IMPORTANT DEFINITIONS

Blockchain

The technology upon which most digital currencies are created.  The blockchain functions as an efficient, decentralized digital ledger in which all transactions for a single currency are recorded chronologically and publicly.  This continuously growing list of records are organized into groups called blocks.  These blocks are linked to one another and secured using encryption.  Using this method, all transactions are verifiable and permanent.

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Mining

The process by which a block (a series of digital currency transactions grouped together in chronological order) are verified, added to the blockchain, and encrypted.  Mathematical equations are solved by computers in order to perform the verification that transactions took place and the encryption and securing of the block to the blockchain.  In exchange for solving these mathematical equations, digital currency is provided as a "reward" to the miners, in addition to any transaction fees that may be charged.  This is how new coins are created.  The coin being mined will determine the difficulty of mining and the type of hardware that needs to be used.  Some coins can be mined with normal PC CPUs, some require high-end graphics cards to perform the calculations, and some coins require dedicated specialized hardware called ASICs.

Exchanges

A company with an internet web site which allows users to trade one digital currency for another, or to trade digital currency for fiat currency (US Dollars, Euros, British Pounds, etc.)  These exchanges are modeled after, and function quite similarly to, stock exchanges.  Many of the digital currency exchanges allow for limit orders, market orders, shorting digital currencies, and trading on margin.  Typically, the exchanges are considered to be the weak link in the security of digital currencies as historically it has been the exchanges which have been hacked and where coins have been stolen from.

Coins

Coins, sometimes referred to a virtual currency, digital currency, or cryptocurrency, are a form of electronic money that exists only in digital form (i.e., there are  no tangible physical forms such as gold coins, bills, or bank notes).  Coins exhibit properties similar to physical currencies such as the Euro or US Dollar, but allow for instantaneous transactions and borderless transfers to other parties.  Coins can be subdivided into smaller units arbitrarily, but typically at most are extended to 6 decimal places.  When purchasing or trading coins, the transactions can be performed on fractions of a coin and do not need to be performed on a whole coin.

Blocks

A series of transactions of a given digital currency which are grouped together to form a permanent record.  Once a block is formed and includes the most recent transactions on a digital currency network which have not appeared in any previous block, it will be provided to miners who will solve mathematical puzzles to verify that the included transactions are valid.  Once the transactions are verified, a hash is performed on the immediately preceding block on the blockchain, and that hash value is used to link the new block to the blockchain using encryption.  The creation of this hash value ensures that the blockchain can not be altered.  A block is similar in principle to a single page of a ledger or record book.

Wallet

Like a traditional physical wallet which can hold physical bank notes, a digital wallet is software or hardware used for the express purpose of storing digtial currencies or coins.  Each wallet has a unique address.  It is this address that is recorded on the blockchain as part of a transaction (either the sender or recipient).  These wallets allow the owner to send and receive digital currencies.  Each digital currency has its own wallet with its own unique system of addressing.  These addresses are the "public key" of the encryption system.  Thus, a Bitcoin wallet can not be used to store, send, or receive Litecoin.  When creating a digital wallet, a user will be forced to create a "private key". 

 

Note:  It is incredibly important that this private key be recorded somewhere permanently but never shared (think writing on paper and storing in a fireproof safe or safe deposit box).  This private key will always be able to recover the user's wallet. 

Wallets exist in two forms:  software wallets, which are programs that can be downloaded and installed on a user's computer, and hardware wallets, which are purpose-built physical devices used to store a wallet's private keys, as well as store, send, and receive coins.  Hardware wallets are by far the more secure of the two options, and are recommended for individuals that have larger investments in cryptocurrencies.

Cryptocurrency

Often referred to as coins, digital currency, or virtual currency, the name derives from the use of encryption to create the digital ledger or blockchain upon which the currency is based.  As of the creation of this site, over 1,300 cryptocurrencies have been created, and that number is growing.  Each cryptocurrency changes something about its underlying protocol which makes it different from others.  Realistically, only a handful of cryptocurrencies are in widespread use and are available for purchase or trade on exchanges.

Mining Pools

A website setup to group individuals with mining hardware.  The pool monitors the blockchain for newly created blocks and distributes portions of this block to their users.  The individuals compete with one another to solve the block and thus gain the reward for the group.  Users that make more attempts to solve the block are typically provided with a larger percentage of the block reward as their faster (or greater numbers of) mining systems contributed more work to the solution.  By aggregating miners and their mining equipment, mining pools can solve blocks faster and are thus rewarded more frequently.  For most digital currencies, the difficulty in solving a block has risen so high that a single user with even the fastest mining equipment is not lockly to solve even a single block within a one year timeframe.  Thus, most miners belong to these mining pools to improve their chances at obtaining block rewards.

ASIC

Short for Application Specific Integrated Circuit, an ASIC is a chip that is created to perform a single function with maximum possible speed and efficiency.  In the digital currency world, ASICs have been created to perform hash functions which verify blocks and add them to the blockchain.  Large numbers of these chips are aggregated and sold as "miners" which can be used to generate coins when blocks are solved and rewards distributed. 

 

ASICs are not limited to the digital currency world, and are seen in most electronic devices because of their relative low cost compared to a general purpose processor like a PC's Intel CPU.

Forks

A change in the protocol or rules of a digital currency that is made after the currency's blockchain has been created.  There are two types of forks possible:  soft forks and hard forks.  A soft fork is a change in the protocol that maintains backward compatibility with all previously mined blocks that have been added to the blockchain.  These are often small changes such as an increase to the number of possible coins that can be mined which do not fundamentally change any of the underlying characteristics of the currency.  By contrast, a hard fork is a very significant change which results in a fundmamental change to the blocks and renders them incompatible with the previously mined blocks of the blockchain.  A hard fork will necessarily result in the creation of a brand new coin.  An example of a hard fork was the expansion of bitcoin block sizes from 1 megabyte to 8 megabytes, which has resulted in the creation of a new coin called Bitcoin Cash.

Transaction Fees

Additional fees that are paid to miners, and are added as part of a block reward.  Transaction fees can be used to expedite transactions and ensure that they are added to the most recent block that is submitted to the miners for solution.  Once all of the coins of a particular digital currency have been successfully mined, every transaction on the network will have an associated fee to allow it to process.  The sum of the transaction fees collected for any block will be the reward that is given to the miners for solving a block.  Theoretically, all transactions for a coin should be free until all of the coins for that currency are mined.  In practicality, however, there are several coins including Bitcoin and Ethereum which now have completely filled blocks (i.e., there is not emough room in their block size to fit all of the most recent transactions).  In such a scenario, users who include a transaction fee with their transaction will have their transaction prioritized in the most recent block before a transaction which does not include a fee.

Private Keys

Digital coins are based on asymmetric encryption, which means that a different key or password can be used to decrypt a message than the one used to create the message.  This is also known as public key cryptography.  The encryption and decryption keys are different, but are mathematically linked.  The complexity and length of the keys determine how difficult it is for an attacker to guess the keys or to try all possible key combinations (referred to as a brute force attack.)  The private keys for a wallet are the only thing that is required for a wallet to be completely recovered. 

 

Note:  As long as you and you alone know your private keys, your coins remain yours.  If anyone else knows your private keys, then they can initiate sends from your wallet, thereby stealing your coins.  This is the reason for the advice given in the wallet definition above to write down your private keys and store them somewhere secure such as a fireproof safe, a safe deposit box, or a hardware wallet.

Public Keys

Digital coins are based on asymmetric encryption, which means that a different key or password can be used to decrypt a message than the one used to create the message.  This is also known as public key cryptography.  The encryption and decryption keys are different, but are mathematically linked.  The complexity and length of the keys determine how difficult it is for an attacker to guess the keys or to try all possible key combinations (referred to as a brute force attack.)  The public keys in digital currencies are actually the wallet addresses.  These addresses can be distributed without fear of compromising the privacy and security of your wallet.  These public keys, or wallet addresses, are the source of your send transactions, as well as being used to receive coins from others.

Hashing Algorithm

A hash function is any function that can be used to map data of arbitrary size to data of fixed size. The values returned by a hash function are called hash values, hash codes, digests, or simply hashes.  A cryptographic hash function allows anyone to easily verify that a particular data input maps to a given hash value.  However, the reverse is not true in that if the input data is unknown, it is deliberately difficult to reconstruct it by only knowing the stored hash value.  In digital currencies, hashing functions form the backbone of the blockchain.  When a new block is to be added to the blockchain, the most recently added block is hashed, and that hash is added to the current block before the new block is added.  By doing this, it makes the blockchain permanent and immutable for all practical purposes because in order to change the blockchain, the hash value of every block after the changed block would need to be recalculated and redistributed to all nodes as a valid copy, something that even the fastest supercomputers would be unable to accomplish in a sufficiently short time frame.

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Fungibility

A concept by which each individual of a group is indistinguishable from any other, giving a uniform value to all members of the group.  When applied to digital currencies, this is the principle that each coin is equivalent to all others.  In some digital currencies, the records on the blockchain are stored in such a way that it can be guessed who owns which wallet addresses.  If a wallet address is associated with illicit activities, then any coin that has passed through that wallet can be blacklisted.  By contrast, a fungible digital currency would be able to obfuscate transactions and coins in such a way that individual identities can not be ascertained.  Monero, and any other digital currency implementing confidential transactions, would be considered examples of fungible coins.

 

Buy Wall / Support

When viewing an order book, a buy wall is a large number of coins that are set to be purchased once the digital currency price drops to a specified threshhold.  The large number of coins may be from one investor or many.  The price of the digital currency will not drop below the order's set purchase price until all of the coins in the order have been purchased at that price.  This prevents the price from decreasing further and is typically referred to as a support level.

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Sell Wall / Resistance

When viewing an order book, a sell wall is a large number of coins that are set to be sold once the digital currency price rises to a specified threshhold.  The large number of coins may be from one investor or many.  The price of the digital currency will not rise above the order's set purchase price until all of the coins in the order have been sold at that price.  This prevents the price from increasing further and is typically referred to as resistance.

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Order Book

An order book is the list of orders (typically limit orders, although some market orders may be included around the current trading price), created either manually or electronically, that a digital currency exchange uses to record the interest of buyers and sellers in a particular digital currency.

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Altcoin

Any digital currency that is not Bitcoin.  These alternative currencies include Litecoin, Ethereum, Dash, Ripple, Bitcoin Cash, Monero, Dogecoin, and many other digital currencies.

 
Fiat or fiat currency

Fiat currency is money that a government has declared as legal tender, but is not backed by a physical commodity.  The value of the money is based on supply and demand rather than any physical substance from which the money is derived.  The US Dollar is an example of both a fiat and non-fiat currency.  The Dollar was backed by gold (the United States was said to be "on the Gold Standard") until 1971 when Richard M. Nixon issued an executive order removing the tehter between the US Dollar and the United States gold reserves.  Thus, prior to 1971 the Dollar was a non-fiat currency, while post-1971 it has become a fiat currency.  It should be noted that all government backed currencies as of 2017 are fiat currencies, as none of them are backed by the gold reserves of their respective countries.