Useful Definitions – Cryptocurrency

November 25, 2021

Altcoins – refers to all coins that are not Bitcoin 

Blockchain – represents any and all transactions in a particular cryptocurrency which are stored in a digital ledger 

Crypto Futures – are a type of derivative contract which is an obligation that allows the trader/participant to buy or sell an asset at a date in the future at a fixed price.  

Crypto Options – are a type of derivative contract that allows the purchaser to buy or sell an asset at a predetermined price on a predetermined date.  “Put Option” is the right to sell and a “Call Option” is the right to buy. Please note unlike a future an option gives the participant the right but not the “obligation” to buy or sell an asset. 

Crypto Swaps – allows participants/traders to exchange one cryptocurrency or asset for another e.g., Bitcoin, (BTC) for Ethereum, (ETH).  

Decentralised Apps or dApps – these are open-source applications built as a layer over a blockchain and allows for the creation by developers of new on-line tools. They are free from control of any single authority, as they run on a decentralised environment. 

Decentralised Finance or DeFi – is an overall term that covers transactions within the cryptocurrency market. One of the primary functions of DeFi is cutting out third-parties or middlemen. If you pay for something by credit card, your bank sits in the middle of the transaction. Under Defi, everything is peer to peer with no interference from third parties or regulators. 

Digital Wallet – is a blockchain or crypto wallet that allows the holder to manage their bitcoins, altcoins, and NFT’s. This wallet ensures the owner can transfer cryptocurrencies and convert them back to fiat currency. There are a number of wallets, the main ones being a hardware wallet and software wallet. The hardware wallet provides more protection than software wallets, but software wallets are easier to understand.  

Distributed Ledger Technology or DLT – is in fact another term for blockchain.  

Hash or Hashing – is an algorithmic process used by miners to validate transactions on a blockchain. It is a “proof-of work” (see below),  

Gas – Every time a transaction occurs on the Ethereum Blockchain a fee must be paid to a miner. This fee is known as the “gas price”  

Initial Coin Offering (ICO) – This is the cryptocurrency markets equivalent to an IPO, Initial Public Offering. Usually, companies who wish to raise investment use an ICO to create a new coin or app. 

Merkle Tree – is an integral part of the blockchain. It is made up of a number of hashes being separate blocks of data. The Merkle Tree serves as an overview or summary of each transaction within the block. 

Mining – is the process of verifying new transactions and coins on the blockchain. 

Private Key – is a highly sophisticated piece of cryptography that protects the owners of Bitcoins, Altcoins and NFT’s from theft. It also allows the owners to access their coins and NFT’s. It is used to decrypt messages sent from other user’s public keys. Private key is usually made up of alphanumeric characters which makes it very hard to hack. The Public key (see below) is created from the Private key.  

Public Key – acts as the account holders or digital wallet holders’ address. Public keys are accessible to all other public key holders and are used to encrypt messages. The private key decrypts messages received by the public key. Basically, the public key acts as a mailbox, and the private key is they key that unlocks the mailbox. 

Perpetual Contracts – were introduced on the Bitmex exchange in 2016. It is an agreement to buy or sell an asset at an unspecified date in the future. Traders are not required to hold the underlying asset or post the collateral equivalent of 100%. This allows the trade to be leveraged many times over. All margins are denominated in Bitcoin. A list of available contracts can be found on the Bitmex website. 

Proof of Authority, (POA) – is a consensus algorithm that is based on reputation, (as opposed to proof-of-work and proof-of-stake). Blockchain miners/validators stake their own reputation rather than coins and are pre-approved participants. These participants are also known as validation nodes (see below) 

Proof of Stake – allows miners to validate cryptocurrency based on the number of coins they own 

Proof of Work – is the traditional means, (Bitcoin), by which miners are recompensed. A hashed block shows proof of work has been completed. See above for “hash”. 

Seed Phrase – a series of or number of words that are created by a cryptocurrency wallet that gives the owner of that wallet access to the contents of the wallet, (see above). The seed phrase is also used by the wallet to create the private key, (see above). 

Segregated Witness – is a process that separates transaction data from digital signature data. A simple transaction data is where a seller sells Bitcoin to a buyer. A digital signature proves that the public key is connected to the private key without revealing the private key. It validates the authenticity of messages. 

Smart Contracts – This is one of the main features of NFT’s and the Ethereum blockchain. They are essentially just ledger contracts written in computer code. The contracts are carried out automatically once pre-set agreements have been met. A number of banks and investment houses are using smart contracts to execute trades.  

Validator Nodes – are essentially miners who are responsible for validating blockchain transactions and adding new blocks to the blockchain. 

Whale – is an individual who owns an exceptionally large amount of bitcoin and can move the market with one trade. As of the end of March 2021 three bitcoin wallets owned 7.1% of the total bitcoin in circulation. This equates to a value of USD74 Billion. One third of all bitcoin was held by just 100 wallets equating to USD 342 Billion. 

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