The crypto space can be extremely overwhelming for newbies. It includes many financial and developer terms, and there are many things to learn in order to make sure you can navigate on your own and don't get scammed. In this post, we’ll discuss 15 terms that are widely used in the crypto space. Knowing these will let you know what is actually going on and clarify all the unscrambled data in your head. The links provided in each section will give you complete courses on each term.
DeFi is short for Decentralised Finance and is a movement that has created a new financial system without a central authority. DeFi platforms are open to everyone, and since there are no third parties involved, they are trustless, unlike how you need to trust banks and governments. Such systems came into being to minimise fraud, corruption, and manipulation in many areas, especially financial transactions.
A smart contract is similar to a conditional sentence in grammar; they do something when certain conditions are met. "If this happens, I’ll do that". Smart contracts are mainly written on Ethereum, and their main goal is to remove human error from systems. Smart contracts are immutable, meaning they cannot be changed once they’re created. They are also open-source, meaning you can take a look at the code and see how secure the contract is.
A blockchain is literally a “chain of blocks”. A block is essentially a collection of records (called a ledger) like a list of transactions. In the case of Bitcoin, each block consists of around 1500 transaction records. Blocks have a limit for how much data they can store in them. They are limited, and once they are full, they get added to the system to create more blocks. Full blocks need to get verified to be added to the network. This process of verification is called ‘mining’. We can mine the blocks and verify them by finding their hash, which is basically the ‘key’ to the block.
Wallets store private and public keys for safety, with nobody having access to the keys. There are two types of crypto wallets: hot (online) wallets and cold (offline) wallets. Cryptocurrency wallets enable users to send and receive cryptocurrencies. Technically, wallets don't hold and store your crypto; they rather allow you to prove you are the owner of your digital money.
Consensus mechanisms are plans of actions that computers implement to achieve a general agreement. It means that at least %51 of nodes or users agree to the current condition and the next global state for the blockchain. Due to this mechanism in a cryptonomic system, cyber-attacks are reduced by %51. Because if a hacker intends to attack, they need to take control of %51 of the network to launch attacks, which is next to impossible. Two of the well-known consensus mechanisms are Proof-of-Work and Proof-of-Stake.
Tokens and coins can only be used on their own native blockchains and not on other blockchains. Because of this, it is not possible to deposit Bitcoin on a dApp that runs on the Ethereum blockchain. Wrapped assets came into being to fix this issue of inter-blockchain interoperability. By wrapping an asset, a Bitcoin, for example, you lock up your real Bitcoin and mint a Wrapped Bitcoin as a token on the Ethereum network. This wrapped token is not the same as your original asset, but it represents it on the new blockchain. By taking an asset and wrapping it up, you can use that asset on a different blockchain.
Forks are major changes in codes, like an old code that has been changed or updated. Forks are categorised as soft forks and hard forks. A soft fork doesn’t need the blockchain’s community agreement, and it doesn’t affect the entire blockchain. But a hard fork’s change is so significant that it alters the blockchain and requires miners to install a new system to continue mining.
DEX stands for Decentralized Exchange and is an exchange that allows you to trade your coins and tokens without a central authority. DEXs are made up of smart contracts. A DEX has limitations, and it only allows users to swap crypto for crypto, and these cryptos have to be on the same blockchain. Uniswap is a well-known DEX that allows swaps for Ethereum-based tokens.
Basically, every single asset besides Bitcoin is called an altcoin. You can say cryptocurrencies are divided into two basic categories: Bitcoin and altcoins.
A stablecoin is an asset with its value pegged to an external reference. These assets rarely have volatility since their price is tied to another asset like fiat currencies; that’s why they are called “stable” coins. A pretty well-known stablecoin is Tether (USDT) which has its value tied to US dollars, meaning the price of one Tether is always equal to $1.
An entity that holds a large number of coins or an asset is called a whale. By looking at a blockchain explorer, you can see the whales, aka the wallets, who hold the most considerable amount of that asset. For example, here, you can see the wallets with the largest balance of Dogecoin.
FUD stands for Fear, Uncertainty and Doubt and is a strategy used to emotionally manipulate people into making a decision, the decision generally being to sell their holdings. Headlines like “I was a millionaire then lost everything as the crypto market crashed” are excellent examples of what FUD looks like. They might sound true to some extent, but they are usually focused on the worst-case scenario rather than the present reality.
ROI stands for “return on investment”, which means how much profit an investment has brought you. For example, Shiba Inu’s ROI of the last year has been 43,917,096%, meaning if you had invested $100 a year ago, you would have $439,170.96 by now. Pretty crazy, isn’t it?
NFT, which stands for "Non-Fungible Token,” is a proof of ownership of a unique physical or digital item, like real estate, works of art, videos, or music. NFT is a unique token that can be considered a modern-day collectable. The assuring fact about them is that NFTs are securely recorded on a blockchain.
An airdrop is a marketing strategy that includes sending tokens or assets to wallet addresses for free. This strategy is used to promote the crypto asset. Airdrops are also used to reward the early adopters or investors of a protocol or platform.
A 51% attack, also known as a majority attack, is when a group or an individual take control of more than 50% of the hashing power on a blockchain network. This is typically done by renting the hashing power from a third party, as it is extremely hard to accomplish, especially in bigger blockchains like Bitcoin or Ethereum.
Congratulations! You have successfully passed your first course in essential crypto terms! Keep checking Cryptologi.st to be updated about more terms you need to know to make a solid base for your knowledge of crypto. Crypto space is like an endless sea, and every day we see new projects and cutting edge technologies providing features we never knew we needed. It is a very fast-paced industry, and keeping yourself updated is the key to successfully navigating through this space. Also, here at Cryptologi.st, we cover news, overviews, projects and everything DeFi.
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