8 Important Words You Should Know About Cryptocurrencies
Cryptocurrency remains one of the most valuable currencies in the world. However, it's so easy to get swept up in the minutia of cryptocurrency jargon. Here is a list of terms to help you better understand the concept.
Cryptocurrency remains one of the hottest topics in recent years. The combination of technological innovations, software prowess, and business acumen attract a wide variety of people.
However, it's so easy to get swept up in the minutia of cryptocurrency jargon. Right now, that jargon is what's keeping the general public from understanding how it works. If the average investor struggles to understand the language behind an idea, then why do cryptocurrency fanboys swear that everyone will support it within the next decade?
In the words of United States Senator Thomas Carper, "Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us."
This list of terms starts at the very basics of the industry to explain key phrases and words you'll probably hear a lot as digital currencies get more popular.
Let's start with understanding the key concept -- cryptocurrency. In short, cryptocurrency is a medium of exchange that uses cryptography to transfer funds. It was designed to be anonymous and (surprisingly) secure. It's completely decentralized and thus relies on a massive public ledger (called a blockchain) in order to validate transfers and maintain the ledger. There are no fees and no extensive regulations which pique the interests of those exhausted by financial squabbles within their own countries.
Cryptocurrencies might be brilliant for those willing to take a risk on investing, but major banks have stayed relatively clear of them. Cryptocurrencies make it hard for central banks to influence the price of credit in an economy. They take away a regulatory body's ability to gather data about economic activity. Many banking executives expect cryptocurrencies will also hinder a central banking agency's ability to control exchange rate and other major functions of monetary policy.
Cryptocurrencies -- especially bitcoin -- have garnered a reputation in pop culture as being the go-to transaction for illicit activities like drug deals. (And, due to the extensive anonymity offered by the very nature of cryptocurrencies, we can neither confirm nor deny the validity of that association...)
Still don't get it? SciShow did a brilliant explanation of Bitcoin (but Cryptocurrencies as a whole) which you can watch below.
In 2008, Satoshi Nakamoto created the world's first (and arguably most important) cryptocurrency. He never intended to invent an entirely new currency system; he just wanted to make a "peer-to-peer electronic cash system" unconnected to anything else. The most important contribution of Bitcoin's initial founding was that it developed a decentralized digital cash system after decades of failed attempts.
Bitcoin remains the most popular and most frequently traded cryptocurrency to date. In March 2017, the value of Bitcoin outweighed the value of an ounce of gold, $1,268 compared to gold's $1,233. The value peaked at nearly $5,000 earlier last month.
These are basically any cryptocurrency that isn't Bitcoin. It's a blend of "alternative" and "bitcoin." All altcoins also use decentralized control and a similar blockchain transaction setup. Popular altcoins include any initial coin offering (ICO) group. Ripple, Litecoin, and Ethereum are big names amongst altcoins.
Forks are what happens when two bitcoin roads diverge in an internet woods, to borrow a Robert Frost poem. It's when developers don't agree on how to improve the program, and thus the codebases split. The blockchain can handle this split but, since the realm of cryptocurrency isn't regulated, the developers sort out values on their own.
The most famous fork was in August 2017 when bitcoin split to form another cryptocurrency -- Bitcoin Cash. As with operations in any new bank, resulting companies take time to draw in users. Two new forks could be on their way before 2018. The proposed Bitcoin Gold claims to have a new algorithm and a truly decentralized market. The other fork would be Segwit2X and looks to boost the capability of bitcoin. Ethereum is also planning on its first fork within the next year.
An address is a name by which you send and receive bitcoin. It's like an email address as users send bitcoins to a person by sending it to one of their addresses. However, unlike email, people have many different Bitcoin addresses and different addresses are used for each new transaction.
It's one of the most popular words associated with bitcoin and other cryptocurrencies. Bitcoin mining is how new money is added to the public ledger (see 'blockchain' further down). However, mining for gold in real life might be easier than mining for cryptocurrencies given the increasingly difficult puzzles. Anyone who has access to the Internet and decent hardware can mine. In an oversimplified explanation, participants have to solve an incredibly difficult puzzle. The first person to solve gets to put a new block on the blockchain and win the rewards. Essentially, miners invest time, money, and technological effort into hopefully 'striking it rich' on solving one of the hash algorithms and adding to the blockchain.
The bitcoin signature is one of the most important safety nets in cryptocurrency. In transactions, there are two types of keys -- a private key and a public key. Those keys are specifically linked to one user, and the private key is only known by that user. To send a transaction, the private key 'stamps' the transaction which creates the public key. That public key creates the address by which the transaction is sent. The sender signs the message with the signature and the key to the peer-to-peer public network for validation. The signature is mathematically unique and varies just as your own signature has slight differences each time you sign for a purchase at a store.
"In a physical signature, you'll typically affix, let's say, a sequence of characters representing your name or identity to a document," said Khan Academy's Zulfikar Ramzan. "This process effectively binds your identity to that document and more so by formulating the characters in your name, and maybe some particular to a unique or peculiar way that's unique to you. The hope is that nobody will be able to forge your name on that document. Now in a digital signature scheme, it turns out you can achieve these kinds of properties mathematically."
It's the public ledger for all bitcoin transactions. It lets information get distributed for the sake of accountability but not copied. Fans of bitcoin call it the "backbone of a new type of internet." Think of it like a spreadsheet that anyone can get a copy of across a network of computers. This spreadsheet will update with recent transactions for everyone to see. That's a blockchain in a nutshell.
For many, blockchain technology is the most effective and useful thing to come out of cryptocurrencies. The database isn't stored in one centralized location, meaning there's no incentive for hackers as everyone has this information and can verify it. The data is literally accessible to anyone with internet. Writers Don and Alex Tapscott said, "The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value."
Still want to know more about bitcoin and other cryptocurrencies? Check out Khan Academy's course on bitcoin. It's an excellent and free cryptocurrency primer.