Welcome to the Next Wave Crypto Fortunes Glossary. Below are the most common terms and their definitions to help you get started in the crypto market!

Altcoins

All cryptocurrencies that came after bitcoin. So altcoins are all cryptos that aren’t bitcoin.

It is a competitive field to be the best crypto, so new altcoins are being developed and improved all the time.

They are not all the same. There are many that differentiate themselves from bitcoin and have different uses and algorithms.

Bitcoin

The first decentralized cryptocurrency created in 2009 by Satoshi Nakamoto.

The cryptocurrency is decentralized, meaning the government does not control it or know about the transactions.

Block

A block is a digital file of data. It is like a record book used to keep track of transactions. It can be compared to a receipt you get when you finish a transaction with a bank.

It has all the details of what was bought, who bought it and when. Once the information goes into the block and it is completed, that information is now permanent and can’t change.

The very first block created for bitcoin is called the genesis block.

Blockchain

A blockchain is constantly growing and expanding with completed blocks.

Blockchain was created as an accounting method for the first cryptocurrency bitcoin. But it has since then expanded to other uses for the internet.

Blockchain is completely digitized and decentralized. Meaning: It is created and used through nodes (computers connected to the network).

It is used as a public ledger (financial statements) for cryptocurrency transactions.

Although blockchain was created for bitcoin, it is used for all cryptocurrencies and altcoins.

Blockchain is open source which means it can be modified by the public.

Cryptocurrency

While altcoins are all coins that are not bitcoin, cryptocurrencies categorize as both altcoins and bitcoins. They are not physical items, but rather codes.

It is only digital or virtual, and is, of course, exempt from any government authority. Since it is all digital, the codes are also stored digitally in wallets.

There are many ways you can own cryptos: by purchasing with fiat currency, trading with bitcoin, earning it (by playing video games or getting paid in it) or mining.

Benefits: There is no middleman, like a bank, to charge transaction fees. You can choose from many places where to store and trade your coins.

Cryptographs are used for securities, so there is much less risk of theft.

Exchanges

Also called cryptocurrency exchange or digital currency exchange.

Exchanges are third-party companies that users can use to trade their cryptos or exchange fiat money for cryptos.

Centralized Exchanges

A company that aims to make profits would run a centralized exchange. Companies such as Binance and Coinbase charge fees to make a profit. The fees are charged when traders access the blockchain to make a trade.

The main difference is that centralized exchanges can convert fiat to cryptocurrency, and decentralized exchanges cannot.

These exchanges tend to be more user-friendly and work faster because there are less transaction steps.

Decentralized Exchanges (DEXs)

Decentralized exchanges are part of the decentralized network along with blockchains and cryptocurrencies on a distributed ledger.

Fiat such as USD or EUR cannot be used on decentralized exchanges, only cryptocurrencies.

The users are in control of the funds and trades making hacking a lot harder to achieve.

There are current protocols, such as open source coding, in the making to improve DEXs through the coin 0x.

Halving

To avoid the number of cryptocurrencies to mine from running low, the halving rule was created.

This means after a certain amount of cryptocurrency is mined, the amount that can be mined is cut in half.

For bitcoin halving, about every four years, the number of bitcoins issued by the network is cut in half.

Here is a clock to give an estimated time until the next bitcoin halving: http://BitcoinClock.com/

Layer-1

The base layer of the blockchain protocol, or the underlying architecture. Examples are bitcoin, Ethereum and litcoin.

Layer-2

The network overlaying the base layer. An example is the Lightning Network, which lies on top of bitcoin’s base layer.

Initial Coin Offering (ICO)

Similar to an initial public offering (IPO) in the market, ICO is when funds are raised to start a new cryptocurrency.

Process:

A firm that wants to start a cryptocurrency will write out its plan on everything about its project.

Supporters will buy the coin with fiat or other virtual currency to support the ICO. The coin is like shares of the company, like in an IPO.

If the ICO does not raise the required money, the supporters will get their money back, and the ICO will fail.

The goal of the supporters is to have the ICO become successful and the coin they bought will raise in value.

Market Capitalization

This is the size or amount able to be obtained by a cryptocurrency.

It is important because it helps determine the worth of the coin. Bitcoin is pricing as one of the highest cryptos, but it also has the largest market cap.

Investors use the market cap to determine the risk of trading a coin. Large-cap coins have been around longer and will have a longer stream of steady profits.

I recommend CoinGecko.com/en for all crypto market caps.

Mining

Mining is one of the ways cryptocurrencies can be obtained.

Every time a block is completed with collected data and added to the blockchain, a cryptocurrency is created. This is the only way new cryptos are created.

Anyone with the right resources can mine cryptocurrencies.

But it’s not that easy. It takes advanced technology and understanding to build a computer specifically for mining. And the reward is not always instant and often. But depending on the crypto being mined, it can be very profitable (especially for bitcoin).

A miner of a crypto also gets voting power for the crypto when protocols are announced, such as a soft fork (changes to the software protocol).

Websites such as Blockchain can tell you how much cryptos have already been mined.

It is important for miners to record their transactions. This way, double spending of crypto is not done.

How is works (in terms of bitcoin):

A bitcoin block is 1 MB of transactions. Depending on the data, it can be worth one transaction or hundreds or thousands of transactions.

Once a block of transactions is completed, miners are able to win 12.5 BTC.

It is now up to luck for the miners.

First, 1 MB of block has to get verified. Next is first come, first served.

The mining computers are putting in mathematical equations (a 64-digit hexadecimal number, or hash) until one finally matches the target hash of the block.

The higher and faster computer power you have, the better your chance of finding the best guesswork to match. This is called a hash rate, measured in megahashes per second (MH/s).

Equipment:

This is a picture of a home-built computer for mining.

It consists of graphic cards at the top. As well as a graphics processing unit or an application-specific integrated circuit.

Miners with smaller running computers have an extremely small chance of solving the code first, so mining pools were started. Miners pull their power together for better chances at competing with large mining networks.

Plasma Chains

Plasma chains are a Layer-2 scalability solution that relies on the creation of smaller versions of the Ethereum chain.

This may sound like a Sidechain, but the difference is that in this case, the second chain (Plasma chain) relies on the consensus and security protocols of the Ethereum chain. This is not an independent chain and is built on top of the Ethereum chain.

That is why it is referred to as a child chain, making Ethereum the parent chain. Child chains can also be built on top of other child chains resulting in a tree-like structure.

In this case, the child chain handles the heavy lifting such as block validation and only relies on the parent chain for security functions such as dispute settlement and reporting fraudulent nodes.

By doing this, the child chain can reduce the amount of data and fees on the parent chain. Additionally, Plasma chains are advantageous because they can be used with other Layer 2 solutions.

The main drawback of Plasma chains is that they have long withdrawal periods for funds. This is so that Plasma can allow for an arbitration period, but that may not be suited to someone who may want to withdraw their funds immediately and end up having to wait the default 7-14 days.

An example of a Plasma chain would be OMG Network.

Side Chains

Sidechains aren’t technically a Layer 2 solution. They are independent blockchains that rely on their own consensus and security protocols, unlike a Layer 2 solution that relies on the main chain’s (Ethereum’s) consensus and security protocol. Sidechains run alongside the main chain and communicate with it.

If you want to move assets between the chains, you build a smart contract on Ethereum, then lock the assets in the smart contract and mint them on the sidechain. You do the opposite if you want to move assets from the sidechain to the main chain.

The drawback of sidechains comes from the fact that they have their own consensus and security protocols. Since these are smaller projects and aren’t as well tested in the real world as Ethereum’s blockchain, it raises security and reliability concerns.

An example of a sidechain would be xDai.

State Channels

State channels are a Layer 2 solution that allow users to conduct multiple transactions while only submitting two transactions on the main chain. An illustration of this might be if two users wanted to send each other a number of transactions on a daily basis.

This would work by first having the users create a multi-signature contract and locking their assets in that contract. From this point on, whenever they make a transaction, they sign an off-chain transaction.

Now, if one of the users wanted to leave this channel and withdraw their assets, they would unlock them from the smart contract. In this example, the creation of the multi-signature contract is the first entry on the main chain, and the unlocking and withdrawal of assets is the second entry. All other transactions take place off-chain.

The drawback to this solution is that each channel’s users have to be known and are limited to those who signed the multi-signature contract initially. It cannot be used to send transactions to unknown users who are not already part of the channel. To add a new user, a new channel with a new contract has to be set up.

An example of a project using state channels is Raiden.

Rollups

Rollups are a type of Layer-2 solution that focuses on compressing transactions and packaging them into a single batch that is submitted on the main chain (Ethereum).

In this case, the execution of the transaction or series of transactions takes place off the main chain like on a sidechain, alleviating the pressure on it. But the underlying transaction data is in a smart contract on the main chain.

This way, the main chain can enforce the correct transaction execution that took place off-chain. This means that, unlike a sidechain, rollups retain the security aspect of the main chain. There are two types of rollups that exist:

ZK-Rollups — the first type is called ZK because of the type of proof it uses — a zero-knowledge proof. It is also known as a “validity proof.” This is a probabilistic method of making sure that the transactions are accurate.

This proof is then submitted to the main chain, and the main chain only has to validate the proof as opposed to all transaction data. This allows for much quicker processing since there is a lot less data involved in that particular block.

An example of a project that is using ZK-Rollups is Loopring.

Optimistic Rollups — the second type is known as optimistic rollups. In this case, transactions sent to the rollup contracts are received off the main chain by entities known as aggregators who respond with signed receipts promising to accurately execute and order the received transactions.

Aggregators are rewarded for being honest and executing transactions as expected. They are also required to stake funds which will be slashed if they aren’t honest. If a user suspects fraud, they can prove it by alerting an adjudicator contract on the main chain, which is able to verify the validity of the results produced by the aggregators.

The offending sequencer will be slashed, and some of the slashed funds will be rewarded to the whistleblower.

An example of a project that is using optimistic rollups is Optimism.

Tokens

Crypto tokens are a subcategory of cryptocurrencies. So cryptocurrency is used as a currency for making and receiving payments, but crypto tokens are more than a currency.

The tokens are used for transactions of smart contracts or decentralized apps.

Users are able to create their own tokens for any purpose in the Ethereum network, or other networks.

They are tradeable as well.

Wallets

A wallet is needed to store cryptocurrencies. You can use it to monitor a crypto balance, send cryptos and receive cryptos.

It is a digital program that uses private and public cryptographic keys to hold and monitor the users’ cryptocurrencies.

Records of transactions of all the cryptocurrencies are stored on the blockchain. So wallets work with the blockchain.

There are different types of wallets and some are more secure than others. The safest wallets are offline, because they cannot be hacked.

How does it work?

When someone sends a coin, the person is signing off ownership of the coin. The address of the coin then becomes public access.

To receive a coin, your private key in your wallet must match the coding of the public access coin. When they do match, then your wallet balance will increase.

Actual coins are not exchanged, but rather the transaction record on the blockchain.

Click here to watch our Exodus wallet tutorial for more information.