Demystifying some crypto terms

If you are a beginner, here are some of the terms and phrases that will help you better understand the world of crypto investing. 

Altcoin

Any coin that isn’t Bitcoin is known as an altcoin. Altcoins range from the second-most popular coin, Ethereum, to thousands of coins with an extremely low market value.

Algorithmic Stablecoins

A type of stablecoin, algorithmic rely on complex algorithms to keep their prices stable, effectively balancing funds held on the blockchain via smart contracts with supply and demand to maintain price stability. Ideally, the algorithmic stablecoins function as real central banks, defending their currency’s peg in the market. The algorithmic stablecoin system reduces the token supply if the price falls below the fiat currency it tracks. It is done by locking staking, burning, or buy-backs. If the price surpasses the value of the fiat currency, new tokens enter into circulation to reduce the stablecoin’s value. 

Annual Percentage Yield

When it comes to storing the cryptocurrency, one can choose between a private hot or cold crypto wallet and cryptocurrency savings account for storing it. The biggest difference between the two is that the former does not generate interest on your holdings, while the savings account does. One may deposit your bitcoin or ether (or another crypto asset) and receive a fixed rate of return over a specific period of time. The crypto asset that one deposit is further invested in opportunities that yield better returns and this is how better returns are assured through APY.

APY exists for both fiat currency as well as crypto assets. In fiat, the interest is paid in traditional money while in virtual assets, it is in crypto. 

Bitcoin

On January 3, 2009, this first and most valuable cryptocurrency was released. While its value has consistently increased since then, it has experienced violent swings. Bitcoin’s price has swung from a record high of $60,000 down below $30,000 in just a few months.

Know more about Bitcoin

Blockchain

Simply said, blockchain technology is a decentralized, distributed ledger that tracks the provenance of digital assets. The data on a blockchain can’t be changed by design, making it a real disruptor in industries like payments, cybersecurity, and healthcare.

5 steps to kickstart your Blockchain career

Centralized Exchanges (CEXs)

Centralized exchanges are organizations similar to conventional stock exchanges that facilitate cryptocurrency trading on a large scale. Centralized exchanges can be used to conduct trades from fiat to cryptocurrency (or vice versa). These exchanges have lists of open buy and sell orders, consisting of volumes and prices. They match up buyers and sellers and announce current market prices based on the last price an asset sells for. for those users who do not have their crypto wallets, the exchanges store the cryptocurrencies on their behalf. Some well-known global CEXs include Binance, Coinbase, Gemini and Kraken. In India, CoinDCX, WazirX. CoinSwitch Kuber, Unocoin, etc., are the popular ones.

Centralized Finance (CeFi)

The whole concept of Crypto revolves around decentralization. However, these transactions happen with strangers or anyone worldwide based on smart contracts. These kinds the ecosystem is new and thus still not trusted by many. CeFi is an alternative where one can borrow money, buy and sell Crypto, and spend and earn rewards with a crypto credit card. The crypto assets one deposits are further lent or invested in better return options, creating opportunities for the CeFI platform to yield better interests. A percentage of this interest is passed to the investors.

Commodity backed Stablecoins

A type of stablecoin that is pegged against commodities. They have the backing of real-world assets that may include real estate or gold. That give these kinds of coin absolute stability. However, such commodities can fluctuate in price and therefore have the potential to lose value. There are other issues also with such kinds of coins. Holding physical commodities like gold and silver isn’t always a realistic proposition. 

Two of the most liquid gold-backed stablecoins are Tether Gold (XAUT) and Paxos Gold (PAXG).

Consensus Mechanism

As a decentralized process does not have a single institution or bank that controls it, the consensus mechanism is used to achieve agreement, trust, and security. Proof-of-work (PoW) and proof-of-stake (PoS) are two of the most prevalent consensus mechanisms in cryptocurrency and other blockchain-based applications.

Cryptocurrency

Cryptocurrency is based on blockchain technology, which records and maintains information about all transactions in a public ledger that is open to the public. It is a decentralized structure that is not governed by any central authority. All transactions are recorded in a decentralized ledger that is open to the public, eliminating the need for a central authority. It is safeguarded by robust encryption, unlike digital cash.

Typically, cryptocurrencies are decentralized, built on blockchain technology and uses cryptography to secure the cryptocurrency’s underlying structure and network system.

Cryptocurrency Airdrop

It is a marketing tactic used for launching a digital currency. or a Defi protocol, with the objective of promoting them. It has been a common practice endorsed practically by every company, especially to launch a product. It involves delivering the tokens to the wallets of people who opt for this Airdrop, either for free or in exchange for a promotional service. However, one should be aware of dusting attack which is often associated with AirDrop.

Crypto Assets – Backed Stablecoins

Stablecoins are cryptocurrencies with a fixed value that’s usually pegged to a leading fiat currency like the U.S. dollar, fiat currencies, or exchange-traded commodities such as precious metals. These kinds of stablecoins are backed by cryptocurrencies acting as collateral. As the crypto market is highly volatile, crypto-backed stablecoins usually over-collateralize the reserves as a measure against price swings.

Since these are dependent on highly complex technological processes, they are very different from the fiat-collateralized kind and introduce more significant risks of exploits due to bugs in the smart contract code. 

Cryptocurrency Burning

It is the process in which tokens are removed from circulation, which reduces the number of coins in use. Burning means the tokens are sent to a wallet address that cannot be used for transactions other than receiving the coins. Hence the tokens can no longer be used. It is similar to publicly traded companies’ practice of buying back stock to reduce the number of shares in circulation. Cryptocurrency burning is practised to increase the value of a currency.

Crypto Wallet

If you want to trade, buy and sell cryptocurrencies or blockchain-based applications, you need a crypto wallet. They allow you to store and transfer your funds with complete security because they are cryptographically safeguarded.

Know more about Crypto Wallets

Decentralized Applications (DApps)

Decentralized applications (DApps) are applications that run on top of blockchain networks. They look similar to any regular Apps, but in the backend, it is run by smart contracts on peer-to-peer networks. Since it is decentralized, there is no single entity controlling the coins or tokens and therefore users can propose and vote on changes to the DApp. 

Decentralized Autnomous Organization (DAO)

 As the name suggests, Decentralized Autonomous Organizations (DAO) are not controlled by any institution, whether the government or the central bank. They are divided among a variety of computers, networks, and nodes. DAOs are generally flat organisations where members need to vote for any changes that are implemented. MakerDAO’s token MKR is widely available on decentralized exchanges. So anyone can buy into having voting power on the Maker protocol’s future.

Decentralized Crypto Exchanges (DEXs)

Decentralised exchanges or DEXs is a peer-to-peer marketplace where transactions occur directly between crypto traders. This means users can buy and sell cryptocurrencies with one another without the need for brokers. Users connect their crypto wallet to a DEX, select their crypto trading pair of choice, enter the amount, and hit the swap button. The most popular DEXs — like Uniswap and Sushiswap — utilize the Ethereum blockchain. Unlike centralized exchanges, DEXs don’t allow for exchanges between fiat and crypto — instead, they trade cryptocurrency tokens for other cryptocurrency tokens.

Decentralized Finance (DeFi)

It js an emerging financial technology which is backed by blockchain technology. DeFi is opposed to centralized banking system that is facilitated by intermediaries who charge fees for using their services. The main objective of DeFi is to remove the control of banks and intermediaries, and facilitate peer-to-peer (P2P) transactions. Since it is P2P, it is faster, reduce transaction time and maximize access to financial system to people in remote areas (without access to banks).

Applications called dApps are used to handle transactions in DeFi and run the blockchain. Since this is based on distributed ledger, this is secure.

Ether (ETH)

The second-largest cryptocurrency by trade volume, one can buy ether from any Centralized Exchanges, Decentralized exchanges (DEXs), or wallets. Ethereum applications and contracts are powered by ether.

Ethereum

Ethereum uses blockchain technology that not only powers the cryptocurrency ether (ETH) but many other tokens and thousands of decentralized applications. The main highlight of the technology is its capability to facilitate a peer-to-peer network that securely executes and verifies application code, called smart contracts. Smart contracts allow participants to transact with each other without a trusted central authority.

Fiat-backed Stablecoins

Fiat-backed types of stablecoin are the most trustworthy since they are pegged against the fiat currencies such as the U.S. Dollar, Euro, or Chinese Yuan, which are kept as collateral. In other words, such stablecoins maintain reserves in fiat currencies. Fiat-backed stablecoins often have one dollar in reserve for every token in circulation — either in cash or cash equivalents.

The largest stablecoin, Tether (USDT), has a market cap of around $80 billion, having surged from just $4.1 billion in 2020. Tether tokens are assets that move across the blockchain just as quickly as other digital currencies. All Tether tokens are pegged at 1-to-1 with a matching fiat currency (e.g., 1 USD₮ = 1 USD) and are backed 100% by Tether’s reserves.

Fork

Cryptocurrencies are powered by decentralized, open-source software called a blockchain. Since it is open-source, the community can make changes to the blockchain protocol. This is where a fork happens. If the changes are accepted by all the community members, it is called a soft fork, and the changes become the currency’s new set of standards. Soft Fork adds new features at the programming level. If the changes are radical and are no longer compatible with the existing one, then a split happens. This is called Hard Fork. Hard Fork creates an entirely new cryptocurrency. Bitcoin Cash and Bitcoin Gold are examples which have evolved out of the original Bitcoin blockchain via a hard fork. 

A fork in a blockchain can occur in any crypto-technology platform—not only Bitcoin.

Hardware Wallet

A Hardware Wallet is a crypto wallet that helps the user to store the private key in a secure hardware device, a form of cold storage device that commonly resembles a USB. Similar to portable devices that can be connected to a computer are these wallets (plugged in). They are hack-proof and less vulnerable to hostile attacks, as was previously mentioned. The three leading manufacturers of hardware wallets are Ledger, Trezor, and KeepKey.

One must make sure that your hardware wallet is connected to your computer in order to conduct a transaction from it.

Hash

The backbone of a blockchain network, a hash is a mathematical function that converts an input of arbitrary length into an encrypted output of a fixed length. A hash is developed based on the information present in the block header. In other terms, a hash is the output produced after a piece of data is submitted through it.

HODL

HODL is derived from a misspelling of ‘hold,’ and stands for ‘hold on for dear life’ among crypto investors. The term started in 2013 with a post ‘I AM HODLING’ on Bitcointalk plastform by GameKyuubi. He wrote, ‘You only sell in a bear market if you are a good day trader or an illusioned noob.  The people inbetween hold.  In a zero-sum game such as this, traders can only take your money if you sell.’

HODL is a now an investment strategy followed by the crypto investors where the underlying principle is to follow a long-term approach to cryptocurrency.

Initial Coin Offering (ICO)

Similar to Initial Public Offering (IPO), Initial Coin Offering (ICO) is launched to raise money for a new project or a coin. The process is often initiated by creating a white paper giving an overview of the new product or offer on the website, describing how it works, and seeking funding. Anyone can launch an ICO. 

Paper Wallet

A paper wallet is a method of offline cryptocurrency storage. Your private key and public key are both on this printed piece of the paper wallet, which can be accessed by scanning a QR code. Large sums of cryptocurrency are frequently stored in these wallets because it is highly secure.

Two popular paper wallets are Bitcoin Paper Wallet and MyEtherWallet. Funds can be transferred from your software wallet to the public address listed on your paper wallet using a paper wallet in conjunction with your software wallet. 

You park your money in a software wallet first, and then you transfer it to the paper wallet’s public address using your software wallet’s public address.

Private Key

The private key is a passcode to keep the crypto wallet safe. The key is generally comprised of 12 words. To access your wallet, one needs to type the words in the same order. And if, by chance, someone forgets it, you have no ways to retrieve it and may lose all your cryptocurrencies and other assets stored inside it.

According to the cryptocurrency data firm Chainalysis, 20 per cent of all bitcoin accounts are owned by people who can’t access them.

Know more about Private Key

Proof of Stake

Proof of stake (POS) is a type of consensus mechanism used for processing transactions and creating new blocks in a blockchain. In a decentralized blockchain network, there are no financial institutions or corporates that control the system. In that case, each member in the network needs a way to verify transactions. POS was created as an alternative to POW, the original consensus mechanism used to validate a blockchain and add new blocks. In POS, validators are chosen based on a set of rules depending on the ‘stake’ they have in the blockchain.

POW requires a significant amount of energy to verify transactions. Since the computers on the network must spend a lot of energy and operate a lot, the blockchain is less environmentally friendly than other systems. 

Proof of Work

Poof-of-work (POW) is a consensus mechanism in the decentralized blockchain network. POW needs people called miners to solve very complex puzzles. Once solved, they get rewarded. It is used widely in cryptocurrency mining, for validating transactions and mining new tokens. This mechanism is the backbone of peer-to-peer transactions in a secure manner without the need for a trusted third party or other cryptocurrencies. POW requires a significant amount of energy to verify transactions since it involves a lot of validators, It makes it less environmentally friendly than other systems. 

Non-Fungible Tokens (NFTs)

NFTs are one-of-a-kind digital assets that represent real-world objects. NFTs can also be digital items, such as digital art, GIFs, in-game items, and tweets. NFTs are not interchangeable and differ from fungible tokens such as bitcoins. As a result, NFTs cannot be exchanged in the same manner that cryptocurrencies can. All transactions in NFTs are done online and are controlled by a digital ledger.

Know more about NFT

Satoshi

The smallest unit of the cryptocurrency bitcoin is the satoshi. It is named after Satoshi Nakamoto, the creator(s) of the Bitcoin cryptocurrency and the blockchain protocol. The satoshi to bitcoin ratio is 100 million satoshis to one bitcoin.

Satoshi Nakomoto

Satoshi Nakamoto is the anonymous name used by the creators of the Bitcoin cryptocurrency. Although the name Satoshi Nakamoto is often associated with Bitcoin, the real person who bears the name has never been identified, leading many to speculate that it is a pseudonym for a person or group of persons with a different identity.

Smart Contract

An algorithmic software that, based on its code, automatically executes the terms of a contract. The Ethereum network’s capacity to execute smart contracts is one of the network’s most valuable features. Smart contracts are written in programming languages such as Solidity and Vyper and are compiled by the Ethereum Virtual Machine into bytecode and executed on the blockchain.

Know more about Smart Contract

Stablecoins

Stablecoins are cryptocurrencies with a fixed value that’s usually pegged to a leading fiat currency like the U.S. dollar, fiat currencies, or exchange-traded commodities such as precious metals. Stablecoins serve as a much-needed antidote to price volatility in the cryptocurrency markets. 

Know more about Stablecoins

Software Wallets

There are different kinds of crypto wallets available. A software wallet is an application that is downloaded onto a computer, a mobile device or a web-based wallet that can be accessed online. Software wallets like Breadwallet, Jaxx, and Copay are widely used. Software wallets fall under three further categories: desktop, online (web), and mobile.

Solidity

Solidity is an object-oriented programming language designed for developing smart contracts that run on the Ethereum Virtual Machine. Smart contracts are programs that are executed inside a peer-to-peer network where nobody has special authority over the execution, and thus they allow to implementation of tokens of value, ownership, voting, and other kinds of logic. While ether is the cryptocurrency native to the Ethereum blockchain, DAI, LINK, COMP, CryptoKitties, etc. are tokens that utilize the Ethereum blockchain.

Token

Cryptocurrencies are the native asset of a specific blockchain protocol, whereas tokens are created by platforms that build on top of those blockchains. For instance, the Ethereum blockchain’s native token is ether (ETH). While ether is the cryptocurrency native to the Ethereum blockchain, DAI, LINK, COMP, CryptoKitties, etc. are tokens that utilize the Ethereum blockchain.

There are token standards for creating crypto tokens – the most widely used token standards are ERC-20, which allows the creation of tokens that can interoperate within Ethereum’s ecosystem of decentralized apps, and ERC-721, enable non-fungible tokens that are individually unique and cannot be interchanged with other similar tokens.

Wash Trade

Wash Trading, especially in the context of crypto and NFTs are referred to as an act in which the same asset is sold and purchased within a short time. This is a market manipulation technique used by traders for influencing an asset’s trading activity and price. Such kind of practice was seen much in the NFT marketplace where NFTs are sold at an absurd and unimaginable price.

An example of this practice was witnessed in October 2021, when CryptoPunk 9998, an NFT in the Cryptopunks series witnessed a wash sale on the Ethereum blockchain. The media reported the NFT was sold for 124,457 Ether (ETH). The ETH used to purchase the NFT was transferred to the seller, then returned to the buyer to repay the loan used to buy the digital blockchain art from Larva Labs – effectively making it not only a flash loan but an example of significant NFT money laundering.

Whitepaper

A whitepaper is a document prepared before launching any crypto project. It generally explains the technology and purpose of the project. The document is prepared for the investors as well as the potential users to talk about the It objective and some of the plans for how they will achieve the target. Statistics, graphs, and algorithms are just a few of the types of data that can be found in a crypto whitepaper. The purpose of this information is to persuade potential investors to buy that coin.

Yield Farming

A service offered by decentralized exchanges (DEX), involves lending or staking cryptocurrency in exchange for interest and other rewards. Yield farmers measure their returns in terms of annual percentage yields (APY). Yield farming pools do not require one to agree to a minimum lock-up period. While potentially profitable, yield farming is exposed to risk.

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