When entering into the crypto universe for the first time, investors are often flooded with numerous terms that can quickly become confusing. Below is a short list of the most common crypto investing terms, designed to give a simple explanation to help you start your adventures as a crypto investor.
Blockchain
A continually expanding and cryptographic ledger of digital records called blocks. Each block has a cryptographic signature matching the previous block with the new transaction data and timestamp. Because recorded data is permanently stored and distributed, blockchains are designed to prevent data from being modified, removed, or corrupted without alteration of all subsequent blocks.
The first blockchain was invented by an unknown pseudonym named Satoshi Nakamoto in 2008 to function as a public transaction ledger for the first cryptocurrency Bitcoin. Blockchain was a revelation because it made Bitcoin the first digital currency to definitively overcome the double-spend problem without the need of a trusted or centralized authority. This birthed the entire crypto movement which has continued to flourish over the last 12 years.
Proof of Work (PoW)
Proof of Work is a protocol where one party proves to other parties that some computational work has been performed. It was originally developed in 1993 as a way to prevent Denial-of-Service (DoS) attacks, but was later popularized by Bitcoin and other permissionless blockchains and cryptocurrencies that rely on proof of work as a consensus mechanism. Bitcoin’s proof of work relies on validators to “mine” Bitcoin by harnessing tremendous amounts of computational power to provably solve complex mathematic problems. For performing this work which verifies transactions and thus maintains the blockchain’s ledger, the validators are rewarded with some Bitcoin proportionate to the amount of work performed. This Proof of Work is what allows the Bitcoin system to exist, continue to survive and remain trustless.
People often compare Bitcoin and Gold due to their mining similarities. Just as physical miners will search for Gold in the earth, bitcoin miners search for Bitcoin (and in turn secure the network) using their computer power. This is why Bitcoin is often considered "Digital Gold".
Staking
While Bitcoin uses Proof of Work, other networks utilize Proof of Stake (PoS). Staking is feature of the Proof of Stake (PoS) consensus mechanism, which is a less-resource intensive mechanism for reaching consensus than mining as performed in a proof of work (pow) consensus mechanism. Staking involves users “locking” their cryptocurrency in a designated wallet used by the network to validate transactions and secure the network. In return, users who stake their holdings are rewarded in crypto based on their staked amount. Ethereum 2.0 and Polkadot are currently the largest Proof of Stake networks live in production, securing billions and billions of dollars.
Decentralization
The process of distributing an control and decision-making away from a small or centralized group of authorities. Decentralization is the precipice of Bitcoin, cryptocurrencies, and blockchain technology which is inherently governed by smart contracts and network participants. This allows these networks to be more robust to censorship and attacks, since they do not have single points of failure or single corporations that can simply shut down the networks.
Private Key
A complex form of cryptography that is used to protect users’ cryptocurrency. When a user creates a cryptocurrency wallet, they receive two pieces of information: a public address that is shared with others to receive funds, and a private key, a highly cryptographic password for the wallet needed to send or transfer funds out of the wallet. Private keys are critical components of Bitcoin and cryptocurrencies as private keys provide a high degree of security to protect unauthorized access or theft of users’ funds. A private key consists of a long string of alphanumeric characters that is difficult to crack. If the wallet owner loses the private key, the owner loses access to the wallet indefinitely unless they have a seed recovery phrase that is used to restore wallet access.
Luckily for iTrustCapital users, they never need to worry about managing a private key or learning about complex cryptography schemes. We secure our assets with our institutional wallet provider Curv. This gives iTrustCapital clients an easy to use platform, which just requires an email and a password to buy or sell crypto.
Altcoin
A cryptocurrency other than Bitcoin or Ethereum, of which there are thousands. Altcoins in one way or another are offsprings of Bitcoin or Ethereum with subtle or significant differences. One example of an Altcoin based on Bitcoin is Litecoin, which used the underlying Bitcoin code except decreased the time between (blockchain) blocks in order to increase transactions per second. An Altcoin based on Ethereum is Tron, which copied the underlying Ethereum code, but chose to use a centralized (PoS) validator set in order to increase transactions per second.
Smart Contract
A self-executing programmable contract that operates autonomously according to a set of protocols. These protocols exist digitally across a decentralized blockchain network. Smart Contracts are designed to reduce the need for trusted intermediaries, arbitrary fees and meetings, fraud, and exploitative and accidental errors. They permit trusted transactions and agreements to be completed between anonymous parties without a need for a central authority, underwriter, or legal system.
Similar to how we are moving into a world of Smart TV's, Smart Cars, Smart Watches and more; we are moving into a world of Smart Contracts. This means that agreements or transactions that would normally require paper contracts and a middle man (ex: Bank), can now be done directly Person to Person (P2P) through Smart Contracts built on Ethereum.
DeFi
Short for “Decentralized Finance,” DeFi is a blanket term used to describe a paradigm shift in finance in which financial instruments and services do not rely on centralized intermediaries such as banks and brokerages but instead rely on smart contracts on blockchains like Ethereum. Some popular DeFi applications (dApps) allow people to borrow from or lend to others, speculate on market movements, and insure against risks. As opposed to meeting traditional financial requirements such as loan applications, credit score inquiries, and background searches, DeFi allows individuals to take out collateralized-loans (usually collateralized with crypto) or lend crypto to earn interest. The DeFi (also known as Open Finance) ecosystem is one of the fastest growing industries in the world, attracting entrepreneurs and talent from all over the world whom are seeking to build a better future.
NFT (Non-Fungible Token)
A unique, individual token that exists on a blockchain. NFTs are a segment of DeFi that are designed to create verifiable digital scarcity and represent unique digital items such as digital art, in-game videogame assets, and even music. Each NFT contains unique data, representing a specific unique value unlike cryptocurrencies like Bitcoin that are indistinguishable and represent the same value. NFTs allow for easy transfer and ownership of unique assets and, because they are tokenized, provide verifiable ownership and scarcity.
We announced our NFT Giveaway in order to allow iTrustCapital clients to be the first people in the world to ever own an NFT.
Crypto IRA
A Crypto IRA is a unique tax-shelter that allows investors to buy or sell Crypto Assets within their tax advantaged IRA/401k accounts. These are powerful because investors get to enjoy the potential tremendous gains from positive price appreciation of their investments without having to give away large portions of their profits to capital gains taxes.
These are just a few useful terms to know when investing in the Crypto and Digital Asset ecosystem. We encourage viewers to continue to study this exciting asset class and focus on long term investing for their future.
DISCLAIMER
This article is for information purposes only. It does not constitute investment advice in any way. It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.
iTrustCapital is a cryptocurrency IRA software platform. It is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrustCapital is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.
Cryptocurrencies are a speculative investment with risk of loss. Precious metals are a speculative investment with risk of loss. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Clients do not receive a choice of custody partner. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.
Some taxes and conditions may apply depending on the type of IRA account. Investors assume the risk of all purchase and sale decisions. iTrustCapital makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrustCapital does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional.
iTrustCapital makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrustCapital disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.
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