Basic Crypto Terms and Their Meanings

Before we look at the basic cryptocurrency terms for beginners let’s talk about cryptocurrency. Cryptocurrencies are digital currency that employs cryptography to secure and verify all transactions. In addition, they are decentralized, meaning they are not controlled or issued by any central authority, such as a government or a bank. Instead, they are created and maintained by a computer network that follows a set of rules.

Cryptocurrencies have their vocabulary and jargon, which can be confusing for beginners. Here are some basic cryptocurrency terms for beginners and what they mean.

All-Time High (ATH)

The highest price a crypto coin has ever achieved. For example, Bitcoin reached its all-time high of $64,863 on April 14, 2021¹.

All-Time Low or ATH

The lowest price ever a crypto coin has ever achieved. For example, Bitcoin reached its all-time low of $0.06 on October 5, 2009.

Altcoin

Any cryptocurrency other than Bitcoin is the first and most successful of all cryptocurrencies. Some popular altcoins are Ethereum, Ripple, Cardano, and Binance Coin.

Blockchain

A blockchain comprises a number of blocks, each containing a group of transactions and a cryptographic connection to the block before it. Doing this creates a blockchain with a complete history of all network transactions.

Block

A computer file that stores a group of transactions and a cryptographic link to the previous block on the blockchain.

Block Height

The number of blocks that have been added to the blockchain since the genesis block, the first block ever created. For example, as of October 20, 2021, the block height of Bitcoin is 709,418³.

Block Reward

The amount of cryptocurrency awarded to the miner who creates a new block on the blockchain. The block reward is usually halved every few years to control the supply of the cryptocurrency. For example, the current block reward for Bitcoin is 6.25 bitcoins per block⁴.

Consensus Mechanism

The method by which the nodes on the network agree on the validity of new blocks and transactions. Different cryptocurrencies use different consensus mechanisms, such as proof-of-work or proof-of-stake.

Cryptography

This is simply the use of mathematical techniques to encode and decode data. Cryptography guarantees that only authorized parties can access or modify blockchain data.

Decentralization

The property of being distributed and operated by multiple independent entities rather than a single central authority. Decentralization enhances the security, transparency, and resilience of the network.

Exchange

A platform for buying, selling, or converting cryptocurrencies to fiat money. (such as US dollars or euros). Centralized and decentralized exchanges are the two types of exchanges we have currently.

Fiat Currency

A conventional currency that is issued and backed by a government or a central bank, such as US dollars (USD), euros (EUR), Japanese yen (JPY), or British pounds (GBP). Fiat currencies have legal tender status in their respective jurisdictions, meaning that they are accepted as a means of exchange for goods and services and are also stored in the traditional banking system.

Fork

A split in the blockchain that results in two or more versions of the ledger. A fork can be either hard or soft.

Hard Fork

A permanent divergence in the blockchain creates two incompatible versions of the ledger. A hard fork requires all nodes to update the new protocol, or they may be stuck on the old chain. A hard fork can be intentional or unintentional, creating new cryptocurrencies. For example, Bitcoin Cash was created from a hard fork of Bitcoin in 2017.

Soft Fork

A temporary divergence in the blockchain creates two compatible versions of the ledger. A soft fork does not require all nodes to upgrade to the new protocol, as they can still validate transactions on both chains. A soft fork can be reversed if enough nodes return to the old protocol. It can implement minor changes or improvements to the network.

Hash data

A hash function generates a unique string of characters from input data. A hash serves as a digital fingerprint that identifies and verifies the data. Hashes create blockchain blocks, transactions, addresses, and keys.

Hash Rate

The measure of how much computing power is used to mine new blocks and secure the network. A higher hash rate leads to increased security and competitiveness.

Other Cryptocurrency terms for beginners

Proof of Work

Proof of work, or (PoW) is a consensus mechanism for reaching an agreement among network members. It entails solving an encrypted hexadecimal number, known as a hash, by expending computational effort. This process creates new blocks and validates transactions on the blockchain. Mining is another name for proof of work, as it involves receiving a reward for the work done. With proof of work, peer-to-peer transactions can be processed securely without needing a trusted third party. However, proof of work also consumes a lot of energy and resources, which poses challenges for scalability and sustainability. Bitcoin, Ethereum, and Litecoin are some cryptocurrencies that use proof of work.

Proof of Stake (PoS)

Proof of stake or POS is an alternative consensus mechanism that requires network members to lock up a certain amount of coins in a wallet or a smart contract, called staking, to participate in the validation of transactions on the blockchain.

POS does not require solving complex problems but rather proving ownership of the coins and following the rules of the protocol. Stakeholders receive rewards in the form of newly minted coins and transaction fees proportional to their stake. Proof of stake enhances the security and efficiency of the network by incentivizing honest behaviour and reducing energy consumption.

However, proof of stake also involves risks such as slashing (losing a portion of the stake for malicious or faulty actions) and illiquidity (being unable to access or use the staked coins for some time). Ethereum 2.0, Cardano, and Polkadot are some cryptocurrencies that use or plan to use proof of stake.

Know Your Customer (KYC)

Know Your Customer (KYC) is a process financial institutions undertake to verify customer identity and evaluate their risk profile. This process is mandatory to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. KYC prevents financial crimes like fraud, money laundering, and terrorism financing. To fulfil KYC requirements, customers must provide valid proof of their identity and address, including ID card, face, biometric, or document verification. Some examples of KYC documents include a passport, driver’s license, or utility bill.

Cryptocurrency Wallet

A cryptocurrency wallet is a digital device or software that stores, sends, and receives virtual currencies. Cryptocurrencies. A wallet has two components: a public key and a private key. The public key is similar to an address used to receive payments from others, while the private key is like a password that must be kept secret and used to sign transactions. A wallet can support one or more cryptocurrencies, depending on its compatibility. Some examples of wallets are Coinbase Wallet¹, Ledger Nano S², Metamask³, and Trust Wallet⁴.

Token

A token is a digital asset representing something valuable, such as a utility, a right, a share, or a currency. A new token can be generated and distributed using an existing blockchain platform, like Ethereum or Binance Smart Chain, using a standard protocol, ERC-20 or BEP-20. A token can have various functions and purposes, depending on its design and use case. For example, a token can access a service, reward users, govern a system,
raise funds, or represent ownership. Some examples of tokens are USDT⁵, UNI⁶, LINK, and BNB.

Initial Coin Offering (ICO)

An initial coin offering (ICO) is a means of raising funds that involves selling tokens to interested investors in exchange for cryptocurrencies or fiat currencies such as USD.

An ICO is usually conducted by a startup or a project that wants to raise funds to develop its product or service, using a whitepaper that describes its vision, goals, roadmap, and tokenomics. An ICO can offer investors the opportunity to buy tokens at a discounted price before they are listed on exchanges or used on the platform. However, an ICO carries high fraud risks, scams, regulation, and volatility.

Decentralized Finance (DeFi)

Decentralized finance (DeFi) is a movement that aims to create an open, permissionless, and transparent financial system that operates without intermediaries, using blockchain technology and smart contracts. DeFi offers services and products that mimic or improve traditional finance,
such as lending, borrowing, trading, investing, saving, insurance, and more. DeFi gives users more control,
access, and efficiency over their finances
while generating passive income and reducing costs. However, DeFi faces security breaches, bugs, hacks, regulations, and complexity.

Non-Fungible Token (NFT)

A non-fungible token (NFT) represents a unique and indivisible digital asset, such as an artwork, a collectible, a game item, or a domain name. Unlike fungible tokens (such as bitcoins or dollars), which are interchangeable and identical in value, NFTs are scarce and have different characteristics and prices. NFTs can be created and traded on platforms supporting the ERC-721 or ERC-1155 standards, such as OpenSea, Rarible, Axie Infinity, and CryptoPunks. NFTs can provide artists and creators with more ownership, authenticity, and monetization opportunities for their work while also offering collectors and enthusiasts more diversity and utility for their collections.

Gas

As one the cryptocurrency terms for beginners, gas is a metric that measures the computational effort needed to carry out a transaction on the Ethereum network. It is paid in the native cryptocurrency of Ethereum, ether (ETH). The cost of gas varies depending on the amount of network activity and traffic., determined by the supply and demand. The gas limit is the highest amount of gas that a user is willing to pay for executing a smart contract or making a transaction. The gas fee is the product of the gas price and the gas limit. The fee ensures that users pay for the resources they use on the network and also to compensate the miners for their work.

Conclusion

Digital currencies and cryptocurrencies use cryptography to secure and verify transactions. In addition, they are decentralized, meaning they are not controlled or issued by any central authority, such as a government or a bank. Instead, they are created and maintained by a computer network that follows a set of rules.

Cryptocurrencies have their vocabulary and jargon, which can be confusing for beginners. In this article series, we explained some basic cryptocurrency terms for beginners and what they mean, such as proof of work, proof of stake, know your customer, wallet, token, initial coin offering, decentralized finance, non-fungible token, and gas. We hope you found this article series helpful and informative. To learn more about cryptocurrencies, visit our cryptocurrency guides. Thank you for reading! 😊