It’s been 12 years since the anonymous Satoshi Nakamoto released their white paper explaining how Bitcoin (BTC), the first cryptocurrency, would work. For many people, cryptocurrency terminology remains an indecipherable language.
It’s impossible to avoid technical terms when discussing a blockchain project. These networks are programmed using advanced coding languages. If you’re new to cryptocurrencies, learning some of the most common crypto slang terms will help you to familiarise yourself with the crypto ecosystem before investing.
The following article dives into 20 popular cryptocurrency terms and phrases you should know to better understand project descriptions and crypto-related news.
Cryptocurrency basics: 20 crypto terms explained
A blockchain is a virtual ledger in which transactions can be recorded securely. It is 'decentralised', meaning that there is no central authority running things. Instead, any new record must be validated by a computer linked to the network, a 'node', before it can be registered.
The name blockchain comes from the network’s structure, where every set of data is considered a ‘block’. New blocks added in a progressive sequence form a ‘chain’.
Records saved in a blockchain cannot be modified or erased. Instead, a new transaction must be made to correct any mistakes or errors made in previous transactions. This prevents them from being tampered with.
Mining (proof of work)
The protocol that powers the Bitcoin network is known as proof-of-work (PoW). It’s a consensus mechanism used to validate new transactions to be included in the blockchain. Although theoretically any person can become a ‘miner’, in practice this process is energy-consuming and requires a lot of computational power, specialised equipment and space to store high-speed servers.
For a transaction to be validated, a miner or node consisting of several powerful computers, needs to solve a random mathematical puzzle to generate the ‘hash’ that will identify the new record. In the case of Bitcoin, an SHA-256 hash will be generated for each record. A hash is a unique number that identifies the data-set. The distributed ledger is then updated accordingly so that anybody can verify the integrity of new and updated records.
In a proof-of-work ecosystem, miners are compensated by receiving a certain number of tokens for validating transactions included in the blockchain.
Proof-of-stake (PoS) is another protocol that can be used to power a blockchain. Under a PoS protocol, only miners who “stake” their cryptocurrencies are allowed to participate as validating nodes, in direct proportion to the percentage of tokens they stake.
As with proof-of-work, PoS nodes need to validate all transactions by solving a mathematical puzzle. For doing so, they earn rewards. However, miners will only be able to validate a percentage of blocks that corresponds to the percentage of holdings they’ve staked.
The PoS is considered to be more energy-efficient and secure than PoW.
Hard fork and soft fork
A fork occurs when a new blockchain is created as a result of a modification to the original project’s source code. The original blockchain and fork each operate under a different set of rules.
In a hard fork, new rules incompatible with rules established by the consensus (the protocol, maintaining the platform integrity) are proposed by a group of nodes. This results in the creation of a new blockchain that operates under the new set of rules.
A soft fork occurs when rules different yet compatible with the consensus are introduced, resulting in the creation of a new blockchain that can still communicate with the original but operates independently.
A smart contract is an algorithm designed to execute a certain transaction based on a set of pre-established parameters. These contracts are executed automatically by the blockchain once the parameters that regulate them have been fulfilled. There is no way to modify a contract once it‘s been incorporated into the blockchain.
Decentralised applications (dApps)
The dApp acronym refers to a “decentralised application” – a program built on top of an existing blockchain. The difference between a regular app and a dApp is that transactions are validated using the blockchain’s infrastructure without the need for an intermediary.
A wallet is an application in which crypto tokens can be stored safely. Since crypto tokens are essentially pieces of code, a wallet functions as a place to park these codes. A wallet prevents third parties from accessing the codes without the owner’s authorisation.
There are several types of wallets, including cold (not connected to the internet) and hot storage (accessed through the internet). There are hardware wallets, which are physical devices, like a hard drive. Mobile and desktop wallets can only be accessed from a smartphone or personal computer, respectively.
Tokens and their classifications
A token is the cryptocurrency used to reward miners and nodes when they validate transactions recorded on the blockchain. These tokens are considered digital assets. They can be traded through a centralised or decentralised exchange.
Tokens are commonly classified as utility tokens, designed and used for a specific practical purpose; payment tokens (or currency tokens), which were created to be used as a means of payment; and asset tokens (security tokens), which are analogous to equities, bonds and derivatives in terms of their economic value. Even though there are other classifications used to group different tokens, these are the most common types, according to FINMA, the Swiss Financial Market Supervisory Authority.
Gas and gas fees
Gas refers to the computational effort required to solve the specific puzzle assigned to mine one block or record a single transaction. The amount of gas required to perform these operations will determine the amount of gas fees to be paid.
Gas fees are the costs involved in recording one transaction on a certain blockchain, commonly expressed as a decimal of the token that powers the network or in a fiat currency, like US dollars. The higher the gas limit you set, the faster your transaction will be verified and added to the blockchain.
Peer-to-peer refers to the interaction between two parties directly without the need for an intermediary. In essence, all blockchains are created to be peer-to-peer platforms through which anything can be exchanged without involving a third party to validate the operation as that function is carried by the blockchain itself.
Both initial coin offerings (ICOs) and initial exchange offering (IEOs) are procedures through which a blockchain project can raise funds by selling a certain number of tokens to the investment community.
In an ICO, there’s no need for a middleman as the project can raise money from anybody willing to exchange fiat money or other tokens in exchange for receiving the project’s proprietary token.
Meanwhile, IEOs need to be authorised by the exchange through which the coins will be offered and sold to investors. In most cases, IEOs are offered through only one exclusive exchange, which reduces the number of investors who can participate.
The word consensus in a crypto glossary refers to an agreement between the different agents that operate to maintain the network’s integrity. Most blockchains are supported by a consensus mechanism through which all parties agree that every new record added to the network has been validated appropriately.
Although the most well-known consensus mechanisms are proof-of-work (POW) and proof-of stake (POS), there is an extensive list of other types of consensus protocols:
A validator is a computer or individual who performs the task of verifying and confirming the integrity of every new record added to the blockchain, whether they follow proof-of-work, proof-of-stake or any other protocol.
In the PoW systems, like Bitcoin, validators are also called ‘miners’. They’re compensated for their efforts by receiving a certain amount of tokens once a block or a group of blocks has been mined. In PoS blockchains, validators earn rewards for proposing new blocks and staking the network’s token.
Decentralized/Centralized Exchanges (DEX/CEX)
A decentralised exchange (DEX) is one through which crypto transactions are made without the involvement of a middleman. They’re considered true peer-to-peer platforms. They function through a series of smart contracts generated every time a transaction takes place, while all transaction records are recorded on the blockchain.
A centralised exchange (CEX) receives and executes orders on behalf of third parties to buy, sell, convert and transfer cryptocurrencies.
A 51% attack occurs when one or more validating nodes controls more than half the network’s computing power, allowing them to take control of the blockchain’s transaction flow. Once they achieve this, these nodes will be able to manipulate which transactions are validated, leaving other transactions unrecorded.
In a 51% attack, the controlling nodes are able to reverse any transactions that were added during the time they had control. They can also double-spend tokens – when a digital currency is spent twice. As a result, the network’s integrity is compromised and the token’s value suffers.
A node is a terminal that is connected to the blockchain. It’s used to maintain the network’s integrity through the consistent validation of new blocks that are being added.
An active node stores at all times the most up-to-date version of the blockchain. It communicates constantly with other nodes to update them on any changes made to the chain.
Altcoin, short for alternative coin, refers to any token that is not bitcoin. Because Bitcoin pioneered the cryptocurrency ecosystem, all tokens launched after BTC are considered by some as alternatives to it.
However, not all tokens are created equal. For example, the ethereum (ETH) token is considered a utility token nowadays because the Ethereum blockchain powers hundreds of decentralised applications. Uniswap (UNI) is one of the most popular decentralised trading protocols, designed to enable the automated trading of decentralised finance (DeFi) tokens. As of the end of July 2021, the top five altcoins by market capitalisation according to CoinMarketCap are: Ethereum (ETH), Tether (USDT), Binance Coin (BNB), Cardano (ADA), Ripple (XRP).
Trade Ethereum to US Dollar - ETH/USD CFD
A hash is a function that turns any input into an encrypted language. In the blockchain world, a hash is generated after the data from a transaction is validated and recorded on the network.
Hashes are a fixed length. This increases security because nobody can decipher the contents of a hash without the specific reference table used to construct it.
The work of miners is to encode any kind of record incorporated into the blockchain by following a specific hash structure that includes multiple sections. These sections provide information on the timestamp of the previous hash, the hash generated by the previous block and the target hash, among others. Hash structures vary from one blockchain to the other based on the developer’s preference.
Fungible and non-fungible tokens
The term fungible refers to one of the most important characteristics of blockchains and the tokens that power them. Any fungible asset, in economic terms, refers to its capability for interchangeability with another asset or good of the same value. One example of a fungible asset is fiat money, as you can exchange dollar bills for goods and services.
In the blockchain world, a fungible token can be exchanged for another asset or token. On the other hand, non-fungible tokens differ from fungible tokens as they don’t hold any inherent value and can’t be interchanged with any other token.
As the price of bitcoin continues to rise, many transactions are made in decimals of one bitcoin and not in integer numbers. To promote the “fungibility” of bitcoin tokens as suitable means of exchange, cryptocurrency developers have named the smallest amount of bitcoin that can be exchanged as 1 satoshi or 1 sat.
The name given to this decimal expression comes from the creator of Bitcoin, Satoshi Nakamoto, the anonymous character who first published the whitepaper that explained how the Bitcoin blockchain worked. One satoshi is the equivalent of 100th millionth of a bitcoin.
Crypto terminology never ends
The list of crypto trading terminology can be extended endlessly. Although a relatively new and fascinating asset class, cryptocurrency has been gradually going mainstream, continuing global adoption. According to the ‘Global Blockchain and Cryptocurrency Market 2021’ report, it’s expected that blockchain technology will become a significant contributor to the global GDP, boosting it to $2trillion by 2030.
CoinMarketCap shows that there are more than 11,000 cryptocurrencies available in the world, as of 28 July 2021. You can become a part of this market by trading the crypto projects you find promising.