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Terminology like “wallet address,” “keys” and “decentralization” are frequently used in the cryptocurrency and blockchain ecosystem. However, to those less familiar, these terms can be confusing. Even for early adopters, this evolving industry produces technical terms that can be difficult to grasp.
Many crypto traders and blockchain enthusiasts participate on communication platforms like Telegram, Discord, and Reddit without a sound understanding of what is being shared. While some terms are newly-developed jargon, others are technical terms that have existed for a long time.
This non-exhaustive list is a starter pack that offers simple explanations of some of the most frequently used terms.
Cryptography is a branch of mathematics that ensures that information is transmitted in secrecy so that only the intended audience can access it. In other words, it is the practice and study of methods for secure communication.
A Block is a file where data is permanently recorded. Think of a block as the individual pages of your book. Typically, a block contains transaction records, as well as a mathematical puzzle waiting to be solved. There is also a reference to all previous activities in each block.
When blocks are created, they are structured into a sequence over a period of time. Each time a computer solves a mathematical puzzle, that block is added to the previous one, and the process continues. The joining together of these individual blocks form a chain of blocks called the Block Chain (Blockchain). Simply put, a database of blocks joined together is called a blockchain.
A cryptocurrency is a digital currency that uses cryptography and encryption to protect and ensure the transfer of value from one person to another. Unlike fiat, which is regulated by a central bank, a cryptocurrency is largely regulated by participants in the blockchain – which serves as the storage location/database for transactions. Examples of cryptocurrencies are Bitcoin, Ether, Litecoin, etc.
Mining refers to several computers competing to solve a mathematical puzzle found inside a block – and producing cryptocurrency as the output. Without the correct answer, the block cannot be added to the previous one. In the case of the Bitcoin network, computers that compete to solve this puzzle are given a reward for their efforts, and bitcoin is produced in the process as well. The mining reward differs between different cryptocurrency projects.
After a block’s mathematical puzzle is solved, and it gets confirmed, the quantity of cryptocurrency that the problem solver receives is called a block reward. This is normally the sum of the created cryptocurrencies and the transaction fees paid by users.
A confirmation signifies that a transaction has been processed (the mathematical puzzle is solved), and therefore the transaction is included in the new block and any subsequent block.
Double spending is a digital currency flaw that allows malicious actors to spend a single digital currency more than once. On a technical level, it involves duplicating a digital cash file to use it twice similar to how digital videos and images could be copied and reused. Economically, double spending digital cash leads to currency devaluation, distrust, and inflationary spirals that could render money useless. Cryptographic controls are designed to prevent the double spending problem.
A private key
A private key is a string of characters that gives you the right to own or spend a particular digital currency/cryptocurrency. Private keys are similar to your passwords and should be known only by you.
A digital signature is a cryptographic mechanism that is used to prove ownership in the digital space. Think of it as your normal signature but in a digital or cryptocurrency world. An algorithmic mathematical mechanism links a private key to a wallet, which forms a signature.
A wallet is a digital storage location for your cryptocurrency – same as your physical wallet but this time for digital currencies. Essentially, it is the “bank account” for your digital assets. There are different kinds of wallets, including software and hardware wallets.
A consensus is a mechanism in blockchain that makes sure that the computers responsible for validating transactions are in agreement. A consensus is achieved when a majority of the miners confirm a block on the blockchain.
The power or speed that a computer uses to mine and verify transactions on a blockchain is called the hash rate. Computers that have higher hash rates would be able to mine and verify transactions (solve the mathematical puzzles) faster than those with low hash rates.
A node is a piece of software or a computer that is connected to a cryptocurrency’s database/network or blockchain, example Ethereum or Bitcoin. Every node keeps a version of the entire blockchain. Nodes are instrumental in keeping cryptocurrencies decentralized.
A fork occurs when two or more miners discover blocks at almost the same time. This can happen when these blocks have the same block height. A fork can also happen as a result of an attack on the network. This has no relationship with a hard fork or a soft fork (explained below).
A hard fork
A hard fork occurs when a single cryptocurrency separates into two. This leads to a radical change to the network’s protocol. Blocks or transactions that were deemed invalid would now be valid and vice versa. When a hard fork happens, all users are normally encouraged to upgrade to the latest version of the protocol because there is a divergence between the new and old blockchain. Computers running old software would be unable to process new transactions and vice versa. Users can find themselves in two groups: those that agree with the upgrade and adopt the new blockchain and those that refuse the upgrade remain on the old blockchain. A perfect example of a hard fork is with the Bitcoin network, which has forked into different networks, including Bitcoin Cash and Bitcoin Gold.
In a soft fork, a cryptocurrency changes its protocol, but previously mined blocks or transactions are still valid. This means that the old blocks will recognize the new ones. This will, therefore, not create any new protocol, cryptocurrency or a blockchain, making it ‘backward-compatible.’ For the new rules to apply, a majority of the miners only need to agree and upgrade to the new version.
Proof of Work (PoW)
Proof of Work is a consensus mechanism that confirms transactions based on the amount of work miners have done. Once an algorithm is solved, transactions are confirmed, and new blocks can be produced. In PoW, the miners on a blockchain compete to solve a mathematical puzzle for a block reward. This consensus mechanism is thus responsible for deterring bad actors from initiating distributed denial of service (DDoS) attacks on a network.
Proof of Stake (PoS)
This is another consensus mechanism that allows miners to confirm transactions based on their stake in the network. This form of algorithm achieves consensus by requiring users to stake a number of their tokens to validate blocks of transactions in exchange for rewards. Thus, a miner or node can validate a transaction based on the number of coins staked on the network. The more bitcoin or altcoins a person has to offer, the more power he or she holds on the network and the more confirmations he or she can handle.
Testnet, the short form of Testing Network is an ecosystem where developers can test their systems by obtaining and spending cryptocurrencies. The cryptocurrencies used in a testnet do not command real-world value and are used for experimental purposes.