Crypto Terms For Beginners: 50 Must-Know Terms

Don’t let the many different crypto terms scare you away from investing in cryptocurrency. Here are the cryptocurrency terms to know before you invest.

 

Navigating the crypto space can be daunting especially if you are just starting out. The constant innovation and changing landscape of the space can leave even the most experienced investor struggling to catch up.

 

Fortunately, there are crypto terms that break down and explain these concepts and ideas simply.

 

If you are new to crypto, these are the crypto terms for beginners you need to know.

 

1. Airdrop

In cryptocurrency terms, an airdrop is a marketing campaign that leverages the sending of coins or tokens to wallet addresses to promote awareness of a new coin or token. 

 

The founders of a new cryptocurrency would usually distribute their coin or token for free with the hope that recipients will be more inclined to take part in the crypto project. While most crypto airdrops are free, they tend to require users to complete certain tasks such as following an account on social media. 

 

2. Altcoin

Altcoin, short-form for alternate coin, is any coin that is not Bitcoin. As Bitcoin was the first coin that was established well before other coins were created, Bitcoin became the “main” coin while the other coins are known as “altcoins”.

 

As of February 2022, there are over 17,000 types of cryptocurrencies according to CoinMarketCap. Ethereum, whose market capitalization currently makes up nearly a quarter of the total crypto market cap, is the most popular altcoin.

 

3. Annual Percentage Rate (APR)

Annual Percentage Rate (APR) differs from Annual Percentage Yield (APY) in that APR does not take into account compound interest while APY does. APR is the annual rate of interest paid on investments without taking into account the compounding of interest in that year.

 

Many institutions and organizations tend to show APY instead of APR as APY typically shows a higher number.

 

The formula for calculating APR is:

APR = periodic rate x number of periods in a year

 

4. Annual Percentage Yield (APY)

Comparing the performance of different investments can be difficult as they might have different compounding periods. For example, an investment might compound daily while another might compound monthly. Annual Percentage Yield (APY) allows investors to determine the actual or real rate of return that will be earned in one year by taking into account the interest compounded.

 

The formula for calculating APY is:

APY = [(1 + r/n)^n] – 1

 

Where:

r = period rate

n = number of compounding periods

 

5. Anti-Money Laundering (AML)

A set of international laws in place aims to prevent criminals from exchanging their unlawfully obtained crypto funds for fiat currencies. As cryptocurrencies have gained widespread adoption, AML regulations play an increasingly crucial role in combating criminals who seek to exploit the anonymity and decentralized nature of the technology for money laundering purposes.

 

Some measures of AML include the identification and verification of users, transaction monitoring, and the reporting of suspicious activities. 

 

6. Beacon Chain

The Beacon Chain was the testnet for Ethereum’s Proof of Stake blockchain. It was created to ensure the smooth transition of Ethereum from a Proof of Work consensus mechanism to Proof of Stake. 

 

7. Block Height

The block height measures the number of blocks that were created in the entire history of the blockchain before the block in question. The first block in the blockchain is known as the genesis block and its block height is 0 since there are no prior blocks before it. 

 

Every block on the blockchain will have a block height value, which can be calculated using the formula: B-1, where B is the total number of blocks.

 

8. Block Reward

A block reward is awarded to users (miners or stakers) when they verify transactions on a given blockchain. Users usually have to solve a cryptographic problem to validate a transaction on the blockchain.

 

Because these validations can be time and energy-intensive, blockchains have to provide incentives to users to continue to validate and secure the network. Block rewards thus serve as financial incentives for users.

 

9. Block Time

Block time is the time taken to create a new block on the blockchain. Transactions utilizing blockchain technology require users to validate them and this takes time. The time taken to produce a new block, also known as block time, will dictate the speed of the transaction on the blockchain. 

 

Block times differ from cryptocurrency to cryptocurrency. Depending on the blockchain network, block times can range from seconds to a few minutes. Bitcoin has a block time of about 10 minutes while Ethereum has an average block time of 15 seconds.

 

10. Bug Bounty/Bounty

Reward to encourage individuals to actively search for and report security flaws within cryptocurrency platforms, protocols, or smart contracts. Bug bounty harnesses the collective intelligence and expertise of the crypto community to uncover potential weaknesses before malicious actors can exploit them.

 

11. Centralized Crypto Exchange (CEX)

Centralized cryptocurrency exchanges or CEXs are organizations that act as a middleman or third parties to facilitate crypto transactions between buyers and sellers. Similar to stock exchanges, centralized crypto exchanges function as crypto marketplaces that match up buyers and sellers.

 

Examples of centralized crypto exchanges include AQX, Binance, Coinbase and Gemini.  

 

12. Cold Wallet / Cold Storage

Cold wallet is a wallet to store your cryptocurrency that is not connected to the internet. Also called a “hardware wallet”, “offline wallet” or “cold storage”, cold wallets store users’ addresses and private keys offline.

 

Due to their nature, cold wallets are usually less vulnerable and less at risk of being compromised compared to hot wallets.

 

13. Decentralized Applications (DApps)

Decentralized Applications or DApps are digital applications or programs that run on a peer-to-peer blockchain network. DApps’ open-source and decentralized nature allows them to operate without the constraints of a single authority.

 

The safeguarding of user privacy, lack of censorship and flexibility in development are some of the more commonly cited benefits of decentralized applications compared to traditional applications and programs.

 

14. Decentralized Autonomous Organization (DAO)

Decentralized Autonomous Organization, more commonly known as DAO, does not have a typical management structure and is an organization that is run by transparent rules encoded in computer programs.

 

As the rules are all encoded, no managers are needed, thus giving DAOs their flexible organizational structure and decentralized nature.

 

15. Decentralized Exchange (DEX)

Decentralized Crypto Exchanges (DEXs) coordinate transactions between buyers and sellers entirely through automated algorithms all without middlemen or third parties. 

 

Unlike centralized exchanges that are officiated by banks, brokers and payment processors, DEXs do not have “order books” that establishes price based on current buy and sell orders. Instead, they use “liquidity pools” where investors stake their cryptocurrencies in exchange for interest, to facilitate trades.

 

16. Decentralized Finance (DeFi)

Decentralized Finance, or DeFi, is an umbrella term for financial services that use cryptocurrency and blockchain technology. DeFi allows users to conduct financial transactions without the need for a central authority such as banks and financial institutions.

 

Because of its decentralized nature, DeFi allows anyone with an internet connection to do most things that traditional finance offers such as earning interest and lending without the need of a third party and the inconveniences that come with it.

 

17. Double Spend

Double spending is the act of spending the same units of a cryptocurrency twice. Due to the decentralized nature of cryptocurrency, there is no centralized intermediaries to ensure that double spending does not occur. 

 

This is where the consensus mechanism comes in to ensure that a transaction is recorded once and cannot be altered or duplicated.

 

18. Ethereum Improvement Proposal (EIP)

Ethereum Improvement Proposal, or EIP, is a formal proposal to alter and make improvements to the existing Ethereum network. Anyone from the public can make these proposals. EIPs can range from minor alterations, like adding new features to the existing network, to major improvements such as changing the network’s consensus mechanism.

 

19. Ethereum Virtual Machine (EVM)

The Ethereum Virtual Machine (EVM) is a key component of the Ethereum blockchain helping manage the state of the blockchain and executing smart contracts on it. 

 

Instructions on the EVM are carried out by nodes in the Ethereum network, ensuring consensus and maintaining the integrity of the blockchain. There is a standardized set of instructions and rules for executing smart contracts, enabling developers to build complex applications with programmable logic.

 

20. Fiat Currency

Fiat currency refers to currency issued by governments that are not backed by a physical commodity like gold or silver. Some examples include US Dollars (USD), Yuan (CNY), Euros (EUR), and Yen (JPY).

 

21. Fork

A fork happens when there is a split in the blockchain network. When users or developers of the blockchain decide to change the software of the blockchain’s protocol, this will create a divergence or “fork” from the existing cryptocurrency blockchain. 

 

A second separate blockchain will be created away from the original blockchain from the point of the fork. However, the recently split blockchain will still share all of its history with the original blockchain up to that point. 

 

22. Fully Diluted Valuation (FDV)

Fully Diluted Valuation or FDV calculates the total market capitalization of the token at the current market price if all tokens were available. FDV builds on the idea of market capitalization. While market capitalization only takes into account the currently available supply of the token, FDV takes into account the token’s market cap if all possible tokens were issued. 

 

Ideally, the difference between the two values should be minimal. A huge difference between values might indicate that there will be inflationary pressure as new tokens are released in the future. Fully Diluted Valuation can be calculated by taking the total supply of tokens, both released and unreleased into circulation, multiplied by the current market price of the token.

 

23. Gas

Gas refers to the fee that users have to pay miners to successfully validate a transaction on the blockchain. Also known as transaction fees, these fees incentivize miners and allow the blockchain to maintain its secure and decentralized nature.

 

The price of the gas fee is determined by demand and supply. If there is an increase in demand for transactions, miners get to pick transactions that pay higher gas fees. This compels users to pay higher gas fees to get their transactions processed quickly. 

 

24. Genesis Block

In blockchain context, the genesis block is the very first block of a cryptocurrency’s blockchain. It serves as the foundation of the blockchain system and holds special significance. The genesis block typically contains unique data and serves as a reference point for subsequent blocks and transactions.

 

25. Gwei

A unit of measurement used in the Ethereum blockchain in which gas prices are often specified in. 

 

26. Halving

Halving is commonly associated with Bitcoin, where it is an event when the reward for mining for Bitcoin transactions is cut in half. This is part of a strategy to keep the supply of Bitcoin finite and limited. Bitcoin miners are rewarded a certain amount of Bitcoin for each transaction they have successfully processed and confirmed. New Bitcoins are only created through this mining process.

 

Thus, halving gives Bitcoin its deflationary nature as each halving decreases the mining rewards given to miners so each new Bitcoin created and released into the ecosystem becomes more expensive with time.

 

27. Hash

Hash is a mathematical function that takes an input and produces a fixed-size string of characters as its output (hash code or hash value). Hash is a crucial element for ensuring data integrity and security. 

 

Each subsequent block in a blockchain contains the hash value of the preceding block, followed by its hash value. Even a small change in the input data will produce a significantly different hash value. Therefore, hashes ensure that blockchain transactions are complete and valid. 

 

28. Hot Wallet / Hot Storage

Hot wallet is a cryptocurrency wallet that is connected to the internet that allows users to store, send and receive crypto. As hot wallets are connected online, there’s no need to transition between offline and online to make cryptocurrency transactions. 

 

Because hot wallets are always connected to the internet, they tend to be more vulnerable to hacks and thefts compared to cold wallets. 

 

29. Immutability

Immutability is a characteristic of blockchain and it refers to the inability to alter or modify data once it has been recorded on the blockchain. Once a transaction or any other piece of information is added to a block, it becomes a permanent part of the blockchain. 

 

30. Initial Coin Offering (ICO)

An Initial Coin Offering (ICO) in the cryptocurrency industry is similar to an initial public offering (IPO) in the traditional finance industry. The company that aims to raise funds can launch an ICO and investors can buy the cryptocurrency token issued by the company.

 

Investors who own the cryptocurrency token will have a stake in the company and depending on the token, there might be utility beyond just representation in the company. 

 

31. Initial Exchange Offering (IEO)

Initial Exchange Offerings (IEOs) have gained appeal at the back of multiple ICO scams over the years. An initial exchange offering requires having a cryptocurrency exchange platform oversee the token sale.

 

IEO is favoured as there is a greater level of due diligence done on projects than with an ICO as there is a third party facilitating the sale of the token. Furthermore, the crypto exchange has an incentive to perform checks on the project before greenlighting the sale on its platform as the exchange’s reputation could be at risk if the project turns out differently from what it is supposed to be.

 

32. Know Your Customer (KYC)

Know Your Customer (KYC) is the process of verifying the identity of individuals or entities by financial institutions before enabling them to utilize their platform or service. KYC are measures to prevent money laundering, terrorist financing, fraud, and other illicit activities. 

 

The KYC process typically involves the submission of personal information and supporting documents, such as passports or proof of address, which are then verified by the service provider. 

 

33. Market Capitalization

The market capitalization of a cryptocurrency is the total dollar value of all the coins mined at the current market price. The general consensus is that a coin or token will a large market capitalization tends to be a more stable investment compared to one with a much smaller market capitalization.

 

Market capitalization can be calculated by multiplying the total number of coins in circulation by the coin’s current market price.

 

34. Merge 

The Merge refers to Ethereum’s transition from a Proof of Work consensus mechanism to Proof of Stake. It involves the merger of the Ethereum Mainnet with the Beacon Chain into a single chain. 

 

35. Merkle Tree

A hierarchical data structure to efficiently verify and maintain integrity checks on large sets of data. As its name suggests, the structure of a Merkle Tree resembles that of a tree. Each level of the tree is created by combining the hashes of its child nodes. 

 

The structure enables efficient verification of the integrity of the data set by comparing the Merkle root with a previously known hash value. If the data changes, the corresponding hashes at each level of the tree will be different, indicating that the data has been tampered with.

 

36. Mining

Mining is the process that some cryptocurrencies use to validate blockchain transactions and create new cryptocurrency coins. The decentralized nature of blockchains requires miners to verify and secure transactions. 

 

Miners have to contribute their processing power to validate the transactions that take place on the blockchain and in return for their resources, miners are rewarded with new coins. 

 

37. Mnemonic Phrase

Also known as a seed phrase or recovery phrase, mnemonic phrase comprises a series of words chosen from a specific word list. The phrase serves as a backup or recovery mechanism for users’ private keys and allows them to regain access to their cryptocurrency wallets or accounts in case of loss, theft, or device failure. 

 

38. Node

A node is a participant in the blockchain network and it performs essential functions such as sending and receiving information. A blockchain node helps verify and validate blocks on the network.

 

Consensus mechanism is the foundation of blockchain technology and this mechanism relies on nodes to function effectively. A computer is an example of a blockchain node.

 

39. Non-Fungible Token (NFT)

Non-fungible token, also known as NFT, are unique digital assets that cannot be replicated or replaced. NFTs are typically used to represent objects in the real world such as artworks, soundtracks, and films. Many NFTs are built on Ethereum’s ERC-721 or ERC-1155 standards. 

 

40. Peer-to-Peer (P2P)

Peer-to-Peer is the direct exchange or sharing of assets, information or data between two or more individuals without intermediation by a third party. In cryptocurrency terms, users can conduct financial transactions with one another without the involvement of any financial institutions.

 

The exclusion of a central authority when conducting transactions is one of the primary goals of cryptocurrencies. With a P2P structure, the network is sustained by users instead of a central authority. 

 

41. Proof-of-Work (PoW)

Proof-of-work is a consensus mechanism that allows cryptocurrencies such as Bitcoin to carry out and confirm transactions without a central authority. When it comes to online transactions, spending any holdings twice or double-spending is an issue as these digital actions are very easy to duplicate. 

 

Proof-of-work makes double-spending very hard as other participants in the network have to verify that the required amount of computing power – usually a huge amount –  was used. So the person has to have “proof” that he or she has done a significant amount of “work”. This disincentivizes manipulations or attacks on the network.

 

42. Proof-of-Stake (PoS)

Proof-of-stake is a cryptocurrency consensus mechanism that requires users to stake their cryptocurrency for them to validate transactions on the same network. Proof-of-stake was created as an alternative to Proof-of-work. 

 

The main difference between the two different consensus mechanisms is that Proof-of-stake requires validators to be owners of the cryptocurrency while Proof-of-work does not. 

 

43. Proof-of-Reserves (PoR)

Proof of Reserves is used by cryptocurrency institutions to provide transparent and verifiable proof that they hold the required reserves to cover the assets it claim to hold on behalf of their users. PoR allows these crypto institutions to verify their funds without disclosing sensitive details about individual accounts. 

 

44. Protocol

A protocol is a software code that governs how a particular network functions. Think of protocols as a set of rules that govern interactions between entities.

 

For cryptocurrencies, protocols establish the foundation of the blockchain allowing transactions and further applications to be built on it.  

 

45. Shard

Sharding is one method that cryptocurrency developers are looking at to increase the scalability of the network. Instead of having each node process the transactional load of the entire network, each node only processes a specific information or shard.

 

This way, nodes can access all the information recorded on the blockchain without having to process and store all the information. Proponents of this technique believe that this will increase transaction speeds and the scalability of the network.

 

46. Smart Contract

A smart contract, like any contract, establishes the terms of agreement between two or more parties. The difference however between a smart contract and a traditional contract is that in a smart contract, the agreement is written into lines of codes and carried out automatically without the need for a central authority.

 

Nick Szabo, the inventor of a virtual currency called “Bit Gold” back in 1998, defined a smart contract as a “computerized transaction protocol that executes the terms of a contract.”

 

47. Stablecoin

Stablecoin is a type of cryptocurrency that is pegged against a reserve asset like the US dollar. By pegging against a relatively stable asset like the US dollar or gold, stablecoins can offer greater price stability and less volatility compared to unpegged cryptocurrencies.

 

This form of digital currency is also more suited for everyday use by the public as its value is relatively stable over longer time horizons. Think of stablecoins as a bridge between cryptocurrency and fiat currency.

 

48. Token

A crypto token is a crypto asset that is built and run on another cryptocurrency’s blockchain. Token and coin tend to be used almost interchangeably however technically, a crypto asset is a coin only if it is the native cryptocurrency on the blockchain.

 

A crypto token has many uses and functions beyond just as a tradeable asset, such as giving users governance in the future of a protocol.

 

49. Total Value Locked (TVL)

Total Value Locked (TVL) refers to the total value of crypto assets deposited in a DeFi protocol or DeFi protocols. TVL includes but is not limited to the value of crypto assets used for staking, lending and liquidity pools. However, it is important to note that TVL does not include the value of the yield that the crypto assets are expected to generate from these activities. 

 

Investors typically use the TVL of a protocol to gauge the overall interest and health of the DeFi protocol.

 

50. Whitepaper

Whitepaper is a document that lays out the purpose and technology behind a crypto project. One way an investor can scrutinize a crypto project is through its whitepaper. When done well, a whitepaper gives legitimacy and a professional look to a crypto project.

 

A whitepaper usually contains data, statistics and facts to convince investors to purchase the project’s cryptocurrency.

 

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. 

 

Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.