According to a study conducted by Cambridge University and the Center for Alternative Finance, the number of cryptocurrency wallet users has increased more than sevenfold from 2018 to 2021. Although interest in the topic is growing, all novice cryptocurrency users need to understand basic terms. To facilitate easy understanding, we have divided the terminology into four main categories. Within each category, the terms are arranged in order of relevance.
- Blockchain. Literally, it’s a chain of blocks. Blockchain is a database developed with the help of distributed ledger technology. The peculiarity of the technology is that it’s decentralized, meaning data is stored on several network nodes or computing centers. Blockchain technology is the basis for the vast majority of cryptocurrency projects.
- Block. A basic unit, a “link” in the blockchain. New blocks are formed regularly and contain information about transactions. They use the computing power of devices connected to the blockchain. These devices validate information entered into the block within the network. After verification, the block is added to the chain. The entered information and the sequence of blocks cannot be deleted or altered. The complete chain of blocks is stored on all nodes that are involved in making the network work.
- Consensus. An algorithm that blockchain network participants use to confirm the validity of new information added to each block. There are various consensus algorithms, but all of them are designed to ensure that the information in the blocks is valid.
- Wallet. Software or technical means for storing and using cryptocurrency assets. Wallets are divided between “hot” (with permanent access to the Internet) and “cold” (without access to the Internet) variants. They can be implemented as client programs for personal computers, web services, and discrete devices resembling a flash drive.
- Address. A complex combination of characters (from 26 to 34 characters) used as the wallet’s identifier. Using a specific address, users can exchange cryptocurrency within the network.
- Key. A complex combination of characters that gives access to a cryptocurrency wallet. There are public and private keys. A public key is available to all users and with a private key, it is converted into a wallet address. Thus, a user can generate as many public addresses as he needs. The wallet generates the private key and enables transactions, and it is available only to its owner. The public key can be recovered if you know the private key, but the private key can only be recovered using the 12-word combination set during wallet creation.
Every time a user needs to provide a cryptocurrency wallet “account number,” it generates a public key, which is the address to transfer funds. You can use the same public key or generate a new public key for each transaction. In this case, the private key remains unchanged, which acts as an encoder for creating any number of public keys.
- Transaction. Any transfer of funds between wallets. Information about transactions is fixed in the block. Therefore, it’s impossible to cancel after confirming the transaction and making the corresponding record in the block.
- Smart contract. An algorithm that automates the execution of transactions within a blockchain or in the interaction of various blockchains. It contains information about the parties’ obligations. It works according to the “if A, then B” approach. Decentralized applications and many other cryptocurrency technologies are based on smart contracts.
For example, a blockchain-based electric car rental application can be fully automated thanks to smart contracts. The process may look something like this: the user transfers a certain amount to a public address, the smart contract processes the incoming information and generates a token, which is sent back to the payer and contains information to activate the vehicle. In the same way, the smart contract can bill the user for automatic lease renewal and deactivate the vehicle without recording a new receipt of funds.
- Cryptocurrency. A digital means of payment, the accounting and functioning of which is provided by a decentralized payment system based on blockchain technology. It is considered as an alternative to fiat (traditional) money. Cryptocurrencies exclude the possibility of centralized control and regulation by conventional financial institutions.
- Fiat money is the common currency of central banks. It is not backed by real assets and is considered a means of payment on the basis of state laws and regulations (fiat = decree/regulation in Latin).
- Bitcoin. The first and best-known cryptocurrency. It has the largest capitalization – about $1 trillion (more than half of the entire cryptocurrency market). Bitcoin was created in 2009. Its anonymous developer (or a group of developers) assumed the pseudonym of Satoshi Nakamoto (after 2011, Satoshi disappeared from the Internet).
- Coin. The designation of any cryptocurrency.
- Altcoin. All cryptocurrency coins, except bitcoins. The first altcoins are considered to be Litecoin and Namecoin, which appeared in 2011. In 2021 there are more than 4,000 active altcoins.
- Ethereum (Ether). The biggest altcoin. The second-largest cryptocurrency by market capitalization. It is not just a payment system and cryptocurrency, but a digital space for decentralized applications (dApp). Ethereum was created by Vitalik Buterin in 2015.
- Token. A digital asset controlled by a smart contract. Tokens are created and based on blockchain networks. The most popular platform for issuing tokens is Ethereum. The common standard for Ethereum tokens is ERC20. Many large cryptocurrency projects, such as the Tether stablecoin, operate on this basis.
- Stablecoin. A cryptocurrency whose value is tied to the value of traditional currencies and exchange-traded assets (gold, for example). Cryptocurrencies have high volatility – the dynamics of price changes. Stablecoins do not have this feature.
- Tether. The biggest stablecoin. The most famous Tether token is USDT, the “digital dollar”. The value of the token is 1 to 1 in relation to the price of the U.S. dollar. Tether Limited trades a number of other stablecoins on the market, whose prices are tied to the prices of the world’s major currencies and some exchange-traded assets (gold, platinum). Tether token (USDT) ranks first in terms of the volume of daily transactions.
- Mining. The computational process of forming a new block and adding it to the blockchain. Miners, respectively, are the people whose computing devices take part in the process of mining. Remuneration for finding a new block is given out in the corresponding cryptocurrency – this is also the process of issuing (releasing new coins) of almost all cryptocurrencies. Miners receive a fee for processing the transactions themselves (their confirmation, for example) as a reward. The calculation of this reward differs in various cryptocurrency networks.
- CPU mining. Computational operations for mining new blocks, performed in computer processors. Processors have low processing power and, therefore, this type of mining is only used in relatively new cryptocurrency projects.
- GPU mining. The use of graphic processors, located in the computer video cards. It is the most widespread technical means for mining.
- ASIC miners. Special computing equipment for mining, which uses integrated circuits and specialized processors. Devices of this type are created to mine a specific cryptocurrency. More precisely, for processing cryptographic algorithms of a strictly defined type, which underlie the operation of the blockchain network of a particular cryptocurrency.
- Node. A computer (server) that takes part in mining. This computer contains the full current version of the blockchain.
- Hash rate. A unit of measurement of the computing power of the equipment for mining.
- Mining difficulty. A characteristic that determines the amount of computing power needed to add a new block.
- Mining pool. A joint software group of miners into a unified network. A way to increase the overall hash rate and the probability of adding a new block. The remuneration is divided between the members of the mining pool. There are several algorithms for distributing remuneration.
- Mining farm. Specialized equipment that combines several devices for mining. As a rule, a mining farm belongs to a particular person or organization.
- Cloud mining. A service that provides the ability to use computing equipment to mine remotely.
- Halving. A mechanism for regulating the issue of new coins and maintaining their price. It implies a halving of the reward upon reaching a specific network state (the number of blocks).
- Volatility. The main market characteristic of cryptocurrency assets. It assumes high dynamics of price changes. Volatility can be interpreted in both positive and negative contexts.
- Cryptocurrency exchange. A digital marketplace that provides the opportunity to buy and sell cryptocurrencies and digital assets, as well as exchange them for real money.
- Trader. An individual representing his or her own interests on an exchange.
- Broker. An individual or legal entity representing the interests of third parties on the exchange.
- Bulls. Market participants who profit from an increase in asset prices.
- Bears. Market participants interested in falling asset prices.
- Long position. A market strategy that implies buying an asset in anticipation of an increase in its value and selling it later at a higher price. The main strategy of bulls.
- Short position. A market strategy that implies borrowing a particular asset, with the expectation that its value will decrease later. The asset is immediately sold, and after a considerable drop in its value it is bought again, after which the debt is repaid, and the difference in price is the bear’s profit.
- Whale. A heavy market participant with a large amount of capital, which allows them to influence the price of a particular asset to a certain extent.
- Dump. A deliberate sale of a large volume of cryptocurrency assets to bring down their exchange rate.
- Pump. An intentional increase in a cryptocurrency asset price assuming exchange collusion between several large players. Pumping almost always results in a sharp drop in the price of the asset.
- Rocket. A slang term for the rapid rise in the price of a cryptocurrency asset over a short period of time.
- Spike. A slang term for the rapid decline in the value of a cryptocurrency asset over a short period of time.
- Flat (sideways trend). The continuous presence of an asset in a certain price range with a low level of fluctuation.
- Hodl. A humorous acronym, based on a misspelling of the word “Hold.” It exaggerates a popular tactic “Buy and Hold” to the point of absurdity. The full phrase is “Hold On for Dear Life.”
- Hamster. A derogatory slang term for a beginner trader, who usually makes wrong decisions in a panic.