Decoding Cryptocurrency: Key Terms for Beginners

Cryptocurrency intends to serve as a digital or virtual currency, functioning as a general medium of exchange. They function in a decentralized manner, with no central bank controlling them. Cryptocurrency uses cryptography for security, protected by strong and complex encryption algorithms. Cryptocurrency entered public usage in 2008 as a protocol designed to allow a network of users to connect through digital communications. There are more than thousands of cryptocurrencies in the market, such as Bitcoin, Litecoin, Ethereum, Z Cash, and many others. Cryptocurrencies use hashing algorithms, for example, Bitcoin uses SHA256 and Ethereum uses ETHASH. These transactions are first validated and then added block by block in the blockchain.

Crypto users commonly use the following terms:

• FOMO: is used for “Fear of Missing Out”, and is considered as the worry of losing out on profitable opportunities and making investments or trading.
• WAGMI: is used for “We Are Going Moonward, Indeed” or “We Are Gonna Make It”. It is used to convey enthusiasm and optimism about the future success and potential of a coin or investment.
• HODL: is used for “hold”, it means keeping cryptocurrency assets rather than selling them, despite market turbulence, in the expectation that their value would rise over time.
• ICO: is used for “Initial Coin Offering” in the cryptocurrency industry to raise money for their growth. 
• Whale: a person or organization with substantial Bitcoin holdings.

Cryptography

Cryptography is a set of techniques for ensuring information security. Archaeologists discovered it in ancient Egypt, making it one of the oldest written languages. Cryptography aims to ensure data confidentiality, integrity, authentication, and non-repudiation. Users maintain confidentiality by keeping the content of information a secret from all, except those authorized to access it. They enable the receiver to authenticate the origin of a transaction. Users actively enable the receiver to verify the integrity of a transaction, ensuring that it has not been modified. Non-repudiation, a sender should not be able to falsely deny later that he sent a transaction. It detects and prevents security attacks.

Cryptography ensures that only the legitimate owners of cryptography could view their balances and make transactions. Users utilize cryptographic keys to sign and validate transactions on the blockchain. Cryptography is an essential part of cryptocurrencies, it offers security and the confidence required for decentralized and digital money.

Types of Cryptocurrencies

There are thousands of cryptocurrencies in existence, but here are some of the most popular cryptocurrencies:

• Bitcoin (BTC): the most known cryptocurrency, created by an unidentified individual or group named Satoshi Nakamoto.
• Ethereum (ETH): a cryptocurrency that supports decentralized software and smart contracts.
• Ripple (XRP): a cryptocurrency created for international money transfers.
• Litecoin (LTC): a cryptocurrency with quick transactions and cheap costs.
• Bitcoin Cash (BCH): a digital currency that resulted from a hard fork of Bitcoin in 2017. Its creation aimed to enhance transaction performance and reduce fees.
• Binance Coin (BNB): a cryptocurrency utilized on the Binance market.
• Cardano (ADA): a cryptocurrency that focuses on quick transactions and employs a proof-of-stake consensus algorithm.

People use the term “altcoin” to refer to all cryptocurrencies that are not Bitcoin. Altcoin represents a type of cryptocurrency that developers created as an alternative to Bitcoin.

Blockchain

Cryptocurrency arranges numerous data blocks chronologically, forming a digital list of data records. Users create records in the form of a block and inscribe transaction details within it. Blocks link to each other, forming a chain of blocks known as a ledger. All participants in transactions share the ledger, which functions as a public ledger. This creates the basics of the blockchain. Data within the blocks are encrypted by complex arithmetic. Blockchain is a collection of records connected. Every user in the network has two keys: the public key and the private key.

Private Keys

Private keys are unique addresses, which have an important effect on the cryptocurrency industry. Users utilize private keys to provide proof of ownership over cryptocurrency assets and sign transactions. To prevent unwanted access or theft, users keep private keys secret and never share them. If a user loses or has their private key stolen, they forfeit all access to their cryptocurrency assets.

Public Keys

Users utilize the public key to identify themselves and facilitate secure transactions. The private key generates the public key as a long string of characters. Users freely share the public key, which is used for receiving cryptocurrency. During transactions, the sender includes the recipient’s public key and the amount of cryptocurrency being sent. Miners, and other users on the network, validate the transaction. They ensure that the recipient’s key is valid, and the sender has enough cryptocurrency. Since it is almost impossible to guess the private key from the public key, this indicates that public keys are safe. 

Fork

Fork is a software update or modification in the blockchain that results in the creation of two versions of the blockchain. When the majority of the network rejects a group of developers’ proposals, a fork may occur. Blockchain splits into two different parts, hard fork, and soft fork. When one party adheres to the original protocol and another party adheres to the new protocol, it is referred to as a hard fork. When a network embraces the developers’ suggestions and the new blocks align with the old protocol, it is termed a soft fork.

A hard fork takes place, resulting in the splitting of the two chains and the creation of a new cryptocurrency with its own name, price, and mining rules. Both chains share the same transaction history before the fork. This means that the holders of the original cryptocurrency also receive an equivalent amount of the new cryptocurrency. The importance of forks in the cryptocurrency industry is high because they can split and produce two different currencies. It is also confusing for the users, they have two separate versions and should determine which one to support.

Token

A token is a digital asset that is issued and controlled on a blockchain in the context of cryptocurrencies. They represent a particular asset within a decentralized application or network. They release them on an existing blockchain and depend on that blockchain’s infrastructure to operate. In a decentralized network, users can utilize tokens for various purposes. For instance, they can use tokens as a form of payment within a specific industry. Tokens fall into two categories: security tokens and utility tokens.

Security tokens aim to represent ownership in a real-world asset or company and are subject to securities regulations. On the other hand, utility tokens serve the purpose of accessing a specific service or application. Developers often employ initial coin offerings (ICOs) to raise funds by selling new cryptocurrencies or tokens to investors in exchange for money. They are very important for the cryptocurrency industry, by offering a wide range of use cases and applications.

Initial Coin Offering (ICO)

ICO is a form of crowdfunding strategy that blockchain-based organizations use to raise money for their growth. During an ICO, developers issue and sell a new cryptocurrency or token to investors in exchange for money. ICOs are important for the growth of the blockchain and cryptocurrency industry. It allows entrepreneurs to fundraise and innovate. However, they have also brought new risks and difficulties. As a result, the industry is constantly changing and investors struggle to understand this territory of finance.

 

Wallet

Wallets are digital tools that are used to store, manage and transfer digital assets. Digital assets management and security need the use of wallets. Users should pick a wallet that fits their needs and safeguard their private keys and digital assets from theft or loss. These wallets are available in a wide range of formats, including software applications to hardware devices. When users receive cryptocurrency, the cryptocurrency is sent to a public key linked to their wallet address. The wallet manages the user’s private key, which is used to sign transactions and provide proof of ownership over the cryptocurrency assets. Hot wallets and cold wallets are the two main types of cryptocurrency wallets.

Cold Wallets

 Cold wallets are offline and used for long-term storage. There is another way to provide a more secure way to store cryptocurrency assets, these are hardware wallets. Hardware wallets are examples of cold wallets, they store private keys offline. Since these wallets are not online, they are safe from hacking and other online attacks. Using them for frequent transactions is less practical.

Hot Wallets

Hot wallets are online and often utilized for frequent transactions. Examples of hot wallets include software wallets that users can install as apps on desktop or mobile devices. Users access them through a web browser, and they are straightforward to use. However, these wallets could be subject to hackers and online attacks.

Mining

Mining is a process that verifies and validates transactions on a cryptocurrency network. It is based on proof-of-work and proof-of-stake consensus algorithms, to confirm transactions. The mining process uses specialized software and hardware for solving complex mathematical algorithms. Miners, the users who attempt to solve mathematical puzzles, earn rewards upon successfully solving them. Whenever someone sends cryptocurrencies to another person, the network transmits a transaction.

Nodes (computers that run the cryptocurrency software) check the transaction’s validity. Miners group transactions into blocks, with each block containing a header (block version number), a list of transactions, and a nonce. Nonce is a random 32-bit number that miners use as a base for their hash calculations. Miners solve mathematical puzzles which combine header and nonce. They should use large processing power to earn their reward. When the miner solves the puzzle, the solution is transmitted to the network. Nodes in the network verify if the solution is correct, and then the miners get their reward.

Proof-of-Work (PoW)

Proof-of-work is a mechanism to validate transactions and add new blocks to the blockchain. It requires miners to use computational power to solve mathematical puzzles and create new blocks. It ensures the network’s security and the verifications of the transactions. Proof-of-work has its drawbacks, it consumes a high amount of energy and has an important impact on the environment. 

Proof-of-Stake (PoS)

Proof-of-stake is a mechanism to lock up a certain amount of cryptocurrency as collateral. In this case, users must lock up the cryptocurrency as collateral. It uses less energy than Proof-of-work and encourages users to keep their cryptocurrency. Proof-of-stake has its drawback, for being more centralized. Validators with higher stakes exert a greater influence on the consensus process.

Nodes

Nodes are one the most important parts of the cryptocurrency industry, such as individual computers or servers. They store a copy of the blockchain ledger and validate the transactions in the network. Cryptocurrencies contribute to the security and transparency of transactions due to their decentralized nature. They create a decentralized system, working without the need for intermediaries. Nodes store a copy of the blockchain ledger, which encompasses records of all past transactions on the network.

Nodes verify the validity of transactions on the network, to ensure that the sender has sufficient funds. It ensures that the transaction has not been previously used. Once the nodes confirm the transaction, they add it to a new block. The new block is then broadcasted to all other nodes on the network. Nodes also participate in the mining process when they utilize computer power to solve mathematical puzzles. This procedure helps to keep the blockchain network’s integrity and guarantees the security and transparency of transactions. 

Hash Rate

The hash rate refers to the computational power utilized to validate and secure the transactions on the blockchain network. It measures the amount of work for solving mathematical puzzles by miners and creates new blocks of validated transactions. Increasing the hash rate enhances the security of the network and reduces malicious attacks. A higher hash rate signifies the utilization of more computational power to mine blocks. This happens because it is harder for hackers to control a high network’s hashing power. 

We measure the hash rate in:

•  (H/s) hash per second
• (KH/s) kilo hashes per second
• (MH/s) mega hashes per second
• (GH/s) giga hashes per second
• (TH/s) tera hashes per second

A high hash rate indicates network security and healthy miner participation. Also, it indicates a higher competition among miners and higher electricity consumption.

Smart Contract 

A smart contract is a computer software that operates on the blockchain network. It automates the execution of a contract. They were first proposed by Nick Szabo, a computer scientist in the 1990s. They became a reality after the development of blockchain technology. Lines of code contain the terms of the contract, functioning as a self-executing contract. The blockchain network stores them. When specific conditions are met, the smart contract automatically executes the agreed-upon terms of the contract. They are useful for cryptocurrency transactions because they ensure the secure, efficient, and transparent execution of financial agreements. Users accomplish this without the intervention of banks or other financial institutions. Smart contracts are useful for complex financial agreements, where the terms of the agreement can be difficult to enforce manually.

 

Takeaways

• Cryptocurrency is a digital or virtual currency, used as a general medium of exchange.
• Cryptography is important for cryptocurrencies, it ensures data confidentiality, integrity, authentication, and non-repudiation.
• Blockchain arranges numerous blocks chronologically, creating a digital list of data records.
• Each user in the network has two keys: private and public keys.
• Fork is a software update in the blockchain, and it results in the creation of two different versions of the blockchain.
• Blockchain issues and controls tokens, which are digital assets.
• ICO is a form of crowdfunding strategy that blockchain-based organizations use to raise money for their growth.
• Users employ wallets as digital tools to store, manage, and transfer digital assets
• Mining is a process that validates and verifies transactions on the cryptocurrency network. It is based on Proof-of-work and Proof-of-stake processes.
• Nodes are individual computers or servers that store a copy of the blockchain ledger.
• Miners utilize hash rate, which represents the computational power, to validate and secure transactions on the blockchain network.
• Smart Contract is a computer software that operates on the blockchain network.