Digital, decentralized currencies known as cryptocurrency are all the rage right now, but let’s be honest: Unless you’re well-versed in the intricacies of how they work, it’s hard to wrap your head around them.
Making good investments requires expert knowledge, and cryptocurrency is even more complicated than the average financial market. Anyone hoping to make money in the crypto game, or even start getting involved in cryptocurrency, needs to read up. Here’s a list of definitions that will help you understand the basics about cryptocurrency.
Altcoin: When people think cryptocurrency, Bitcoin is usually the first thing that comes to mind, and with good reason: It’s the first and by far the most valuable of available cryptocurrencies. Altcoins are any form of cryptocurrency that isn’t Bitcoin.
ASIC: Application specific integrated circuits (ASICs) are chipsets built to perform a very specific task. Many ASICs are built to mine cryptocurrency, and are a huge improvement in power consumption and speed over graphics processing units (GPUs) that have been the most common hardware to date.
Bitcoin: Bitcoin is the original form of cryptocurrency; it was developed by a programmer or a group of programmers going by the name Satoshi Nakamoto. Bitcoin is a decentralized cryptocurrency that relies on the blockchain to distribute its ledger and record proof of work.
Bitcoin Cash: This cryptocurrency is a hard fork of Bitcoin that was created to decrease fees associated with Bitcoin transactions by increasing block size. It’s also designed to be more spendable than Bitcoin.
Block: Blockchains consist of individual blocks that are added to the ledger as they are mined. Once a block has reached a predetermined size (which varies from cryptocurrency to cryptocurrency), it is verified and added to the blockchain.
Blockchain: Blockchain is the driving force behind cryptocurrency, but its uses aren’t limited to monetary ones. A blockchain is a decentralized, distributed ledger that can consist of cryptocurrency transactions, computer code, and other forms of data. It’s split between all the notes that participate in the network so that a consensus can be formed as to what is a valid transaction and what is not. For a more thorough explanation of blockchain technology see TechRepublic’s blockchain cheat sheet.
Centralized ledger: Not all blockchain ledgers are decentralized and distributed. Some ledgers, like the blockchain that is associated with the Ripple altcoin, are controlled by a single entity that has ultimate authority over its contents.
Consensus: Blocks can’t be added to a blockchain without a majority of users reaching a consensus as to their validity.
Cryptomining malware: As cryptocurrency has gained value, malware creators have quickly stepped up their efforts to build malware that uses infected CPUs to mine cryptocurrency—then, the coder adds it to their personal wallet. Different forms of cryptomining malware exists—some of the malware installs apps on mobile devices and computers, and some malware operate as scripts that run from the web.
Cryptographic hash: Hashes are the cryptography part of cryptocurrency, and are what makes a blockchain secure, verifiable, and unhackable. Cryptographic hashes can take inputs of variable length, but always output a fixed-length string of numbers and letters. Most cryptocurrencies use SHA-265, which always outputs a 256-bit string regardless of whether the input is “hello” or an entire sentence.
Decentralization: One of the key reasons cryptocurrency has been such a hit is because it has changed the way data like ledgers and applications are stored. Instead of relying on a central node like a server, blockchains, Bitcoins, decentralized applications, and all the data they contain are distributed between nodes. The greatest strength of decentralization is its resilience: If one node goes offline, there’s no data lost and no downtime since individual nodes contain no unique information.
Decentralized applications: Also known as dapps, decentralized applications take the concept of distributing blockchain ledgers and go a bit further: Dapps distribute actual applications among redundant nodes. The most popular dapp platform is the Ethereum Virtual Machine, which uses its own unique cryptocurrency called Ether to pay rewards to block miners and fuel its peer-to-peer app hosting.
Difficulty: Difficulty is a measure of how hard it is to successfully mine a single block in a blockchain. Cryptocurrency miners are attempting to find cryptographic hashes for specific blocks of data, which becomes more difficult the longer a blockchain becomes. Difficulty continues to rise, making mining a more intensive process as time goes on.
Distributed ledger: Distribution involves decentralizing data between multiple nodes. A distributed ledger is a blockchain ledger that is redundantly shared between peers so there are multiple valid copies to prevent data loss. Centralized ledgers are the exact opposite: Centralized ledgers are held by a single node and are not redundant.
Distributed network: What a distributed ledger is to cryptocurrency a distributed network is to decentralized applications. As opposed to using a single source like a server to run a dapp, a distributed network (e.g., the Ethereum Virtual Machine) shares the processing work and stored data between its nodes.
Ethereum: Ethereum is a decentralized computer network, also known as the Ethereum Virtual Machine (or EVM), that operates dapps and is fueled by the cryptocurrency Ether.
Ether: Often mistakenly called Ethereum, Ether is the cryptocurrency that powers the EVM, commonly called Ethereum. Ethereum is used to reward blockchain mining and dapp nodes for participating in the work of the EVM.
Fiat currency: Fiat currency (e.g., dollars, euros, pounds, yen) is the form of money that we use every day, and it derives value from the government that issued the currency. Cryptocurrency isn’t fiat currency because it isn’t given value by a central authority.
Fork: Forks are points at which an existing blockchain splits into two or more different blockchains. Up to the point of forking, both blockchains contain the same data, but after that point are different. Forks can be both hard (i.e., not backwards compatible) and soft (i.e., backwards compatible), and can occur due to a change in consensus or a change in blockchain protocol (i.e., underlying code).
Hash rate: A hash rate is a measurement of how efficiently cryptocurrency mining rigs are operating and is measured in hashes per second.
ICO: When a new cryptocurrency venture begins it can make an initial coin offering (ICO), similar to an initial public offering (IPO). Instead of company shares being sold to early investors, ICOs involve the sale of cryptocurrencies to early backers of the project. Companies offering ICOs have to surpass a minimum earning threshold before the ICO or all money is returned to backers and the project fails.
Ledger: A ledger is usually a record of a specific type of transaction such as money, purchases, etc. Ledgers in the cryptocurrency world are also known as blockchains, which contain complete records of the history of a cryptocurrency’s use. In this case, the ledgers are not physical objects—ledgers are digital lists of cryptographically hashed data validated through group consensus.
Litecoin: Litecoin is an altcoin that is a fork of Bitcoin, and it was launched in 2011. Litecoin is nearly identical to Bitcoin, but it differs in several key ways: Litecoin has a faster block generation time than Bitcoin; Litecoin has a higher maximum number of coins than Bitcoin; and Litecoin uses the scrypt cryptographic hash algorithm instead of SHA-256.
Mining: Cryptocurrency mining is the act of attempting to solve hashes in order to add blocks to a blockchain. It takes an intense amount of computing resources, with many miners building their own specialized rigs or buying into a share of a cloud-based mining computer. When a block is successfully mined and added to the blockchain, anyone who did work to help solve it is paid a small amount of cryptocurrency as an incentive to mine.
Monero: Monero is another altcoin, and was specifically designed for anonymity. Monero transactions can’t be traced, which has made it a popular cryptocurrency among cybercriminals and crypto mining malware coders.
Private/public keys: Keys are used in all cryptocurrency transactions and come in two forms: Public and private. A public key is what is sent by the owner of a cryptocurrency wallet when they want to send currency to another user or use their coins for a purchase. Private keys are unique to all cryptocurrency wallets and are used to validate the public key and act as unique signatures for each cryptocurrency transaction. Private keys should never be shared, as someone with access to a private wallet key has control over the cryptocurrency in that wallet.
Proof of stake: Proof of stake (PoS) is a consensus algorithm that rewards cryptocurrency miners based on the amount of cryptocurrency they hold. The more cryptocurrency a miner owns, the larger the share of the payout for each solved block they receive. There is no actual block reward in a PoS, with miners directly earning transaction fee currency instead. PoS is the newer of the two consensus algorithms, and it is slated to begin being used for Etherium mining sometime in 2018. Supporters of PoS argue that it’s more cost effective than proof of work mining.
Proof of work: Proof of work (PoW) is the traditional consensus algorithm that rewards cryptocurrency miners based on how much they contributed to a solved block. The more work performed the more the cryptocurrency miner earns when a block is added to the chain. PoW is used by most cryptocurrencies, but it makes it more difficult for those with low-end mining rigs to earn money.
Reward: Rewards are cryptocurrency paid to blockchain miners whenever a block is solved and added to the blockchain. The currency rewarded comes from two sources: Transaction fees and incentive coins that are generated as blocks are solved, thus adding more coins to the total supply.
Ripple: Ripple is a centralized cryptocurrency that is designed to make international payments easier by eliminating exchange rates and cross-border fees. It has faced criticism due to its centralized ledger, which gives the Ripple company—instead of purchasers and investors—the ability to control prices.
Scrypt: Scrypt (pronounced ess-crypt) is a cryptographic hash algorithm that is used by several cryptocurrencies as an alternative to SHA-256. Scrypt is simpler, less resource-intensive, and easier to solve than SHA-256, making it a more popular choice for individual miners since they don’t need specialized hardware to mine it. The trade-off is that scrypt is supposedly less secure, though there has been no real-world case of it being cracked.
Supply: Supply refers to a total amount of a particular cryptocurrency and is divided into three terms: Circulating supply, total supply, and maximum supply. Circulating supply refers to the estimated number of coins being used by the public or available in markets; total supply is the total amount of coins that currently exist; and maximum supply is the total amount of coins that will ever be issued. Most forms of cryptocurrency have a theoretical maximum supply, but in many cases it’s unlikely to ever be reached.
Transaction block: Each block that is mined and added to the blockchain consists of a list of transactions, such as buying or selling coins, trades, or purchases using cryptocurrency.
Transaction fee: Whenever an individual buys, sells, trades, or otherwise uses cryptocurrency, they have to request that a miner mines their transaction, adds it to a transaction block, and then adds the completed block containing their transaction to the blockchain. In order to ensure a transaction is mined, a fee has to be paid to incentivize miners to solve it. Transaction fees aren’t fixed, but offering too little can result in a failed transaction, while offering too much simply means the user is wasting money. Failed transactions can be dangerous for cryptocurrency users—if a transaction doesn’t make it to the blockchain, someone else could theoretically spend the same coin, robbing the user of its value.
Wallet: A wallet is a digital storage space for cryptocurrency. Wallets can be apps, cloud-based websites, or just a plain TXT document stored on a hard drive. If a cryptocurrency wallet is stolen, or its private key is revealed, anyone has access to the coins it contains—just like having your wallet stolen in real life.