Basic Concepts in Cryptocurrencies
Cryptography. The science of data encryption, a subsection of mathematics. It solves the problem of preserving information for a narrow range of individuals. The science involves Internet protocols such as HTTP, HTTPS and VPN services, which allow blocked sites to be bypassed. Cryptography products are used to hide data from theft, for example, a card number when buying from AliExpress.
Decentralization. A method of distributing rights and power. For example, a concierge in a house who has the power to let people in or keep people out. This is centralization. A decentralized variant of the concierge is when all residents of the house take turns being the concierge and collectively decide who to let in and who to keep out. No one except the board of concierges has the power to decide whether John or Mary will be on duty tomorrow.
Encryption. The process whereby data is hidden from outsiders. The result of encryption is information that is difficult or impossible to use without a password. For example, encryption occurs when two friends agree on a signal to start congratulating a third friend on his birthday. This way, secrecy will not be violated until the phrase “HAPPY BIRTHDAY!” is said.
Validation. The process of confirmation, which proves something. For example, when Helen paints a picture and signs it, a validation of ownership of the painting takes place. Helen’s signature on her paintings makes them “authentic,” whereas Helen’s paintings without her signature would make them “inauthentic.”
Anonymity. An attribute required for well-functioning decentralization. It equalizes all participants by eliminating social status, political views, prejudices, skin color, and other factors. It allows blockchain participants to make decisions collegially and impartially to one another, rather than quarrel among themselves.
Cryptocurrency. A general term for money on a blockchain. Denotes both tokens and coins, but only those with financial value. According to the tokenization method, it is backed by anything: faith, math, tokenized assets or man-hours. It is used in trading, to running smart contracts, or staking.
Trading. A way of making money from changes in cryptocurrency rates. It is something between a casino and a betting agency in terms of the risk and level of emotion involved.
Volatility. A financial term from the classic market economy. It means the frequency and the height of exchange rate fluctuations. High volatility is when a rate jumps from side to side like a scalded cat. Low volatility is when the exchange rate moves smoothly and in one direction, like a river.
Understandable Technical Terms and Phenomena in Cryptocurrency
Blockchain. Technology for managing, storing, and encrypting data in any form, the decentralized Internet. Conditionally, it is an automatic book of accounts that indicates where and what to transfer and executes contracts. The rules in the book are changed by readers, but collegially. A blockchain knows how to do calculations and orders without humans. You can’t tear pages out of a blockchain. Synonyms: chain, sequence.
Read more about blockchain technology in this article: Bitcoin for beginners: what do you need to know?
Blocks. Parts of a blockchain. Conventionally, the pages of an automated ledger. A block can contain any information. For example, a date and place of birth or a person’s DNA sequence. The information recorded in a block cannot be changed. In practice, blocks contain data verifying the validity of cryptocurrency coins. If there is no data about the coin in the block, there is no coin as such. The validity of blocks is confirmed by the results of mathematical calculations performed by miners or the blockchain itself. Once written to the blockchain, the block cannot be changed.
Smart contracts. Digital agreements that are executed without human involvement. For example, John signs a contract to supply aluminum; a robot then reads it and coordinates extraction, delivery, and shipment on its own, without John’s involvement. All John has to do is accept the work. The robot itself, or the smart contract, is written by other people or John himself. In Belarus, smart contracts have legal force. The home of smart contracts is the ETH blockchain. At its core, it is software code, but executed on a blockchain.
Tokenization. The universal process of turning something into a token. For example, upon the delivery of goods, a delivery note is given to the recipient. The delivery note here is a token that confirms the correctness of the delivery procedure. You can tokenize anything: a phenomenon, a process, an object, an agreement or disagreement with something, or the result of a process. For example, one BAT token represents one unit of attention. In terms of physical items, there are cases of turning toilet paper and gold into tokens.
Token. A “coupon” that is used to validate or use something within one particular blockchain. It is only issued by smart contracts on the parent blockchain. It is not meant for trading, but may have monetary value in exchange trading. The token’s closest relatives are stocks, bonds, and government bonds. It only has power within the parent blockchain.
Coin. A means of payment. It has its own blockchain, where it serves as the basic unit of currency and is only used for payments. For example, ETH is a coin, which represents a separate blockchain, while BAT is a token on the Ethereum blockchain, which is launched using a smart contract.
Utility tokens. Tokens that have no monetary value. They are not made to be traded on an exchange and instead perform service tasks within the parent blockchain.For example, a subway token is a utility token within the Metropolitan blockchain that gives you the right to use a train. In this analogy, a Metro cashier would be a smart token that gives out tokens. Utility tokens serve as tools within smart contracts. For instance, a utility token is a fuel for commissions on the Tron blockchain. It is issued by the blockchain itself every 24 hours. A consignment note would also be considered a utility token.
Consensus. A concept expressing the general agreement of blockchain participants on an issue. Voting is carried out by using cryptocurrency, but only by the one on which the blockchain operates. Both ordinary users and special users with a certain amount of cryptocurrency in their wallets have the right to participate in the consensus. It depends on the particular blockchain. Sometimes, consensus participants are automated and replaced by smart contracts. Synonym: quorum.
Reaching consensus. The result of consensus when voting participants in a blockchain network come to a common decision. If no decision has been made, it is said that “no consensus has been reached.” The result of consensus is to write new data on the blockchain. The consensus method is used to make decisions, such as taking a branch of the main chain for an entirely new path of the blockchain. An example of this was with ETC in 2016, when a fork of ETH was voted on by the chain members themselves.
Hard fork. This is when an alternate version of one blockchain is created and taken as the main one. A hard fork can turn back time and return to the old block of the original blockchain, or change the entire chain’s mechanics. It is an arduous procedure for the blockchain because the moment the branching occurs, the new blockchain is no longer compatible with the old blockchain. This, therefore, only takes place when it is really necessary. It can be forced or voluntary.
Soft fork. A process similar to a hard fork, but with a correction for compatibility. Thus, in a soft fork, the cryptocurrency and smart contracts of the blockchain will work in the new branch, unlike in a hard fork. It is needed to implement updates to the blockchain.
Staking. A mechanism for dealing with volatility. Conventionally, it is the opening of a no-term deposit in the blockchain for remuneration, in the form of interest on the deposit.
Miners. People who give resources to the blockchain in order to generate new blocks. They perform smart contracts, commands, and assigned tasks in exchange for a monetary reward. It is a voluntary and useful role.
Nodes/Validators. Servers, data centers, or adapted devices that process requests within the blockchain. They provide their processing power to run the entire chain. In some blockchains, such as Tezos, this is a voluntary position with a monetary reward.
Processing power. Since certain types of blockchain use smart contracts, they require power to execute the programming code embedded within them. The source of processing power is always hardware: servers, nodes, validators, or miners.
Proof-of-Work. A process, the first of the two validation mechanisms, literally “proving work.” An analogy: a completed consignment note is proof of correct delivery. The value of the consignment note is equal to one set of correctly completed delivery jobs. The result of PoW validation will be a PoW cryptocurrency coin. One unit of PoW cryptocurrency, such as a bitcoin, confirms that one of the solutions of the mathematical formula meets the rules of the blockchain. The PoW validation work is done by miners and the result is written into the blockchain.
Proof-of-Stake. The second validation mechanism, which is literally “proof of contribution.” In PoS validation, the entire blockchain issues new coins. Miners are replaced by nodes/validators that provide processing power to the blockchain.
