Crypto glossary - the most important terms related to cryptocurrencies and blockchain
Bitcoin, Ethereum, Dogecoin - everyone is talking about cryptocurrencies and the associated buzzwords. As a communications agency with a specialized blockchain practice, we open up European markets for the often highly complex blockchain-based businesses. We love our mission to educate! In this blog post we compiled a glossary of crypto terms that are important to know. If you are relatively confident with the terms blockchain, bitcoin and wallet, but want to dive deeper into the matter, you are in the right place. In this blog post, we have summarized more advanced terms from the crypto area.
Altcoins
Altcoins are all cryptocurrencies that were invented after Bitcoin. Generally, the term is meant to summarize all other currencies in a value-neutral way. However, not every altcoin is equal. Everything from dubious business models to coins with disruptive functions that go far beyond payment and bookkeeping fit into this category. Some are fluctuating in value, others are tied to commodities or fiat currencies (euros, dollars, etc.), and still others are tied to businesses. Not all altcoins are based on the blockchain, neither are all altcoins generated through mining. A well-known example of an altcoin is Ethereum.
Bitcoin
Bitcoin was the first cryptocurrency and is still the most valuable one in terms of market capitalization. In 2008, under the pseudonym "Satoshi Nakamoto", a still unknown person or group published a whitepaper that described the first formulated method for a purely decentralized transaction system for digital cash. To this day, no one knows who Satoshi Nakamoto is, but his system and accompanying rules are influencing the financial world.
Blockchain
Let's put it this way: with blockchain, Asterix and Obelix would have been able to get pass 38a at the House of Madmen, without countless stairs and stamps. In the end, the blockchain is basically a database where everyone can write and read at the same time. Not only can fraud be actively avoided, it eliminates the need for intermediaries in many processes. But how? To put it simply, every blockchain consists of a chain of data records (blocks) that are managed by all the computers in a network. A copy of the encrypted data ends up on every computer connected to the network (also called a node). This means that it is de facto no longer possible to forge or even delete the data. With each new record (block) that is added, the blockchain is updated. This makes a blockchain extremely fail-safe. The fail-safe nature of the blockchain makes it interesting not only for the financial world; it is also used in the healthcare sector or in the digitalization of production. Thus, blockchain technology forms the basis for cryptocurrencies.
For a detailed introduction to Bitcoin and Blockchain, we recommend the free e-version of the English book "The People's Money" by Adam Tepper.
DAO
DAO stands for "decentralized autonomous organization". The organization is managed purely digitally by its members without a central decision-making committee. The rules of procedure are based on a set of rules that the entire organization has voted on beforehand. These rules are stored in one or more smart contracts and cannot be changed without the approval of a predetermined majority.
Decentralized apps (dApps)
dApps are applications based on blockchain technology that function similarly to traditional apps. However, their code resides in a distributed manner on a decentralized network rather than on a central server. dApps can be programmed in a decentralized manner because their logic is controlled by smart contracts, not by an individual or a company.
Decentralized Finance (DeFi)
DeFi is a collective term for decentralized alternatives in the form of dApps to traditional finance. The concept of decentralization is in contrast to traditional financial services, which are usually centrally organized, i.e. controlled by a single institution such as a central bank or financial institution.
Distributed Ledger Technology (DLT)
A distributed ledger is a type of database that is set up in a decentralized manner, i.e. distributed across several locations, regions or participants. This means that all participants in the distributed ledger can access all the records in question. A distributed ledger can be used to record static data such as a registry and dynamic data such as transactions. Any blockchain network can be called a distributed ledger technology. However, conversely, a DLT network does not necessarily use blockchain technology.
Hash Function
A hash function is an algorithm which allows data to be verified without knowing its content. The result of such a function is called a "hash" and usually has a predetermined length (while there are no specifications about the data that is hashed). A property of some hash functions is that it is virtually impossible to use a hash to infer the original data. Furthermore, hash functions often have strong collision resistance - two different sets of data may not result in the same hash in practice, but the same data set will always result in the same one.
For example: the word "Blockchain" yields with the hash function SHA-256, which is also used by Bitcoin, the hash "625da44e4eaf58d61cf048d168aa6f5e492dea166d8bb54ec06c30de07db57e1". If we now hash the word "blockchain", the resulting hash is "ef7797e13d3a75526946a3bcf00daec9fc9c4d51ddc7cc5df888f74dd434d1".
Initial Coin Offering
An ICO or Initial Coin Offering in the crypto world is roughly what the Initial Public Offering is in the financial world. However, while such an initial public offering involves the sale of company shares, an ICO involves the sale of so-called tokens or coins. These tokens are like digital coupons whose function can vary depending on the ICO. Probably in most cases, they serve as the currency for the project that is financed with them. So in that case, investors get the opportunity to invest early in a cryptocurrency that is not actually available yet. The idea is that if the project is successful, then the value of the token should also rise above the original issue price. Depending on the type of ICO, this financing method is subject to fewer regulations compared to securities trading, for example.
Cryptocurrency
What is a cryptocurrency, anyway? So simple, but so complicated. Basically, a cryptocurrency is a decentralized digital currency, i.e. an alternative payment method. Based on the blockchain, the currency is also its own accounting system.
Mining
In a blockchain, mining describes the process by which new blocks are produced. This process, in which the consensus algorithm plays a central role, can vary from blockchain to blockchain. Probably the best known type of mining is based on Proof of Work.
Non-Fungible Token (NFT)
Non-fungible (non-exchangeable) tokens represent a very specific asset and are therefore unique. Often, the asset itself is not stored on the blockchain, but only the proof of ownership. For example, NFTs can be used to store ID cards, vaccination certificates, and even proof of ownership in a forgery-proof manner. Currently, another very well-known use case is the link to certain assets such as trading cards, virtual land areas in virtual worlds, or art.
Private Key
The private key is generated when each wallet is first installed and is something like the master key. It grants access to the cryptocurrencies stored in the wallet and should always be kept safe. If you lose the private key to the wallet, you lose all access to your cryptocurrencies.
Proof of Work
Proof of Work is a consensus algorithm in which miners directly compete with each other by trying to solve a calculation task as quickly as possible. For example, one of these tasks is to find a hash that starts with a certain number of zeros. Since a hash function doesn't work backwards, so you can't use a hash to infer an input, miners must 'hash' random inputs until such a hash is found. The first miner who finds such a hash is allowed to produce the next block and connect it to the blockchain. As a reward, he receives the so-called block reward (a fixed number of newly created coins) as well as the transaction fees included in this block. How quickly a block is found and how large the time gap between two blocks is (the block time) depends on the hash rate and the difficulty of the calculation task.
Public Key
The public key corresponds to the private key and both are based on the principle of asymmetric encryption. In asymmetric encryption, a pair of keys is created for each person who wants to communicate in encrypted form. This consists in each case of the private key, which provides access to the wallet, and a public key. These are generated the way that a file that was encrypted with the public key can only be decrypted with the associated private key. In the context of blockchain technology, the public key is an address on the network to which people can send the network's cryptocurrency (e.g., Bitcoin on the Bitcoin network). The credit that is sent to an address can only be accessed with the corresponding private key.
Public ledger
Each blockchain has its own "ledger", i.e. their transaction book. Here, any interested person can view every transaction that has taken place on the blockchain so far. Bitcoin, for example, has such a public ledger. However, some coins use an anonymous or private ledger that cannot be viewed by the public - in this case it is also called a private blockchain.
Smart Contracts
Smart contracts are deterministic programming. They work like a contract, so actions are performed when certain criteria are fulfilled. Each smart contract uses a simple "if-then" logic, which can be imagined in simplified terms like a beverage vending machine: If the beverage is selected and enough money is put into the machine, then the machine will dispense the desired beverage. This logic can be extended to many, quite more complex processes, e.g. actual legal processes, bank transactions or app logics. What's special: Smart contracts are executed on a blockchain and therefore they are transparent, self-sufficient and inviolable. Thus, agreements can be executed without trustees or intermediaries - even if the parties involved in the transaction do not know each other.
Stablecoins
Stablecoins, as the name suggests, promise stability in digital form. The goal of a stablecoin, unlike classic cryptocurrencies like Bitcoin or Litecoin, is that their value is stable against another asset. This is mostly achieved through backing stablecoins according to their market capitalization by the assets they are supposed to be stable against. The most prominent example of a stablecoin (and also the largest stablecoin in terms of market capitalization) is Tether (ticker: USDT). One Tether is always equal to one US dollar, as the issuer of the stablecoin keeps one US dollar (or to a lesser extent other assets) in their reserves for each USDT.
Token (vs. Coins)
In an ICO, you can think of a token as a digital coupon. In general, a token is a digital asset, similar to a coin. A coin, however, is based on its own blockchain (e.g., Bitcoin on the Bitcoin blockchain or Ether on the Ethereum blockchain) and is simply a payment instrument. A token, on the other hand, can have many different forms and uses. Importantly, a token is not based on its own blockchain, but on another blockchain. There are different types of tokens, such as security tokens, which provide the holder with properties comparable to securities or capital, or utility tokens, which provide access to certain services or to a platform. Many dApps use tokens to enable their users to perform certain functions. For example, the dApp CanCan, which runs on Dfinity's Internet computer, allows its users to purchase Superlikes through tokens.
Wallet
A wallet is a virtual wallet that stores and protects digital assets, whether currency or other assets such as NFTs. It works similar to a bank account where the account balance is displayed. There are different providers of wallets for different cryptocurrencies, whereby a private key always serves as access.
The world of cryptocurrencies is not always easy to navigate, but this vocabulary is a good foundation to guide you. If you have any questions beyond that, feel free to contact Paul Gärtner. Located in the heart of Berlin, one of the world's best blockchain hotspots and startup scenes, PIABO has been representing clients from the broader blockchain cosmos for years. Among them are DFINITY, the xx network or financial service providers like Etoro or Vivid.
