system, i.e., dispersed among several nodes or computers. The members of each network have access to and are permitted to own identical copies of the recordings shared by all network nodes.
For the individual parties engaged in a transaction, distributed ledger technology (DLT) guarantees immediate transparency on the transaction’s status and prevents double spending problems. Also, high integrity transactions will be made which can be scheduled with no single point of failure.
Many people confuse DLT with block chain, which leads to the misconception that DLT is a synonym for block chain. But the truth is block chain is one form of distributed ledger technology. The difference lies in the architecture, but the ideology remains the same.
Besides block chain, there are other forms of DLTs as well that including hash graph, holochain, and tempo. Each of these systems solely works to double-check the incoming information, storing it safely while removing the costs and complexity of maintaining data across several ledgers.
Gas
It refers to the amount required to conduct a transaction on the Ethereum blockchain. Gas prices use a small fraction of cryptocurrency known as gwei or gigawei.They are the units used to measure the cost of gas in Ether. There is 0.000000001 gwei in a single ETH.
The gas fees concept of payments was introduced to offset the computational power required to validate a transaction on the Ethereum blockchain. Therefore, based on supply and demand, miners determine the gas price. It fluctuates with market demand and the type of transaction being carried out. This specific fee is given to Ethereum miners in exchange for their computational services. These services carry out all the crucial responsibilities of processing and confirming transactions on the network. If the gas price is too low, a miner may disregard such a transaction.
Other blockchains also charge gas costs for validators, but in slightly different ways than Ethereum. The primary factor that makes Ethereum gas prices so well-known is that they are significantly higher than those of rival blockchains.
Gas is an easy-to-use network. No pre-purchase is required to proceed with a transaction. There are times when it might be pricey, especially if you desire a quicker transaction.
KYC
Know Your Customer (KYC) is the first anti-money laundering foundation with the objective of identifying its clients and trying to comprehend the nature of the industry they operate in. With the help of these procedures, financial firms can evaluate a customer’s risk profile based on their propensity for financial crime.
Crypto KYC operates by collecting the client’s personal information such as full name, date of birth, and address and verifying it with the official government-issued identity and official databases that retain information on politically exposed people (PEP).
Let’s now discuss some of the gains that KYC has given to the crypto compliance system. Not only has it aided in building client confidence, but it has also decreased the number of money frauds and incidences of money laundering. But before implementing any KYC solution, one should also be well aware of the risk factors associated with it.
While implemented properly, KYC aids in giving a name and identity to a public blockchain address, and its applicability is constrained by its static nature and VASP-specific inconsistencies.
Proof of Work (PoW)
Proof of work (PoW) is a cryptocurrency mechanism that is decentralized and contains network participants who struggle to solve a random mathematical puzzle in order to avoid system abuse. It was widely accepted in the crypto world after its launch in 2009. Bitcoin is the first to adopt this system.
In proof of work, the creators are called miners, who are required to buy expensive equipment. Miners must engage in the race of trying to identify the nonce of the block by solving a mathematical problem. Once its validity is confirmed, it can be added to the blockchain. The winner of this race gets a reward in cryptocurrency form once validated by other miners as well.
Proof of work helps prevent double spending of money by confirming the integrity of new cryptocurrency transactions before adding them to the distributed ledger that is blockchain. But on the other hand, not only that this system is expensive and energy deficient, but it also doesn’t allow more scalability. To be able to reduce energy consumption and cost, another system was introduced as an alternative to PoW, i.e., proof of stake PoS.
Proof-of-Stake
It is a consensus technique used by cryptocurrencies to execute transactions and validate data in new blocks on a blockchain.
How does it work? Proof of stake uses the owner’s coin to validate a block. Coin holders who have staked coins are randomly chosen to ‘mine .’They then validate the block, and when specific validators verify the accuracy of a block, it is then finished and closed. Various other mechanisms are used by the proof of stake t verify a block.
For instance, Shards are used by Ethereum when it switches to a PoS system. The transactions will be validated by a validator, who will then add them to a shard block, which needs the confirmation of at least 128 validators. The block is closed when two-thirds of the validators certify that the transaction is legitimate.
In essence, proof of stake is an alternative to proof of work. The basic difference between them is that proof of work requires the miner to completely solve complex mathematical problems to add them to the block. The first one to do it earns the reward. While proof of stake doesn’t require its validator to solve mathematical equations making it energy efficient and increasing scalability
Public Ledger
A cryptocurrency public ledger is a record-holding system. The ledger keeps track of all actual transactions that took place between network members, as well as the anonymous identities of participants and their respective bitcoin balances.
It is a decentralized, encrypted cryptocurrency system that works by facilitating the transfer of crypto tokens across the network. The blockchain system, which almost every other network is operating, is a form of the public ledger. Consensus algorithms, encryption, and incentive systems are just a few of the internal components of the public ledger that work together to ensure that only legitimate transactions are made on the network, and that participant identities are secured.
With this, concerns of keeping a permanent public ledger that records every transaction is challenging as it puts the privacy of the user at the hands of attackers.
Smart Contracts
The concept of smart contracts was introduced by American computer scientist Nick Szabo in 1994. Smart contracts are lines of self-executing code that use a computer network to automatically verify and carry out the terms of a contract between a buyer and a seller. In simple words, it is an agreement between two parties in the form of computer code processed by a blockchain when all requirements are fulfilled.
Implementation of smart contracts in blockchain makes the transaction traceable, permanent and transparent. Many health systems, insurance companies, and government businesses have implemented smart contracts to transfer data securely. Intelligent contracts operate by processing all transactions and other necessary operations digitally. This indicates that the necessity for middlemen is being replaced. Since there is no involvement of a third party, this can help one keep secrecy while also saving money.
Wallet
A crypto wallet is a program that allows you to store all private information such as private keys keeping your crypto safe and secure. They also enable the user to send and receive cryptocurrencies, for instance, bitcoin. Unlike your regular wallets that store cash and credit card, crypto asset wallets stores digital credentials.
There are two main key pairs of a crypto wallet- a private key and a public key. A private key holds more significance since it is used to initiate a transaction. Hence, holding onto it is essential. While the public key can be used by people, you shared it with. They can easily transfer money and also withdraw money with your authorization. Crypto wallet works on blockchain technology. Coins are stored on the blocks, and wallet software lets you interact with those amounts.
There are various types of crypto wallets ranging from simple applications to sophisticated security solutions. The main types include:
Paper Wallets: in this, Keys are recorded on a tangible medium, such as paper, and kept in a secure location
Hardware Wallets: keys are stored in a thumb drive and accessed when using crypto. Online wallets: apps or software are used to store keys.
Each of the above options has its own pros and cons, and it depends on the user which one they opt for.
Conclusion
These were some of the fundamental terms you’d encounter when working in the cryptocurrency and blockchain industries. I hope it will be useful to you.