Get a handle on the most common crypto terms.
You’ve heard of Bitcoin and thought it had something to do with Elon Musk (it does, kind of).
You’ve heard of DeFi and thought, maybe it’s related to WiFi? (it isn’t).
You tried looking up the meaning of cryptocurrency, and ended up down a rabbit hole of blockchain, decentralization, and stablecoins (what exactly makes a coin stable?)
If you’re interested in the world of crypto and don’t know where to start, rest assured. In this post, we’ll cover some of the most googled and popular crypto terms to catch you up. Once you’ve read through this post, you’ll be confident enough to dive deeper into the more complicated aspects of crypto. Let’s start with the foundational terms:
Cryptocurrency
Cryptocurrency is a type of digital asset that functions as a currency. Cryptocurrency is easy to understand when you split it up into its two terms. “Currency,” as we know, defines it as an asset used for trade (buying, selling, exchange). “Crypto” refers to cryptography, the system on which it is based. Cryptography is the process of encrypting and decrypting information. An example of a cryptocurrency is the popular Bitcoin.
Bitcoin is the world’s very first cryptocurrency. It was created by an anonymous individual, or group, under the name of Satoshi Nakamoto. Bitcoin is a decentralized electronic cash system.
Blockchain
We can’t go further into any of the other popular crypto terms without first explaining the blockchain. The blockchain is a huge information file, or digital ledger, which stores all the transactions made in a cryptocurrency. It is made of ‘blocks’ (a digital permanent record, filled with transaction history) which are chained to each other through a cryptographic signature — hence the term ‘blockchain.’ Each time a block is filled to capacity, another block is added to the chain.
The blockchain is copied and saved onto thousands of computers (known as nodes) all over the world, and there is no master copy stored in one, central, location. This means that it is decentralized.
DeFi
Speaking of ‘decentralized’, another popular term you might spot is DeFi — which is short for Decentralized Finance. DeFi is a financial system built on blockchains, which means that it operates without the use of a centralized bank.
DEX
DEX is another term that is useful to know. It stands for decentralized exchange, meaning an exchange which operates without a central authority. The advantage that DEX has over CEX (centralized exchange) is that it is harder to breach.
Public key and Private key
The first thing you need if you’re going to buy or trade in cryptocurrency is a digital wallet. A digital wallet is an application, installed on a PC, smartphone, or remote server, which serves as storage for digital currencies and other crypto assets. The wallet uses public addresses (or public keys), and private keys to function.
Public key: also known as your wallet’s public address, this is a unique code made up of letters and numbers. This is your wallet’s identifier, and is needed to receive cryptocurrency. Think of it, in fiat terms, as something like a bank account number.
Private key: this is an alphanumeric string which functions as your digital signature and password. You need it to access your wallet, withdraw and sell cryptocurrencies. As the name suggests, private keys should be kept private. Keep it as securely as you would a password or PIN code.
Fiat
Fiat currency refers to the types of currency which are controlled by countries and states, as well as central banks. I.e the kinds of coins and currency we use on a daily basis (for example: Euro, USD, CAD, etc.).
Smart Contract
A smart contract acts as a regular contract, but the terms are executed as code running on a blockchain. The benefit of smart contracts is that it runs automatically when contract conditions are met, as pre-defined by the contract creator. This means that contracts can be enforced without the need for a third-party, such as a lawyer.
Liquidity Pool
A liquidity pool, in DeFi terms, is a pool of tokens that are locked in a smart contract. The purpose of these pools is to facilitate efficient trading on decentralized exchanges, while rewarding investors.
Investors add liquidity to the pool by depositing a trading pair of crypto assets, which are equal in value. In return they receive a part of the trading fees every time a trade occurs.
Other Types of Crypto Assets
Aside from cryptocurrency, such as BitCoin, which is used to make digital transactions, there are other types of crypto assets (with different purposes), which we’ll talk about briefly here:
- Protocol Tokens (Platform Tokens)
These tokens act as a platform on which to build decentralized applications (utility tokens) on top of. A popular example of a protocol token is Ethereum.
- Utility Tokens (App Coins)
These are the decentralized applications (dApps) built upon platform tokens. Utility tokens can be used as a means to fund a project.
- Security Tokens
Security tokens are tokens on the blockchain that represent external, real assets — for example, a security token could be shares invested in a company on the blockchain. Because they are external assets, they are subject to the laws of federal security regulation.
- Commodity Tokens
These are tokens which act as rewards to individuals and companies who make the efforts to reduce harmful damage to nature and society. For example, carbon could be tokenized into commodity tokens, and used as an incentive for companies to reduce their carbon footprint.
- Stablecoins
Stablecoins are coins that get their value from an underlying asset. An example of a stablecoin is Tether, which is backed by the USD. Stablecoins have some benefits, but are also not completely decentralized, and can have their supply manipulated.
- Crypto collectibles
Crypto collectibles are digital collectibles which can be exchanged for cash. An example of a crypto collectible is a CryptoKitty.
- NFTs (Non-fungible tokens)
Speaking of CryptoKitties, these collectibles also fall under the category of NFT. Non-fungible tokens can represent real world items, such as artwork or property, or even intangible assets such as a person’s identity.
While cryptocurrencies are fungible, which means they can be replicated and exchanged for one another, NFTs are not alike, and each one has a unique digital signature.
Ways to Earn Money on Your Crypto Assets
There are currently three methods to gain profit from your crypto assets, and we’ll explain the processes briefly here. Each method is different, and the one you end up preferring would depend on your expertise and experience.
Mining: Crypto mining is the process of gaining cryptocurrencies by solving cryptographic equations. Crypto miners validate data blocks and add transaction records to the blockchain.
Staking: Staking is a way to earn rewards for holding certain cryptocurrencies. Not every cryptocurrency allows staking, but if it does, the process involves keeping some of your holding in a wallet (“staking pool”) to earn a percentage reward over time. So you can earn a profit on your crypto assets by just holding them in your wallet.
Farming (Yield Farming): Farming is done by adding assets to a liquidity pool, which is usually a smart contract within a DeFi platform. Individuals conduct transactions within this pool, and you earn rewards from the fees from these transactions. The more you add to the liquidity pool, the higher your rewards.
If you’ve reached the end of this post, hopefully you’ll be feeling a bit smarter, and ready to dive deeper into the world of crypto.
Soon we’ll be covering more intensive crypto- and blockchain-related topics, such as DAOs and a more detailed post on Decentralized Finance, so look out for them!
In the meanwhile, check out some of our other posts here:
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