Lesson 1: A glossary to understanding the blockchain universe
Following a boom 2021 for the crypto universe, 2022 posed a big challenge. Secure blockchain decentralisation, its scalability and new applications apart from those of cryptocurrencies are currently dominating debates among the experts. Let’s have a look at some of the most important buzz words that will be bandied about in 2023.
This is the name generally given to all those currencies that are not bitcoin (BTC). They were created to diversify and enhance the cryptographic ecosystem. A host of cryptocurrencies fall into the altcoin category, one of which is the Ethereum network’s ether (ETH). Many of these are not greatly different from Bitcoin. Nonetheless, they offer different, unique characteristics, such as distribution methods or mining algorithms.
This happens when the bitcoin reward for miners for having created a block is reduced by half to reduce the issue level. In fact, every time miners validate a block they receive a BTC reward. This halving mechanism occurs approximately every four years and serves to reduce the currency in circulation and thereby maintain its scarcity.
Central Bank Digital Currencies (CBDC) are digital currencies issued by a country’s central bank. In other words, these are digital versions of fiat currencies like the digital yuan (also known as e-CNY), the pilot programme for which has been extended to several provinces, or the Britcoin, a payment focused, British digital pound announced by the Bank of England. Meanwhile, the European Central Bank is still studying the viability of a European digital currency. Over 100 countries are already seriously considering the idea of issuing digital currencies.
Cold, warm or hot wallets
Virtual wallets are used to manage cryptographic assets. Cold wallets use keys generated from a source that is not connected to blockchain or the Internet. They are hardware or hard copy (QR code) tools that are much more secure than what are called hot wallets, which are based on software connected online and vulnerable to attacks or key theft. However, they are less convenient for daily transactions. Warm wallets combine the security of the former and the speed of the latter: they are connected online but have additional security layers and require human intervention to authorise transactions.
This indicates the downward trend of markets, when the prices of crypto assets fall and remain well below their most recent highest peak or All Time High (ATH).
Short for decentralised applications, they work independently and are based on a network of interacting nodes according to a set of pre-established rules set out in smart contracts. They enable blockchain users to interact directly without any central authority.
DeFi refers to the application and smart contract ecosystem that seeks to build a set of decentralised financial services by using blockchain technology.
A token digitally represents the value of an asset. Non-fungible tokens (NFTs), unlike fungible ones (such as cryptocurrencies), are unique and cannot be interchanged or replicated.
These are cryptographic tokens resembling any other, the difference being they are linked to traditional financial assets. Their advantage lies in that they cost less than stock shares and avail of the security and benefits offered by blockchain technology.
After ‘The Merge’, this is the latest Ethereum platform upgrade planned for Spring 2023. It will permit users to withdraw the ETHs they had blocked at staking (storage of cryptocurrencies in exchange for rewards) since 2020.
These are pieces of software that contain a digital agreement between two or more parties relating to goods or services. Once the terms of the agreement are met, these IT protocols are automatically executed and the parties receive what has previously been agreed.
Stablecoins are digital currencies pegged to a stable reference asset such as the US dollar (USDT and USDC) or gold (PAXG). They are designed to decrease volatility in comparison to non-referenced cryptocurrencies such as Bitcoin. However, they still maintain some of the most interesting properties owing to their digital character.
This refers to the big revolution in 2022: the merging of the two Ethereum blockchains in their conversion towards Proof-of-Stake (PoS), a transaction validation that generates new blocks much more efficiently, energetically and transaction cost wise than the Proof-of-Work (PoW) model, in which verifiers use much more powerful computers at a much higher energy cost.
Utility tokens represent the right to use a product or service provided on a blockchain network. These types of assets are not created for investment purposes, but rather to offer access to a function in an blockchain ecosystem tied to a particular project or company.
This is the decentralised internet model based on blockchain technology, the third Internet era after web1, the first stage in which browsers and online commerce were created albeit with poor interactive potential, and web2, the era in which blogs and social networks fostered the emergence of a new participatory culture, but one dominated by the tech giants.