Key concepts to understand cryptocurrencies
Cryptocurrencies have revolutionised the global financial system, but like any new technology, they raise a lot of questions. We have prepared a small glossary of the basic terms you should understand getting started in the world of cryptocurrencies.
Cryptocurrencies, also known as digital currencies, are alternative currencies that can be defined as digital assets that use cryptographic encryption to guarantee their ownership, ensure the integrity of transactions, and control the creation of additional units. That said, there are a few key concepts to be clear about when understanding how cryptocurrencies work.
The blockchain is a technology that allows transactions between two or more people without the need for intermediaries. It is the ledger where all transactions are stored, and distributed on computers, which can be anywhere in the world, interconnected through a Peer-To-Peer (P2P) network, and without the need for a central server. It is a technology that facilitates the decentralisation of financial applications and any other digital records. Furthermore, it is also considered very secure because a record of everything that has happened on the network can only be changed if all parties agree.
While in the traditional monetary system, governments print money according to their needs, monetary creation in the ecosystem of the most popular cryptocurrencies, such as Bitcoin, is limited. Moreover, cryptocurrencies are not issued and made available to everyone, they are put into circulation in encrypted blocks that have to be decrypted. This is where the concept of cryptocurrency mining comes from, a computational process by which a set of computers, the miners connected to the network, are given a new algorithm to solve a mathematical problem, which, once solved, is rewarded with a commission for issuing a new unit of the cryptocurrency, which is added to the blockchain.
Cryptocurrency wallets are virtual wallets by which we can manage our cryptocurrencies. The main difference with other virtual wallets that we can find in many banks lies in the security offered by their software, allowing absolute control of the public and private keys to sign transactions and operations executed with cryptocurrencies through the blockchain network. The use of these wallets is indispensable when managing cryptocurrency-based digital currencies that do not exist in the physical world.
Staking and Hodling
The concept of ‘staking’ consists of acquiring cryptocurrencies and keeping them locked in a wallet in order to support the security and functioning of the blockchain. In return, we receive a profit, or reward, in the form of additional cryptocurrencies. Hodl is a similar process, but in this case, the assets are not locked and you can use them freely. It is an option used by investors who want to hold their assets for a long period of time in the hope that they will appreciate in value.
Although the concepts of token and cryptocurrency can be considered synonymous, the distinction lies in the fact that cryptocurrencies have their own blockchain, while tokens are issued on another blockchain, such as Ethereum. A token is a unit of value issued by a person or a private company, with which you can represent different objects within a blockchain. It is a transferable value within the blockchain network but has no real value outside of it, similar to what would happen if we had casino chips or airline points. Therefore, a token can have different purposes: from giving access to more functionalities in an online game, to being able to be exchanged for real objects, collecting, and participating in an event …
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