Key terms and concepts of cryptocurrencies

Note and Coin looking at a large book called ‘CRYPTO DICTIONARY’ Note and Coin looking at a large book called ‘CRYPTO DICTIONARY’

Cryptocurrencies, also fondly known as crypto, are virtual currencies that use cryptography to encrypt and secure transactional data. Unlike regular currencies, crypto is decentralized, which means that there’s no singular entity or entities that are responsible for its creation, supply, and control.

 

If this sounds like something that you might be interested in, then it is essential for you to first get to know the basics about cryptocurrency. And how do you do it? By making yourself aware of the various cryptocurrency terms out there. In this chapter of Smart Money, we’re going to be looking at exactly that. Let’s jump right in. 

 

Essential crypto terms and concepts you should know about

Now that you’ve gotten the answer to ‘what is crypto?’, there are some key terms and concepts surrounding this virtual currency that you should know about. 

 

 

  • Cryptography

 

Cryptography is the technique that cryptocurrencies use to encrypt transaction data. It is designed to prevent unauthorized individuals from gaining access to the data. The cryptography encryption protocol involves complex mathematical puzzles that are used to secure data. To gain access to this data, individuals would have to solve these complex mathematical puzzles, which is typically done using a dedicated and powerful computational device. 

 

 

  • Blockchain

 

This is one of the most important cryptocurrency terms that you should know about. Blockchain is the fundamental technology that cryptocurrencies use and rely on. It is basically a database that’s made up of small blocks chained together. Each block in the blockchain only holds a certain amount of data. Once a block is completely filled with data, it is sealed and encrypted, preventing any kind of alterations. 

 

Data flows linearly in a blockchain, which effectively means that only when a block is filled with data and sealed, a new block is added to the chain. And since a new block is supposed to contain information of all of the previous blocks, any information mismatch between the old and new block would signify tampering of the blockchain and would cause the new block to not be connected to the chain. 

 

That’s not all. Individuals cannot go back and insert a new block in any part of the blockchain since it wouldn’t have the collective information of the previous blocks. And any such attempts would be immediately noticed by other individuals in the blockchain.   

 

 

  • Decentralization

 

As you’ve already seen above, a cryptocurrency is decentralized. What this basically means is that for a crypto to function as intended, it does not need to depend on any central entity or authority. 

 

For instance, to approve a particular cryptocurrency transaction, a majority of the machines within a blockchain would have to work together to do it. So, even if a machine or a few dozen machines fail, get hacked, or don’t approve the transaction for whatever reason, the transaction process can still continue without breaking down. 

 

Compare this with a regular financial transaction, where there is a central entity (like a bank) controlling the transaction process between two individuals. Now, if this central entity was to fail or get hacked, the entire process would break down. 

 

All the cryptocurrency transactions are made peer-to-peer without the involvement of any central entity like a bank or a credit card company. 

 

 

  • Smart contracts

 

Smart contracts are transaction instructions that are automatically performed when triggered by a specified event. These contracts are lines of software code that are deployed within a blockchain. Since it is a digital program that self-executes itself upon the satisfaction of certain predetermined criteria or conditions, a smart contract can drastically reduce the workload of individuals and speed up business processes. For instance, you could design a smart contract in such a way that payment to a supplier is automatically made upon the delivery of a particular consignment.   

 

 

  • Crypto mining

 

Another one of the most important crypto terms that you should absolutely be aware of is crypto mining. Crypto mining is the process through which new coins of a cryptocurrency are created. The process is extremely energy intensive and requires significantly high amounts of computational power. More often than not, crypto mining requires super expensive dedicated computational hardware, the costs of which far outweigh its benefits. 

 

To successfully mine new coins of a cryptocurrency, the computational hardware would have to solve complex mathematical puzzles. Upon successfully solving it, you would receive coins of the said cryptocurrency as a reward. 

 

 

  • Crypto staking

 

Crypto staking is the process of validating transactions in a blockchain that runs on a Proof-of-Stake (PoS) method. Here, the individual wanting to actively participate in crypto staking would have to first hold a particular amount of the said cryptocurrency that they wish to stake. And once this minimum balance criteria is met, the individual can start validating transactions on the blockchain and receive rewards for staking. 

 

 

  • Non Fungible Token (NFT)

 

Have you noticed cryptocurrency terms like Non Fungible Tokens (NFTs) floating around lately? If you have, then here’s what it means. 

 

A Non Fungible Token is basically a unit of data that’s stored in a blockchain. This unit of data is permanent and cannot be altered or interchanged in any way. It can be sold and traded just like a cryptocurrency coin. 

 

The NFT data can be anything from a photo, a piece of audio, or a video file. Unlike cryptocurrency coins, where every coin is identical to another, NFTs may not be identical simply due to representing different underlying assets. 

 

For instance, one NFT may represent a video file, whereas another could represent a digital image. In such a case both these NFTs are not identical and can possess their own value.  

 

 

  • Cryptocurrency exchange

 

Similar to a stock exchange, a cryptocurrency exchange is an electronic marketplace where individuals can buy and sell crypto coins from and to one another. For every transaction that you make, these exchanges levy a small fee. There are plenty of different exchanges that are currently operational, with each of them levying different transaction fees. 

 

Wrapping up

And there you have it. Some key crypto terms that every individual looking to enter the world of cryptocurrencies should know about. Now that you’re apprised of the basics about cryptocurrency, in the next chapter, we’ll take a look at just how many cryptocurrencies there are in the world at present. 

 

A quick recap

  • Cryptography is the technique that cryptocurrencies use to encrypt transaction data. Cryptography encryption protocol involves complex mathematical puzzles that are used to secure data.
  • Blockchain is the fundamental technology that cryptocurrencies use and rely on. It is basically a database that’s made up of small blocks chained together. 
  • All cryptocurrency transactions are made peer-to-peer without the involvement of any central entity like a bank or a credit card company. 
  • Smart contracts are programmed instructions that are automatically performed when triggered by a specified event. 
  • Crypto mining is the process through which new coins of a cryptocurrency are created. 
  • Crypto staking is the process of validating transactions in a blockchain that runs on a Proof-of-Stake (PoS) method. 
  • A Non Fungible Token is basically a unit of data that’s stored in a blockchain. This unit of data is permanent and cannot be altered or interchanged in any way. It can be sold and traded just like a cryptocurrency coin. 
  • A cryptocurrency exchange is an electronic marketplace where individuals can buy and sell crypto coins from and to one another.

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