Overwhelming language makes learning about finance and investing more challenging. Crypto adds a whole new level by introducing technical terminology. Let's start by getting comfortable with them. We'll come across these words and concepts in news articles, social media, and other lessons on Archimedes.
Don't worry if things don't click right away. We'll walk through simplified examples of these terms and concepts in future lessons. This list helps set our expectation of what is to come.
Blockchain is a new technology that allows people to track ownership of assets through digital ledgers of ownership distributed worldwide. Blockchain technology gave rise to cryptocurrencies.
A cryptocurrency is the asset of a blockchain network that can be traded, utilized as a medium of exchange, and used as a store of value. Bitcoin, Litecoin, Ethereum, Dogecoin are all popular cryptocurrencies. It is important to note that there are two types (coins and tokens) within the big umbrella of cryptocurrencies.
Fiat refers to global currencies regulated by the central banks of each country. Examples include US dollars, Yen, Euro, Pesos, Yuan, Crowns, Rupee, etc.
Centralized exchange (CEX)
A CEX is a digital platform by a financial intermediary that connects crypto buyers and sellers. This centralized exchange provides custody which handles our crypto assets just as a bank would with our deposits.
Decentralized exchange (DEX)
A DEX is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. Unlike CEXs, there isn't an intermediary, and DEXs allow buyers and sellers to stay pseudo-anonymous.
Decentralized finance (DeFi)
DeFi is a movement to create an open-source, permissionless, and transparent financial service ecosystem available to everyone and operates without any central authority.
Assets are things investors can buy or sell. A digital asset is different from a traditional asset because it was created entirely within our computerized world. The three most popular cryptocurrencies in the form of digital assets include coins, tokens, and digital collectibles like NFTs. All cryptocurrencies are digital assets, while not all digital assets are cryptocurrencies.
Coins are native assets of a blockchain that are meant to act as both mediums of exchange and long-term stores of value. Coins often have controls to supply intended to compete with and potentially replace some modern fiat currencies. Popular coins are Bitcoin, Litecoin, and Dogecoin. All coins are cryptocurrency, but not all cryptocurrencies are coins.
Mining is the process of creating new coins of a cryptocurrency. Miners validate and add new blocks to the blockchain in a Proof of Work system.
Proof-of-work is the original consensus mechanism for the decentralized network. It's how everyone agrees on things like account balances and the order of transactions.
Proof-of-stake is a consensus mechanism that is faster and requires fewer resources. It was created to address the scalability pitfalls of proof-of-work.
Tokens are units of value that blockchain-based organizations or projects develop on top of existing blockchain networks. Similar to coins, tokens have a monetary value. However, unlike coins, tokens have additional utility tied to the blockchain. Tokens effectively allow blockchains to become the Legos baseboard where other organizations can build services. Popular tokens are ERC20, NFTs and Stablecoins. All tokens are cryptocurrency, but not all cryptocurrencies are tokens.
Stablecoins are cryptocurrencies with limited price fluctuations. Their value is fixed to another underlying asset, usually to a fiat currency like the US dollar. They can also be backed by a commodity or other cryptocurrencies. Some are just supported by an algorithm that controls the supply. Stablecoins are in fact tokens and not coins even though coin is the name since stablecoins are created through DApps on the Ethereum Blockchain.
Initial coin offerings (ICOs)
ICOs are the crypto equivalent of IPOs. They are a form of fundraising for a company that wants to create a new coin, product, or service. Investors buy tokens for fractional ownership of the company. Tokens can also provide utility for the product or service that the company is developing.
Non-fungible tokens (NFTs)
NFTs represent digital assets, often art or collectibles, created on the Ethereum blockchain. The blockchain certifies that they are unique and not interchangeable.
Fungible assets are stores of value that are interchangeable with another of the same type. For example, a dollar bill is fungible, identical to any other dollar bill.
A smart contract is just code on the Ethereum blockchain that outputs a result if we, or another contract, inputs ETH.
There are a lot of confusing words used in crypto. Refer back to this lesson to remember the basic terms. They become less intimidating the more often you use them, and they'll become part of your vocabulary!