Want to invest in cryptocurrency but terms like bitcoin, Ethereum blockchain, gas, minting, and mining looks confusing to you? If your answer is yes, then you must first learn these terms used in the cryptocurrency ecosystem.
Let us begin with ‘cryptocurrency’. It is a kind of currency that is encrypted and digitized for trading. It uses algorithms to invigilate the creation and transfer of funds between buyers & sellers. All cryptocurrency transactions happened without the involvement of financial intermediaries such as banks.
That’s not all. The whole process of trading cryptocurrencies includes many steps on which any investors should have thorough knowledge on.
Blockchain
When a verified cryptocurrency transaction hapened between buyer & seller, it is recorded in a digital ledger known as blockchain. Each transaction is time stamped and individually coded with through the virtual ledger.
It is underlying technology that is used in cryptocurrencies.
You can consider it as a series of blocks that build upon one another. A blockchain network will keep adding cryptocurrency or other transactional data, making it an unabated and irreversible process. When it obatin its capacity, a new block gets added to the chain.
It can be accessed on any laptop or computer using the internet. This also means blockchains are decentralised and are not limited to one location, laptop or network.
Fiat
Fiat refers to money that is issued and recognised by governments like the US dollar, euro & pound. It is circulated via banks too.
Unlike cryptocurrency, fiat currency is centralised and is controlled through a central authority.
If you are interested to transact fiat currencies in the blockchain network, then you must need a centralised institution for the custody of your funds.
In such transactions, you get a ‘token’ which allude the money you owe. The value of each token based on the current market value and can fluctuates daily.
Token
Tokens are cryptocurrencies that are not native to the blockchain they are a part of. E.g. the native currency of the Ethereum blockchain is Ether, but the blockchain itself supports various other coins. Therefor Ether is a cryptocurrency, while the others known as crypto tokens.
Additionally, tokens can be made without creating a blockchain, as the support function can be provided by various party. They can be utility or security tokens. The former is used for transactions within an ecosystem.
Bitcoin & Altcoin
Bitcoin is a cryptocurrency that is accrescently becoming an accepted mode of payment system alongside fiat money. Transactions using bitcoin do not have 3rd party involvement and, unlike fiat money, are usually free from regulatory mechanisms. Additionally, it can be offered as rewards to blockchain miners for verifying transactions & traded as assets too on cryptocurrency exchanges.
Altcoin is a digital currency which is not bitcoin that means it is a centralised digital currency that includes banks and other financial intermediaries, apart from buyers & sellers. It is an amalgamation of two words the first one is ‘alternative’ & the second one is ‘coin’.
Each altcoin has their own set of rules and regulations, properties, and specific use cases. The non-bitcoin crypto includes the 2nd most popular coin to mine, Ethereum and other thousands of coins added regularly, which have very minimal market value.
Exchange
For buying or selling cryptocurrency, you need a common platform. Think of an exchange who is playing that role as a digital marketplace.
You can use this online service to change your digital assets for fiat, based on their market values. You can trade one cryptocurrency for another too.
Same as traditional brokerage, you can deposit money using net banking/ debit card/ bank transfer, and other standard deposit methods, as enabled by the exchange.
Some Indian crypto exchanges include
- Unocoin
- CoinSwitch
- WazirX
- CoinDCX.
They include various fee structures for transactions. The exchanges can differ too on the basis of the currency conversions they allow.
Wallet
The wallet only stores your crypto’s location on the blockchain; it does not hold the currencies. It provide a platform to store and fetch your digital currencies and provide you a unique code that represents your blockchain address.
Though the wallet address is public, it reckon in a number of ‘private keys,’ signifying the owners along with the account balance.
There are two kinds of crypto wallets in the crypto landscape — the first one is hot and the second one is cold. A hot wallet is connected to the internet and is higher stung to online hacking, a cold wallet works without the internet and is considered to be the more secure way of safeguarding your crypto investments.
Cold wallets come with specially designed USB drives that store your crypto for later use. Some of the well-known cold wallets are the Ledger Nano X & Trezor Model One. Ledger Nano X is known for supporting 23 various types of cryptocurrencies along with other additional features.
Gas
Gas is a fee charged for operating in the Ethereum network. It is used to allocate the Ethereum virtual machine’s resources so that decentralised applications such as smart contracts can be self-executed securely.
For the uninitiated, smart contracts are blockchain programmes which get executed when certain, predetermined conditions are met.
While some operations entail a small cost of 3 -10 gas, a full transaction costs 21,000 gas. It depends on the demand & supply took place between the miners and the users. Gas is charged in Gwei, (tiny fraction of Ether).
Minting
Minting is the creation of a new coin to circulate in the cryptocurrency ecosystem. It seems to be similar to mining, but there have fundamental differences on a deeper level. The term mining is generally used to refer he process termed as proof-of-work, which is basically validation of transactions on a block through problem-solving.
The other process is known as staking. It follows the mechanisam known as proof-of-stake in which a certain amount of pre-existing cryptocurrency is staked by those who want to validate transactions for a profit.
Minting happens via both mechanisms.
Mining
Mining refers to the process by which tokens are minted. It becomes part of the blockchain once they are minted. The blockchain is the one who maintains the transactions.
Most of the cryptocurrencies depend on a reliable mining system, which entails solving complex maths riddles to protect and empower a network along with beget new tokens. This is done with the help of computing resources like computers.
DeFi
DeFi is known for Decentralised Finance which includes conducting financial transactions without any exchange, brokerage, bank or any financial institution.
This means the digital currencies which are exchanged include crypto. Also, the particular cryptocurrency transactions happened between two parties only which is the buyer and the seller, without a middleman.
Some of the popular DeFi projects have decentralised exchange protocols, which consolidately automate the crypto transactions among buyers & sellers.