The ABC of Blockchain and Cryptocurrencies: key concepts and terms you need to know. Part I

A is for …

Altcoin: Short for alternative coin, the name says everything. These are alternative cryptocurrencies to the two big players, Bitcoin (BTC) and Ethereum (ETH).

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Airdrop: An airdrop is essentially a cryptocurrency or token give away. Operators of a network either give additional tokens away to people who already hold tokens, or offer them to new network customers, usually in return for promotion on social media sites.

B is for …

Bitcoin: Does it need an introduction? Bitcoin (BTC) is where it all began back in 2009, the first and most significant cryptocurrency. The value of one Bitcoin has skyrocketed from $0.10 in 2010 to $1,000 in 2013 to a peak of nearly $20,000 in 2017, and this incredible growth is one of the main reasons investors are so excited about cryptocurrencies.

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Blockchain: Defining Blockchain in simple terms isn’t easy, but this revolutionary technology is at the heart of how cryptocurrencies operate. The best starting point is to think about what Blockchain does. Essentially, it is a decentralized network that acts as a permanent, unalterable public ledger. To put it another way, it is a record of transactions that anyone can see and that have been verified by many members of the network’s community. So, how does Blockchain do this? That’s where things start to get complicated. A prospective transaction (for example, a transfer of funds) is sent to numerous computers in a network (these computers are called nodes). Then each node individually confirms the transaction. When enough nodes confirm the transaction, a block (basically a chain of code segments) is formed and added to the Blockchain, and the transaction is authorised. Once there, it can’t be altered or removed. The beauty of this system is that transactions are verified instantly, at very low cost, and there’s no centralized authority that can alter or hide it.

C is for …

Cold Storage: This means storing cryptocurrencies in an offline environment for security reasons. This is done by generating, and then storing offline, the private keys that let you access your cryptocurrency. When your cryptocurrency is not in cold storage, exchanges and third party wallets hold you private keys on your behalf, so if something goes wrong with their servers or if they are hacked, your coins are at risk.

D is for …

Dapp: Dapp stands for decentralised app, which means a program that uses Blockchain to create applications running on a decentralised network. For example, developers create their own Dapps using the Ethereum blockchain.

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Digital Signature: A digital code generated by public key encryption that is attached to an electronically transmitted document to verify its contents and the sender’s identity.

E is for …

Exchanges: Crypto exchanges are online platforms where you can exchange units of one cryptocurrency for units of another, or for fiat currency. Some of the largest exchanges include Coinbase (USA), Binance (Hong Kong), Kucoin (Hong Kong), Bithumb (Korea), and Bitfinex(USA).

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Ethereum: While Ethereum and Bitcoin are the two big players in the cryptocurrency world, they are actually quite different. Bitcoin is essentially a money distribution system built on the blockchain, whereas Ethereum is a blockchain network with a much wider range of capabilities. Ethereum’s currency, Ether (ETH), is just one aspect of this wide ranging network, which also features its own internet browser, coding language and payment system. In terms of value, 2017 was the big year for Ethereum, with one Ether valued at under $10 at the start of the year but over $800 by December 2017. It’s value spiked at over $1,300 in January 2018 but has fallen back since. Nevertheless, its value as a decentralised network with no central point of failure, plus the fact that it allows developers to build Dapps on its blockchain, mean Ethereum has built up real momentum.

F is for …

Fiat currency: The simple explanation is that a Fiat currency is a ‘real currency’ that you use in the everyday economy, for example US Dollars or Euros. The more complicated answer is also much more interesting. Let’s start with the word fiat, which means command or decree. So how does this connect with money? The answer is that the term fiat currency was introduced to make a distinction between currencies of no fixed value (fiat currencies) with those that either have intrinsic value themselves (eg. Gold) or can be directly converted into something of intrinsic value (eg. a paper currency that can be taken to a bank and exchanged for an amount of gold). In 1971, President Richard Nixon decided to end the gold standard, which defined the amount of gold one US Dollar could be converted into. With this move, fiat currencies, unchained to material objects like gold, became the norm. In other words, after 1971 you could no longer go into a bank and exchange Dollars or other currency for a fixed amount of gold. Instead, the supply of a currency, regulated by a central bank, is the main factor in defining a currency’s worth — this is why fiat currencies are often described as centralised, especially in comparison to crypto currencies. In contrast, Crypto currencies like Bitcoin are decentralised — their value is defined by mathematical rules which determine how a currency is mined, not by a central institution.

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Fork: This term relates to blockchains and how they develop. Because they are decentralized networks, any proposed changes to a blockchain must be accepted by its users in order to be implemented. If enough users accept the change (for example, an upgrade or change in code), the change goes through. These changes are called forks, and can be broadly categorised into two types (though there are many more specific types of fork). The first is a hard fork — this is essentially a fundamental change in the rules. One way to identify a hard fork is whether software validation using the old rules would define blocks created using the new rules as invalid. Another way to think of a hard fork is that the changes implemented are not backwards compatible. Backwards compatibility means old versions and new versions of a network or system can still work together. The second type of fork is a soft fork. Here the changes made are backwards compatible, so blocks created using the new rules are still recognised by software validation using the old rules. A final key point to understand is that forks can lead to splits in the community. This happens when some network members accept the new change but others don’t — those who continue with the old rules create blocks that aren’t recognised as valid by those who are using the new rules. This famously occurred when the Ethereum blockchain split into Ethereum and Ethereum Classic.

G is for …

Genesis block: Just as Genesis (which means origin or root) is the first book of the old testament, the genesis block is the first block of code created on a new blockchain network.

H is for …

Hashing: In order to be confirmed or authorised by a blockchain network, any piece of data needs a unique way to be recognised — you could think of this as a digital fingerprint or bar code only belonging to that single piece of data. The process of creating these digital fingerprints is called hashing. One important factor when evaluating a network is its hash rate — how many hashes per second it can create. Or to put it another way, how fast is the network at creating unique digital fingerprints using intense mathematical operations?