The Flourish Team
Cut through the jargon with our cryptocurrency glossary.
An airdrops is a mass distribution of a cryptocurrency token or coin sent directly to a number of wallet addresses at the same time, often for free or in exchange for promotion or past usage. Airdrops are often used for marketing/promotional purposes, in hopes of quickly driving widespread usage of a new cryptocurrency.
Beyond Bitcoin, the most notable cryptocurrency, other coins are termed “altcoins”— short for “alternative coins”.
The most famous cryptocurrency and largest by market capitalization. Bitcoin was conceptualized in a 2008 Whitepaper authored by the pseudonymous Satoshi Nakamoto. When capitalized, “Bitcoin'' is typically used to refer to the protocol/technology, while the uncapitalized “bitcoin” is used to refer to the currency, which is abbreviated as BTC.
Shorthand for a license to conduct “virtual currency business activity” issued by the New York State Department of Financial Services (NYDFS), one of the most important cryptocurrency regulatory bodies in the United States. Introduced in 2014, a BitLicense is generally required for a person (whether an individual or an entity) to conduct certain business activities involving cryptocurrencies (referred to as “virtual currencies” under the NYDFS regulations) involving New York or New Yorkers. Firms that are chartered under New York banking law may also receive separate approval from the NYDFS to engage in cryptocurrency business activities.
A file containing all cryptocurrency transaction information completed during a specified period of time (e.g. approximately every 10 minutes for Bitcoin). Blocks are verified and appended to the blockchain in a sequential manner, with the newest block references the block that came before it—meaning there is no way to manipulate the historical record of prior blocks once verified.
An application enabling a user to view data inside a block on a blockchain. Also known as a blockchain explorer.
In order to append new blocks to the blockchain, miners compete to solve cryptographic problems in exchange for a reward—in effect, leveraging economic incentives and the power of the free market to secure the blockchain. A block reward is the amount of cryptocurrency that is awarded to a miner in exchange for solving the problem and creating a new block on a blockchain.
A distributed ledger, analogous to a database or spreadsheet with no owner, and that is accessible to anyone in the public. A blockchain is composed of a series of sequential “blocks” that are “chained” together; each block records all of the transactions that occurred in a specified period of time and each sequential block references the prior block on the chain, creating a public database. The data stored on a blockchain may be purely financial transactions or may be more complex data, such as contractual information. Blockchains are the foundational technology of cryptocurrency.
Central Bank Digital Currency (CBDC)
A theoretical digital currency issued by a central bank, not a decentralized network. China is the most advanced nation when it comes to CBDC issuance and innovation, though a range of other major central banks are looking into CBDCs.
Cryptocurrencies are held in “wallets,” which take a wide variety of formats. A cold wallet is a wallet that is not connected to the internet, and so it is resistant to digital theft/hacking and widely considered to be safer than wallets that are connected to the internet. Cold wallets hold their own risks, however, such as physical damage or destruction. Holding assets in a cold wallet is also referred to as “cold storage.”
A new block is only added to a blockchain when network participants agree to the order and content of blocks—known as consensus.
The study and practice of securing information. Cryptography has been used for thousands of years, often for securing military communications. In the context of cryptocurrencies, cryptography is the underlying set of technologies that secure digital information against unauthorized access and manipulation, enabling new use cases like digital currencies that cannot be manipulated.
Decentralized Finance (DeFi)
DeFi is a catch-all term used to refer to financial applications built on a blockchain that are not controlled by a central institution, such as a traditional bank, exchange, payment processor, or insurance company in traditional financial markets (“TradFi”). DeFi applications are most commonly built on the Ethereum blockchain, and can encompass lending, borrowing, exchanges, insurance and more. Uniswap is an example of a DeFi application: a decentralized exchange that allows users to exchange cryptocurrencies with each other without the need for any central authority, and is instead governed by its global community of token holders. DeFi applications present novel risks in comparison to TradFi, as any bug or loophole in the code can be potentially exploited without recourse.
The process of transforming previously encrypted data into a readable format.
A ledger (e.g. database) which stores data across a network of decentralized computers and servers in constant communication, rather than centralized and controlled by a single authority.
Double-spending is the risk that a unit of digital currency can be spent twice. This risk does not exist with physical cash—once you’ve handed a bill to a merchant, you cannot spend it next door. In comparison, digital information is inherently open to duplication—for example, if you email a photo to a friend, that photo exists on both of your computers—and so digital currencies could not exist without a way of overcoming the double-spend problem.
Blockchains are the solution to the double-spend problem in cryptocurrency—a public record of transactions that is confirmed and secured by a network of computing power that is financially incentivized to protect the network. When you initially make a bitcoin transaction, it’s unconfirmed; once the transaction is included in a block, it is publicly written onto the blockchain, preventing double-spending.
Ethereum is a blockchain used for its own cryptocurrency—Ether or ETH. Unlike the Bitcoin blockchain, which can store an extremely limited amount of information and so is predominantly used to record transfers of bitcoin, the Ethereum blockchain has the ability to store more complex information within its ledger, enabling “SmartContracts” and “Distributions Applications (DApps)” to be built and run on the Ethereum blockchain. For example, if a technologist wanted to write code that enabled one user to lend funds to another user, but wanted that code to be decentralized, publicly available, and outside the control or manipulation of any third party, that record of lending information could be written onto the Ethereum blockchain. At the time of writing, ETH is the second largest cryptocurrency after Bitcoin, and most Decentralized Finance (DeFi) and NFT activity takes place through the Ethereum network in 2021.
Similar to traditional finance, a location where buyers and sellers of cryptocurrency come to transact. The most famous cryptocurrency exchanges in the U.S. are Coinbase (Nasdaq: COIN), Bitstamp, Gemini, and Kraken.
Among cryptocurrency users, money that is created by governments is referred to as fiat money, fiat currency, or simply fiat.
Because information stored on a blockchain is publicly available and managed through decentralized networks, it is possible for a blockchain to temporarily or even permanently diverge into multiple potential paths or sets of records. Temporary forks are common when not all network participants immediately reach consensus; these are quickly and dynamically resolved through the consensus process until one fork emerges as the true record. “Hard forks” emerge when the software underpinning the blockchain changes; if not all users upgrade to the new software, a permanent split in the blockchain can occur. For example, in 2017 a subset of participants in the Bitcoin network attempted to upgrade the Bitcoin protocol, but the majority of participants did not go along with the change, resulting in the creation of Bitcoin Cash in addition to Bitcoin. Critically, because the historical record is not altered in hard forks, users who owned bitcoin prior to the fork simply owned both bitcoin and Bitcoin Cash, with market dynamics driving the price of the two forks.
The first block of data that is processed and validated at the beginning of a new blockchain. Referred to as block 0 or block 1, the Bitcoin genesis block famously contains a news headline from the London Times during the 2008/09 financial crisis: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.
Derived from a typo for “hold,” as in “buy and hold.” Now famous in cryptocurrency culture and sometimes now used as an acronym for: “Hold On for Dear Life.”
Bitcoin has a predefined monetary policy: the total amount of bitcoin will expand at a decreasing rate over the next ~120 years until a hard cap of 21 million bitcoin is reached. The rate of expansion is governed by the amount of coins rewarded to miners in exchange for validating new blocks on the blockchain. Roughly every four years, these rewards are cut in half, reducing the rate of expansion of the currency.
Cryptocurrency are held in “wallets,” which take a wide variety of formats. A “hot” wallet refers to a wallet that is connected to the internet. While this is required in order to transfer crypto or for other use cases, it exposes the owner to the risk of digital theft, which is not present for cold wallets.
Immutable means unchanging over time or unable to be changed. This refers to a common property of blockchains: once information has been verified and appended to the blockchain, it is impossible for that information to be altered unless the entire blockchain is hacked. This is a key property for the creation of digital money.
One of the largest challenges facing the Bitcoin network is scalability: a relatively small number of transactions can be written onto the Bitcoin blockchain each day, which prevents Bitcoin from reaching scale as a digital currency. The Lightning network is a “second-layer protocol”—e.g. a technology that sits on top of the Bitcoin blockchain—that can enable a significantly higher volume of payments to be written onto the blockchain. In effect, users route transactions through the Lightning network, and then the Lightning network in turn writes numerous transactions onto the Bitcoin blockchain in a single transaction, allowing millions of transactions to be made in seconds and recorded to the Bitcoin blockchain for final settlement.
Individuals or companies that use computing power to validate information on the blockchain in exchange for financial incentives (block rewards). Mining is increasingly dominated by professionals operating at large scale; in total, Bitcoin is secured by the most powerful computing network in history.
Process by which blocks are added to a blockchain. In the Bitcoin blockchain, miners race to complete cryptographic puzzles in order to validate transactions and append information to the blockchain. Upon completion, miners are rewarded with bitcoins. In effect, the Bitcoin blockchain is secured by this decentralized network of miners that participate in exchange for rational market incentives.
Where multiple miners combine their collective computing power to more effectively mine the next block on a blockchain, and share the block reward if they are successful.
Computer used for mining cryptocurrency. Increasingly, mining rigs are dominated by highly specialized and dedicated computing hardware, although it is still possible to mine cryptocurrency on a home computer.
Any computer that connects to a cryptocurrency network is a node. Because blockchains are decentralized ledgers, each node participates in and supports the network, storing pieces or the entirety of the blockchain, monitoring the blockchain to validate legitimate transactions, relaying transactions, and helping to keep the network secure.
Non-Fungible Token (NFT)
While the most well known use of blockchain technology is to record the ownership of bitcoin and other cryptocurrencies, the technology can be used to publicly record ownership of virtually any type of digital records. NFTs are cryptocurrency tokens without fungibility—e.g. each record is unique, but still recorded on the blockchain. Today, NFTs are often used to transfer and record ownership of digital art, music, playing cards or even components of games; in the future, NFTs could potentially be used to store records representing real world assets, such as real estate and intellectual property records. NFTs are recorded on the Ethereum blockchain.
A private key is a randomly generated string of numbers and letters that is generated during the encryption process and is used in order to decode cryptocurrency information and effect transactions. Private keys must be kept safe; if they are lost or stolen, there is no process for recovering them. To give an analogy: your email address is a publicly available address used to send and receive email; similarly, all blockchain participants have public addresses. However, accessing your account and sending emails requires a secure password, similar to a private key.
Proof of stake
Blockchain networks are secured by giving network participants the ability to compete to validate information and secure the blockchain in exchange for financial incentives. Proof of stake is an alternative to proof of work for securing a blockchain network. Rather than competing to solve cryptographic puzzles, as in proof of work, in proof of stake a network of validators contribute, or “stake,” their own crypto in exchange for a change to validate transactions and update the blockchain. Participants who have contributed the most crypto for the longest time have the highest chance of being selected to validate the transaction, effectively rewarding participants who are the most invested. The “staked” funds serve as the economic incentive to act in the best interest of the network: if the validator verifies incorrect information, they forfeit a portion of the funds that they have staked.
Proof of stake is argued to be:
- More energy efficient, as it does not require energy to mine blocks
- More democratic, as there are reduced hardware requirements
- More immune to centralization, leading to more nodes in the network
While a number of crypto projects are already leveraging proof of stake, such as Cardano, the Ethereum blockchain is in the process of upgrading from proof of work to proof of stake. Any participant who holds at least 32 ETH can act as a validator on the Ethereum blockchain.
Proof of work
Blockchain networks are secured by giving network participants the ability to compete to validate information and secure the blockchain in exchange for financial incentives. The most well known and common mechanism for doing so is referred to as “proof of work;” participants deploy vast amounts of computing power in order to compete to validate transactions by solving cryptographic puzzles. The transactions are validated when a new block is accepted into the blockchain, and the winning participant is rewarded with crypto. The Bitcoin network utilizes proof of work, effectively securing the blockchain with the most powerful computing network in history—solely motivated by rational market incentives. Given the size of the network, it requires a significant amount of computing power and energy consumption to come up with a winning proof of work, driving highly specialized mining equipment and interest in alternative consensus mechanisms, such as Proof of Stake.
Set of rules that define interactions on a network. When people say the ‘Bitcoin protocol’ they are referring to the rules—encoded in the technology—that govern and operate the network. Because accessing the blockchain requires leveraging the same software, the protocol cannot be changed without creating an entirely new cryptocurrency unless virtually all participants decide to update the software at the same time.
An address used for the sending and receiving of payments. Public addresses cryptographic hashes of public keys—i.e. while different, public addresses and public keys are closely related. You can think of a public address as similar to an email address—one receives email, while the other can receive cryptocurrencies from any source, but requires a password (or private key) in order to access.
Bitcoin can be split into smaller units to facilitate smaller transactions. A satoshi is the smallest unit of bitcoin, equivalent to 100 millionth of a bitcoin. Named after Satoshi Nakamoto, the author of the original Bitcoin whitepaper, and commonly abbreviated as “sats.” You can think of bitcoin and units of satoshis as analogous to dollars and cents.
The backup code for a wallet—hot or cold. If forgotten, the user can never access or restore the wallet if they forget their password. Some cryptocurrency investors go as far as hammering their seed phrase into sheets of metal which are securely stored.
A secondary blockchain that runs parallel to a primary blockchain to help the foundational blockchain enable certain use cases more efficiently. For example, the Lightning network is a side chain that enables a dramatically higher volume of bitcoin transactions, with final settlement recorded on the Bitcoin blockchain. Many cryptocurrency investors forecast a ‘multichain’ future, with many chains seamlessly interacting to enable additional use cases and scale.
While the most common use of blockchains are to record financial transactions, such as Bitcoin, certain blockchains can also be used to record more complex information. A Smart Contract is a computer protocol that facilitates, verifies or enforces a contract on the blockchain without the need for third parties. For example a Smart Contract could govern a lending relationship directly through the Ethereum blockchain, without the need for an intermediary financial institution and without the need for lawyers to draft physical contracts.
A cryptocurrency that is designed to have extremely low volatility, so that it can be used as a medium of exchange without converting back to fiat currencies, which cannot be directly used by the cryptocurrency ecosystem. For example, “USDT,” or tether, is a cryptocurrency that is pegged to the U.S. dollar, and is used as a bridge between traditional financial marketing and cryptocurrency markets.
Staking is the process of contributing cryptocurrency in order to participate in the validation of transactions on a proof of stake blockchain, such as Ethereum. Anyone with a minimum balance of cryptocurrency can validate transactions and earn staking rewards as a form of yield in exchange for temporarily locking up their funds in the network. Staking on Ethereum is similar to mining on Bitcoin.
The two most common digital assets are cryptocurrencies and tokens. “Cryptocurrencies” typically refer to a digital asset that has its own blockchain, such as bitcoin. Crypto tokens, by contrast, are digital assets that are built on top of an existing Blockchain, and are given to participants, investors and contributors in the specific application. For example, the decentralized exchange Uniswap is built on top of the Ethereum blockchain; Uniswap issues tokens to its investors and contributors which can be used to vote on the future development of UniSwap in a decentralized fashion. Tokens can also be bought and sold on the secondary market.
Web 3.0 describes a theoretical digital ecosystem where data, value, and services are interconnected in a decentralized, publicly verifiable way—in contrast to Web 2.0, an Internet era that began in 1997 with notable centralization via technology giants such as Amazon, Facebook, Google, and others.
As Tim Berners-Lee, one of the inventors of the internet, describes, in Web 3.0 users and machines will be able to interact with publicly available data on open blockchains. They will be interoperable, integrated, and automated via smart contracts and enable a range of use cases and industries, including DeFi, social tokens, NFTs, decentralized computing, decentralized social media, and more. Blockchain is the foundational, enabling technology which gives Web 3.0 the opportunity to emerge and, potentially, usurp Web 2.0.
Virtually all reputable cryptocurrency projects are launched with a whitepaper: a document that outlines the project the project is attempting to solve and detailed information about the potential solution. The most famous whitepaper is the Bitcoin whitepaper, written by the pseudonymous Satoshi Nakamora in 2008. Assessing the strength of the whitepaper is one method of determining the validity of a new cryptocurrency project.