Crypto Terminology Cheat Sheet
Decentralized Finance (DeFi): The overall ecosystem of crypto-currency and blockchain. DeFi is a response to issues with centralized financial exchanges (banks, brokerages, etc.) and uses the new technologies of crypto and blockchain to remove third party intermediaries. It allows for direct peer-to-peer financial transactions.
Crypto-Currency: Virtual currency that can be exchanged or transmitted on the blockchain. It can take the form of virtual coins (ETH, Bitcoin, Doge, etc.) or tokens. The coins are like fiat currency and the tokens are like vouchers.
Blockchain: A decentralized ledger, or record of transactions, that relies on an online network to maintain accuracy. After crypto is transferred between wallets it is recorded on the blockchain as a “block.” These blocks are encrypted and then linked together forming a “chain” of immutable transactions.
Wallets: A digital tool that can store, send, and receive cryptocurrencies. Wallets can be hardware-based (physical devices) or software-based (applications or online platforms). Wallets can generate or store “keys” which are used to send and receive crypto. There are two types of keys. The first are public keys, which act like bank account numbers. The second are private keys, which act like personal ID numbers or passwords.
Cold Wallet: A wallet that is not connected to the internet, thereby adding an extra layer of security.
Wallet Seed Phrase: A set of words that serve as a backup to recover a cryptocurrency wallet.
Ethereum: An open-source, decentralized blockchain platform that enables the creation and execution of smart contracts and decentralized applications (DApps).
Ether: The native cryptocurrency of the Ethereum platform.
Bitcoin: The first and most popular type of decentralized cryptocurrency.
Smart Contracts: Programs stored on a blockchain that run when predetermined conditions are met. They can vary wildly and accomplish many tasks.
For example, it would be possible to use a smart contract as an intermediary in the purchase of a house. The buyer would transfer the money to the smart contract, the smart contract would then hold the funds until certain conditions are met (i.e., a satisfactory inspection), then once the conditions are met the smart contract would automatically transfer the money to the seller and the ownership title to the buyer.
Mining: The process by which networks of computers generate and release new Bitcoin and verify new transactions. The computer networks harness their computational power to confirm every new transaction on the blockchain. In return for providing this service, miners receive bitcoin as compensation.
Gas Fee: The amount of cryptocurrency required to perform a transaction or execute a smart contract on a blockchain.
Liquidity Pools: A collection of tokens secured within a smart contract, typically involving two types of tokens: one token with a recognized value (e.g., ETH) and one newly created token with minimal or no established value. Traders can then swap one token for another directly through the liquidity pool. The smart contract automatically calculates the ratio of the two tokens in the pool to determine the price. Contributors to the liquidity pool earn fees for providing liquidity. When users make trades, they pay a small fee, and this fee is distributed among the liquidity providers based on their contribution to the pool.