Most of us heard or read stories about cryptocurrencies, Bitcoin, blockchain and so on over the past few years. Few of us, however, understand what those terms mean. Given that those technologies are probably here to stay, writers and readers alike would benefit from a basic understanding of the terminology involved. Below you will find an initial list with 32 terms. We plan to update it as new ones appear.
Bitcoin is a decentralized digital currency. It is the first and most famous cryptocurrency, having being launched in 2009 by an unknown person or organization under the pseudonym Satoshi Nakamoto. The main goal of Bitcoin is to create a currency that doesn’t rely on a central authority or government, as this feature should give it many benefits, including lower transaction costs. When it was launched the cost of one Bitcoin was only a couple of cents, and late in 2017 the price of one Bitcoin skyrocketed to almost $20,000, crashing after a couple of months to around $7,000. This meteoric rise and fall contributed to increasing the interest in this cryptocurrency around the world.
Each cryptocurrency has a 3-letter symbol that is used to designate it on trading platforms. This is similar to the symbols used on stock exchanges to designate specific companies and stock. BTC is the symbol of Bitcoin.
This is the core technology behind Bitcoin and most other cryptocurrencies. Some people argue that this innovation has more value than Bitcoin itself, because it can be used on countless future projects. The basic idea is to organize all the transactions of a system (i.e. Bitcoin payments) into blocks, and then to connect those blocks in a chain using cryptography. The cryptographic functions ensure that all the transactions on the blockchain are valid, and anyone can check this information, as it is public. On top of that it is impossible to remove or change past transactions, making the system secure. An alternative way of seeing the blockchain is as an open, distributed digital ledger.
A digital currency which relies on cryptography to validate transactions, removing the need to have a trusted central authority reporting which transaction is valid and which is not. Bitcoin is the most popular one but today we have over 1000 cryptocurrency projects on the market.
A nickname given to all cryptocurrencies other than Bitcoin, derived from “alternative coin.” Bitcoin was the only cryptocurrency on the market for many years, and that is why when new ones appeared they received this nickname.
Acronym for Initial Coin Offering. This event happens when a crypto project launches its currency or tokens in the market, allowing the first investors to purchase them. The process is similar to an IPO, where a company offers its shares to the public for the first time. Notice that when you invest in an ICO, however, you are not buying equity from that project. Instead, you are buying the coins or tokens of such project, and investors do so hoping that such coins will increase in value over time.
Currently Ethereum is the second largest cryptocurrency by market capitalization. The goal of this project is to allow programmers to easily create smart contracts (see below) as if they were writing a simple computer software.
The study of strategies and technical implementations to guarantee the privacy and integrity of information exchanged between two or more parties. For example, if you want to send a message to a friend and want to make sure that only him will be able to read it you could substitute each letter on your message with a specific number or symbol. Only the person in possession of the substitution table (i.e. your friend) will be able to revert the list of numbers or symbols into the original message. Cryptography appeared thousands of years ago due to the need of private communications in military contexts and during wars.
This is perhaps the most important characteristic of Bitcoin and other cryptocurrency projects. By not having a central authority (i.e. by being decentralized) cryptocurrencies have advantages over fiat currencies and other payment methods. Those advantages include a limited monetary supply (which can make the value of the cryptocurrency increase over time) and, in theory, lower transaction costs.
Software that allows you to store cryptocurrency, and to send and receive payments.
11. Hot wallet
A cryptocurrency wallet that is connected to the Internet. It can be a web application or a mobile application. A hot wallet gives you more convenience, because you can instantly send and receive payments using it. That being said they are less secure because hackers can try to gain access through the Internet.
12. Cold wallet
A wallet that is not connected to the Internet. You can install such software on a USB drive, for instance. Cold wallets are not convenient to use but they are much more secure because the hacker would need physical access to try compromising the wallet.
13. Private key
A private key (i.e. a sequence of randomly generated characters) is what allows you to spend the cryptocurrency funds in your wallet. It is like a password that you need to make payments and send funds from your wallet. If you lose it you will not be able to access your funds, and there’s no way to recover it.
14. Network confirmation
Remember that Bitcoin (like other cryptocurrencies) is a decentralized digital currency, so there is no company or central authority confirming if a given transaction is valid or not. The Bitcoin network itself will confirm each transaction. Each node (see below) will check each transaction and confirm or deny its validity. The larger the number of confirmations a transaction has, the higher the probability that it is valid. Currently, with six confirmations you have 99.9% of certainty that the transaction is valid.
A computer which is connected to the Internet and runs the software of a given cryptocurrency. Nodes are responsible for validating transactions and packaging those transactions inside new blocks on the blockchain. In other words, it is the network of nodes that keeps a cryptocurrency running.
16. Light node
It represents a computer running a light version of the cryptocurrency software which offers a limited amount of features, usually including payment verification. Some cryptocurrency projects allow light nodes to exist with the goal of increasing the total number of nodes available, possibly increasing the efficiency of the network and reducing the time to validate transactions.
17. Full node
A computer running the full software of a cryptocurrency project, which includes all the transactions (and therefore all blocks) ever registered for this particular cryptocurrency. Running a full node is the only possible way to verify a transactions without relying on a third party.
Since cryptocurrencies don’t have a central authority determining which transactions are valid and which are not and in which order they took place, the network of nodes, relying purely on software and algorithms, needs to reach an agreement regarding those factors. Such an agreement is called network consensus.
Cryptocurrencies were originally developed to be used as electronic cash. Over time, however, people realized that the same technology (i.e. blockchain) could be used for other purposes, most notably smart contracts (see below). Units of those crypto projects that aim to have functionality beyond those of a digital currency are usually called tokens.
20. Security token
This is a subcategory of tokens which usually represent real-life assets like company shares, real estate and so on. Security tokens are expected to make buying, selling and trading those assets much more efficient, even though they are subject to more regulation than other crypto projects.
21. Smart contract
A digital contract that gets automatically executed by software upon its completion. Suppose you want to make a bet with a friend about whether or not it will rain tomorrow. You could use a smart contract for such a bet. Both you and your friend would deposit the money into a temporary Bitcoin wallet, and the software itself would verify whether or not there was rain on that specific day. The software would then transfer the money to the winning party. As you can see, using a smart contract has some advantages, as it can give more security to both sides as well as impartiality when evaluating the results.
As explained above, network nodes are responsible for validating individual transactions. Once there are enough outstanding transactions a node can create a new block on the blockchain by solving a cryptographic challenge. The node that first solves such challenge will get rewarded a certain amount of units of that cryptocurrency (e.g. on the Bitcoin network nodes get rewarded Bitcoins for adding new blocks). The process of validating transactions and adding new blocks to the blockchain is called mining. This nickname was created because it is through this process that the amount of Bitcoin in circulation increases, similar to what happens with precious metals like gold.
A person, group of people or company involved with mining a specific cryptocurrency.
Acronym for Central Processing Unit. This electronic component is the brain of the computer, being responsible for carrying out logic and mathematical operations. If you are a miner, the more CPU power you have available the higher the chances that you will be able to solve the cryptographic challenges when mining Bitcoin or other cryptocurrencies.
Acronym for Graphical Processing Unit. This is a special purpose component in computers which is responsible for processing graphics. Some cryptocurrency projects have algorithms that allow for GPUs to be used in the mining process more efficiently than CPUs.
Satoshi Nakamoto is the name of the person or entity that originally released the Bitcoin paper and software. Satoshi is also the name of the smallest unit of Bitcoin, representing one hundred millionth of a single Bitcoin.
This is a software development term that also applies to cryptocurrency projects. When a fork happens, the current source code of the software is copied and used to start a new, independent version of the software. Usually a different team of programmers is responsible for the new version, and they carry out the fork because they want to have the autonomy to make modifications and/or improvements that the previous development team didn’t agree with. In the cryptocurrency world the most famous case is Bitcoin Cash, which was forked from the original Bitcoin in 2017. The developers behind Bitcoin Cash wanted to increase the size of the blocks on the Bitcoin blockchain, so that they could contain a larger number of transactions and thus be more efficient. Since the Bitcoin development team didn’t agree with this modification, the fork took place, practically creating a rival to Bitcoin.
An online platform where users can exchange one cryptocurrency for another. Some exchanges also allow users to exchange crypto currencies for fiat currencies and vice versa.
29. Stable coin
A cryptocurrency which is backed by a fiat currency (e.g. the US dollar) or a commodity (e.g. gold). The idea behind stable coins is to provide liquidity and security for users who wish to temporarily sell their cryptocurrencies without removing their funds from the exchange.
The largest stable coin in the market with a market cap of around $2 billion.
31. Double spending
A type of financial fraud or attack. It involves spending the same amount of money twice, hoping that the second entity receiving the payment will not realize or not be able to verify that the money has already been spent on a previous transaction. This type of attack has happened with smaller cryptocurrency projects, however there is no confirmation of this attack happening with larger projects like Bitcoin or Ethereum.
32. 51% attack
Since cryptocurrencies like Bitcoin do not have a central authority, it is the consensus of the network nodes that determine which transactions are valid and which are not. If a malicious user controls 51% of the network nodes he might be able to validate his own fraudulent transactions. The larger the number of nodes in the network, the harder it is to make this attack, and so far none of the popular crypto projects has suffered from it.