Decoding Cryptocurrencies: 12 Terms You Need to Know
By now you’ve heard of blockchain and cryptocurrencies, and you’ve watched the values of these unfamiliar assets both peak and trough over the past months. But what is blockchain and what are the components that make up this emerging landscape? We’re digging into the basics and breaking down the terms you need to know if you want to hold your own in the world of cryptos.
- Blockchain: As discussed in our Fintech Glossary, blockchain is a digital ledger that keeps track of transactions and processes and requires validation via a peer-to-peer (P2P) network. Once a transaction is input into the ledger, third-party coders verify the legitimacy of the transaction. When confirmed, the ‘block’ containing this data is solidified – no one can alter or change a block once it is recorded in the ledger. Every subsequent transaction builds upon the block before it, and records transactions chronologically and publicly.
- Ledger: Because blockchain technology revolves around an encoded and decentralized database, the ledger serves as the storage for transaction records.
- Block: A key component in blockchain, blocks are essentially pages in a record keeping book (the ledger).Blocks are the files where unalterable data related to transactions on the network is permanently stored.
- Mining: The term used for discovering and solving blocks along the blockchain. A reward is given for solving the algorithm and lengthening the chain, called a mining reward. A miner who solves a block of Bitcoin’s blockchain is rewarded with a Bitcoin.
- Cryptocurrency: A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds. Cryptocurrencies are decentralized, operating independently of any central bank or governing party.
- Initial Coin Offering (ICO): Similar to an IPO where companies sell shares to investors, an ICO is a means of fundraising through which new projects sell their underlying crypto tokens in exchange for cryptocurrencies, typically bitcoin and etherium.
- Token: Tokens are a representation of a particular asset or utility that usually resides on top of another blockchain. Tokens can represent basically any asset that is replaceable and tradeable, from commodities to loyalty points to even other cryptocurrencies.
- Wallet: Just as you use a wallet to carry around physical cash and credit cards, a cryptocurrency wallet is a secure digital wallet used to store, send, and receive digital currency.
- Altcoin: An altcoin is the community accepted name for any coin that isn’t Bitcoin. These include popular coins like Etherium, Ripple, Stellar and more.
- Signature: A signature is the mathematical operation that lets someone prove their sole ownership over their wallet, coin or data. An example is how a Bitcoin wallet may have a public address, but only a private key can verify with the whole network that a signature matches and a transaction is valid. These are only known to the owner and are basically mathematically impossible to uncover.
- Multisig: Multisig, or multi-signature refers to having more than one signature to approve a transaction. This form of security is beneficial for a company receiving money into their BTC wallet. If a company wants to keep it so that one employee doesn’t have sole access to a transaction, multisig allows for a transaction to be verified by two separate employees before it’s complete.
- Key: In cryptography, a public key is a cryptographic key that can be utilized by any party to encrypt a message. Another party can then receive the message and using a key that is only known to that individual or group, decode it.
These terms may seem like foreign concepts today, however sooner than we know it they may be the foundation for which all financial transactions are grounded.