A quick guide into the crypto world: cryptocurrencies and blockchain explained
12:44, 1 April 2018
The world has gone crypto, it’s time to keep up with times or risk being left behind. New technology breeds new terminology, so let’s get to grips with the top 27 crypto terms to get you started.
1. 51% Attack
The nightmare of crypto. This is a malevolent attack against the network. It can happen when an individual or group of people gain access to the majority – over 51% – of the network. Thankfully for Bitcoin and the other top crypto networks, this idea remains hypothetical.
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2. Address
Like real-world addresses, cryptocurrency addresses are used to send and receive transactions. Appearing in the form of an alphanumeric code, this string of letters and numbers makes crypto network transactions possible.
3. ASIC
ASIC is an abbreviation for ‘Application Specific Integrated Circuit’. It is a piece of technology designed to perform a specific process – like crypto mining. For mining, ASICs are the successors of CPUs (computer processing units) and GPUs (graphics processing units). The technology is advancing as fast as cryptocurrencies themselves, so much so that some argue that such units will soon become obsolete.
4. Bitcoin blockchain technology
Almost a synonym for cryptocurrency itself, the 2008–created network was the first decentralised, open source crypto released to the world. Today, it remains one of the most popular types, with its coins known as ‘bitcoins’ being traded, mined and sold all over the world.
5. Understanding the blockchain technology and 6. Block
Two closely tied terms. The blockchain, explained simply, is a shared ledger created from a series of blocks that contain information about transactions, including a cryptographic hash of the previous block, a timestamp and details about the transaction. Each block links with the previous one, creating an almost unbreakable chain – the blockchain – of transaction records that go back to the original genesis block.
7. Block Reward
Create a block, receive a reward. Bitcoin and other crypto networks need miners to function. In return for their work verifying the networks transactions they receive a reward. This transaction verification also has the added benefit of generating new coins for the network.
For Bitcoin, some of the original miners received up to 50 BTC for their efforts. In Bitcoins reward system, the reward is halved every 210,000 blocks.
| Bitcoin’s Mining Rewards | |
|---|---|
| Blocks created | Reward |
| 210,000 | 50 BTC |
| 210,001 – 420,000 | 25 BTC |
| 420,001 – 640,000 | 12.5 BTC |
| ... | ... |
8. Central Ledger
One point of call for all information about all transactions. This type of ledger is usually maintained by a central agency. Similar to traditional banking systems, two cons of this traditional system are the power given to one source and the potential for system corruption (e.g. hacking).
9. Consensus
Not as simple as ‘everyone will agree’, in crypto terminology, consensus refers to the consensus mechanisms or protocols that are used to verify the validity of transactions on the network. Two of the most common as ‘Proof of Work’ and ‘Proof of Stake’.
10. Cryptocurrency
Simply, a cryptocurrency is a digital asset used in place of a real-world currency. Also known as tokens, these assets can be mined, traded or sold. Today, the top 5 most popular cryptocurrencies are Bitcoin, Ethereum, Bitcoin Cash, Ripple and Litecoin.
11. Distributed Ledger
Remember central ledgers? Well, distributed ledgers are their polar opposite. Operating without a central authority or database, distributed ledgers allow transactions to be witnessed and authenticated by multiple sources. Actualising them without handing over control. The most famous example? The blockchain.
12. Distributed Network
Like a distributed ledger, a distributed network implies multiple sources. With this type, processing power and information data is spread across a network of computers.
13. Digital Signature
A key to authenticate digital transactions, it is a digital code created by public key encryption and used to verify digital documents and the authenticity of its sender.
14. Ethereum
A blockchain based decentralised platform to create smart contracts. Ethereum’s cryptocurrency is ‘ether’. The network, developed by Vitalik Buterin, whilst functioning as a cryptocurrency network also focuses on solving issues of censorship, third-party interference and fraud.
15. Fork – 16. Hard Fork & 17. Soft Fork
Like a fork in the road, a fork in a blockchain network refers to a split in the chain creating two blockchains that run simultaneously together. A fork implies changes to the networks protocol, for example Litecoin is said to be a fork of Bitcoin due to its replication of Bitcoin’s code.
There are two types of forks – not dessert and dinner forks – but instead ‘hard’ and ‘soft’ forks. A soft fork is an updated version of the blockchain protocol that will be backwards compatible with previous versions, with a soft fork, previously valid transactions will be made invalid.
A hard fork is a stricter change in the blockchain protocol. It makes all previously valid transactions invalid and can also work vice versa. When a hard fork is applied it requires all nodes to update.
18. Genesis Block
The original blocks in a block chain, the dramatic term ‘genesis’ refers to the first or an initial number of blocks created on a blockchain.
19. Hash & Hash Rate
The hash function is used in cryptocurrency platforms, such as Bitcoin, to create new transactions. A hash is a computational process which performs an operation using a set input of data and returns an output of data in a fixed size. The input data is known as the ‘string’, whilst the output is known as the ‘digest’ or ‘digital fingerprint’, because the relationship between the input and output is unique digital marker. One other common usage of the hash function is password storage. The term hash rate simple refers to how fast this process happens and is expressed as hashes per second.
20. Mining
Mining is the work behind crypto networks, it is usually how transactions are validated. Significant computing power is usually required for such activity and miners need to solve complex algorithms, however the rewards usually make up for all the effort, some of the first Bitcoin miners received 50BTC, which in 2010 may only have been worth a maximum of $19.50 (at $0.35 each), but at today’s rates is worth $412,386 ($8247.72 March 2018).
21. Oracles
Don’t be fooled by similarly named ‘crypto oracles’, those who portray themselves as geniuses of the crypto networks. In fact, an oracle is an agent that connects the real-world and the crypto one. Oracles provide and verify data about real-world events and submit it to the blockchain as blockchains themselves cannot access external data, the oracle acts as a type of feed. It is just one more step in insuring the conditions of smart contracts are met.
22. Peer to Peer
The backbone of cryptocurrency, Peer to Peer or P2P, means that deals are made between 2 (or more) people or organisations directly, who are connected through a central point (the network). Essentially, P2P cuts out the middle-man often used to verify deals as the network itself creates the trust agent in the transaction.
23. Private and Public Keys
Private and public keys are the lock and keys behind cryptocurrency. In its most simple form a public key is an alphanumerical code that encrypts a piece of data or a transaction. That information can then only be decoded by a corresponding private key, this is known only to the account holder and is, as the title says, private.
24. Proof of Work
This is one way to verify a transaction. Quite simply it is a type of consensus-based validation that the work on the network, in this case mining, actually happened and the result is correct. Proof of Work helps prevent network attacks by ensuring mining calculations are difficult and prevents their replication. Miners who generate the solutions receive a block reward.
25. Proof of Stake
An alternative for transaction verification. Proof of Stake works a little differently than Proof of Work to validation transactions. Blocks are chosen based on their value or wealth, essentially how much is at ‘stake’. They are then processed, during which a miner puts up a section of their stake to verify the block or transaction. The miner, however, doesn’t receive a reward, but they do receive the transaction fee.
26. Smart Contracts
Cutting out the middle-man, smart contracts work by automating the process of the contract including facilitating it, verifying it and enacting its terms. They are essentially a type of computer code that works when certain sets of circumstances are met. Crowdfunding is a perfect example of a smart contract. Three parties are involved – the funders, the network and the project initiators. The funders put in money with the expectation that if the project meets its target, funds will be taken from them and paid to the projects initiators. If it doesn’t meet its target, funds will be returned to them. The network handles the smart contract automatically, enacting these terms when the project does or doesn’t reach its target.
27. Wallet
Like the one you keep in your pocket, a crypto wallet is a storage space for your private keys. Essentially it is a file used to store the data needed for you to access your crypto assets. It allows you to view and undertake transactions.
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