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Cryptocurrency Terms You Need Know, Explained In Simple Words

March 12th, 2018

Cryptocurrency Terms You Need Know Explained In Simple Words

One of the first steps to understanding and becoming an expert in any industry is to come up to speed with the terms related to that industry. So if you want to understand the cryptocurrency space, understanding the terms used in the space is a good place to start. We’ve compiled a list of the essential cryptocurrency terms for you here — in alphabetical order.

Address: Think of it as your email address, but with the example@someone.com format replaced with a bunch numbers, uppercase and lowercase letters. Just as your email address helps determine the destination of an email, a cryptocurrency address helps determine the destination of a cryptocurrency payment. The address is unique to the user to whom it was originally assigned.

Altcoin: An abbreviation for the phrase “Alternative coins,” Altcoins refer to the numerous cryptocurrencies that launched after the success of bitcoin. Typically, altcoins are similar to bitcoin in setup, making just a few tweaks to bitcoin’s codebase and, in the end, offer a new cryptocurrency that claims to solve the problems of bitcoin.

Bitcoin: Created in 2009, bitcoin is the first cryptocurrency that ran on a blockchain network. A person who used the pseudonym Satoshi Nakamoto created it.

Block: A block is simply a group of cryptocurrency transactions that have been verified. A simple way to understand this is to think about the process of packaging biscuits. There’s a set number of biscuits that can go into a box. In the case of a block, each biscuit in the box represents a cryptocurrency transaction and the entire box of biscuit represents a block. In essence, a block couldn’t be completed or created without a certain volume of cryptocurrency transaction just as a box couldn’t be sealed until the set number of biscuits had been packed into it. In addition, the next block couldn’t be created unless the current block was filled just as one box of biscuit had to be filled before packing another one.

Blockchain: As you can probably tell, blockchain is made of two words: block and chain. So blockchain simply means a chain of blocks linked and secured with cryptography. Cryptography is a practice that allows information to be encrypted. And since we’ve said that a block is a group of cryptocurrency transactions bundled together in a sequence once they have been verified, we can put everything together and say that blockchain simply shows a factual history of all the cryptocurrency transactions that have occurred. And since it uses cryptography for encryption, it cannot be edited and it protects user information. Using the biscuit example again, a blockchain would represent a stack of biscuit boxes, each of which couldn’t exist unless the preceding box was filled. Because the existence of a block is proof that the one before was complete, blockchain doesn’t need a third party (like banks in the case of traditional money) to maintain its integrity, hence, the reason blockchain is described as a decentralized ledger.

Cryptocurrency: A cryptocurrency is a digital money that operates on the blockchain technology. Because it runs on a blockchain, which doesn’t need a third party to maintain it (i.e. decentralized), cryptocurrency can usually be transferred from one user to another without going through an intermediary — like a bank in the case of the traditional money.

Cryptocurrency Exchange: Pretty much like in the traditional financial system, a cryptocurrency exchange is a platform where you can buy and sell various cryptocurrencies. Think of it as a forex trading platform for cryptocurrencies. Some popular cryptocurrency exchanges include coinbase, bitfinex and bittrex.

Cryptocurrency wallet: Similar to your mobile wallet where you have stored your payment details including your cards, bank accounts and the like, a cryptocurrency wallet serves to store your cryptocurrencies. To use a cryptocurrency you’ll need a digital wallet, which would allow you send and receive cryptocurrency.

Decentralized: This term appears in most of the definitions of blockchain you’ll encounter. It simply refers to a system that doesn’t have a central point of control or authority to verify, confirm and keep transaction data — i.e. a bank in the traditional banking system. A blockchain is decentralized in that each computer that is connected to the blockchain has a unique version of all the data received and stored on the blockchain network and not just a copy of the data. This means that the system is “crowd-maintained” and no single person or organization can alter the data on the blockchain network.

Fork: A fork in the blockchain space refers to an upgrade or changes in the rules governing a blockchain network in order to render previously valid transactions invalid — or vice-versa. As a result of a fork, a blockchain splits into two paths, one following the old rules and the other following the new rules. Forks are usually performed to fix security issues or add new features. It, sometimes, result in new cryptocurrencies, as in the case of bitcoin cash and ethereum classic. Think about a blockchain fork as putting your fork through a yam to split it into two, just that with blockchain you don’t use a physical force, you just change the governing rules.

ICO: An acronym for “initial coin offering,” an ICO is an event in the cryptocurrency space used to raise funds for a new blockchain project from cryptocurrency investors. ICO differs from the tradition initial public offering, or IPOs, in that investors in ICO receive the newly created cryptocurrency of the blockchain company, usually called “tokens,” as opposed to stocks in IPOs. As in the case of a stock, buyers of the cryptocurrency or token offered by the new blockchain company expect the value of the new cryptocurrency to rise over time.

Mining: Remember that there’s no bank or any intermediary that verifies and confirms transactions in the cryptocurrency space, contrary to what happens in the traditional financial space. So how does the blockchain network verify that a sender has the funds they’re trying to send and that they hadn’t spent it already?

The answer to this question is mining. In simple terms, mining is the process of using advanced computers to verify and confirm transactions conducted on a blockchain. And the computer set up used in this process is called a miner. The person or organization behind the mining activities is usually rewarded with newly generated cryptocurrency, which is the part that actually relates to “mining.”