Digital Assets and Blockchain Explained: Terminology and Definitions

The digital assets, crypto and blockchain markets are rapidly growing and increasingly permeating traditional markets and it is sometimes hard to keep up.

Here we take a look at some of the terminology you may have come across when reading up on these exciting new technologies and asset classes.

51% Attack:

An attack on the blockchain that results in a group of miners controlling over 50% of the network’s mining hashrate, a term used mostly in reference to Bitcoin.

Arbitrage:

The act of using different market values and regulatory dissonance to make a profit from buying and selling said asset.

Cold Wallet:

An offline wallet that is disconnected from the internet at all times. Cryptocurrencies are not able to be hacked online.

Consensus:

Consensus protocols are needed to validate entry which prevents tampering and removes the risk of duplicate entry or fraud which also helps guard businesses from internal corruption. A consensus algorithm ensures that the next block in a blockchain is the one and only version of the truth, and it keeps powerful adversaries from derailing the system and successfully forking the chain.

Consumer Tokens:

Tokens that are inherently consumptive in nature, because their intrinsic features are designed to serve as, or provide access to, a particular set of goods, services or content

Crypto-Assets:

The broad term covering all assets stored on distributed ledgers, including all cryptocurrencies as well as non-currency assets such as security tokens and utility tokens

Crypto Currency:

Currency based on mathematics not fiat.

dApp:

A decentralised application (Dapp) is an application that is open source , operates autonomously, has its data stored on a blockchain, incentivised in the form of cryptographic tokens and operates on a protocol that shows proof of value.

Decentralized:

The concept of a shared network of dispersed computers (or nodes) that can process transactions without a centrally located, third-party intermediary.

Design Goals:

Design goals refer to the first step in the Blockchain 3-layer model. They are set of concepts or properties that you wish your smart contract to have. These include Distribution, Decentralization, Immutability and Peer to Peer.

Distributed Ledgers:

Distributed ledgers are a type of database that are spread across multiple sites, countries or institutions. Distributed ledger data can be either “permissioned” or “un-permissioned” to control who can view it.

Ether:

A token used on the Ethereum network, but not considered a virtual currency. It is however traded as a commodity

Fiat Money/Fiat Currency:

Any money declared by a government to be to be valid for meeting a financial obligation, like USD or EUR. Fiat currency differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money.

Financial Asset Tokens:

Tokens whose intrinsic features are designed to serve as or represent financial assets such as financial instruments and “securities”. Payment Tokens – tokens whose intrinsic features are designed to serve as a general-purpose store of value, medium of exchange, and/or unit of account

FinTech:

The Financial Technology (FinTech) industry uses technology to optimise processes in finance, including mobile banking and cryptocurrency.

Fork:

A fork creates an alternative version of a blockchain. The two chains run simultaneously on different parts of the network. They can be either accidental or intentional.

Genesis Block:

The first or first few blocks of a blockchain.

HASH:

A cryptographic hash function is a kind of algorithm that can be run on a piece of data, like an individual file or a password, producing a value called a checksum. The main use of a cryptographic hash function is to verify the authenticity of a piece of data. Two files can be assured to be identical only if the checksums generated from each file, using the same cryptographic hash function, are identical.

Hot Wallet:

A wallet that is directly connected to the internet at all times. For this reason, hot wallets are considered to have lower security than a cold storage system or hardware wallet.

Howey Test:

The Howey Test asks whether the value of a transaction for one of its participants is dependent upon the other's work. Specifically, the Howey Test determines that a transaction represents an investment contract if "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party

Immutability:

Relates to the unchanging/unchangeable nature of blockchain. Used in technical circles to denote the fact that once a digital object (like documentation or a line of code) is created, it cannot be altered. This is the underlying power of blockchain since no one can hack the blockchain and change it.

Initial Coin Offering (ICO):

Initial Coin Offering (ICO) is an event in which a new cryptocurrency sells advance tokens from its overall coinbase, in exchange for upfront capital. ICOs are frequently used for developers of a new cryptocurrency to raise capital.

KYC:

Know Your Client/Customer rules force financial institutions to vet the people they are doing business with, ensuring that they are legitimate.

Mining:

The process by which transactions are verified and added to a blockchain. This process of solving cryptographic problems using computing hardware also triggers the release of cryptocurrencies.

Multi-Signature:

Multi-signature addresses provide an added layer of security by requiring more than one key to authorize a transaction.

Node:

A node is any computer that connects to the blockchain network.

Open Source:

Open source software is software with source code that anyone can inspect, modify, and enhance.

Peer-to-peer (P2P):

Peer-to-peer (P2P) refers to the decentralized interactions that happen between at least two parties in a highly interconnected network. P2P participants deal directly with each other through a single mediation point.

Private Key:

A private key is similar to a password which should never be shared with anyone but you as they allow you to spend the bitcoins from your bitcoin wallet through a cryptographic signature.

Proof of Authority:

A consensus mechanism in a private blockchain which essentially gives one client (or a specific number of clients) with one particular private key the right to make all of the blocks in the blockchain.

Proof of Concept:

A term used in other industries that usually only refers to a technological development. For blockchain it usually comprises of a basic technical blockchain architecture being used as a feasibility study after which the issue of scaling the technology will be addressed.

Proof of Work:

A consensus distribution algorithm that requires an active role in mining data blocks, often consuming resources, such as electricity. The more ‘work’ you do or the more computational power you provide, the more coins you are rewarded with.

Public Key:

An alphanumeric string which is publicly known, and which is hashed with another, privately held string to sign a digital communication. In the case of bitcoin, the public key is a bitcoin address.

Security Token:

A crypto token that passes the howey test is deemed a security token. These usually derive their value from an external, tradable asset. Because the tokens are deemed a security, they are subject to federal securities and regulations

Smart Contract:

Smart contracts are contracts whose terms are recorded in a computer language instead of legal language. Smart contracts permit trusted transactions and agreements to be carried without the need for a central authority, legal system, or external enforcement mechanism, cutting out the middle man.

Stablecoin:

Stablecoin refers to a new class of cryptocurrencies which offer price stability and/or are backed by reserve asset(s). In recent times, stablecoins have gained enough traction as they attempt to offer the best of both world’s – the instant processing and security of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencie

Smart Contracts:

Self-executing contracts whose terms and conditions are written directly into the code.

The 3 Layer Model:

It is said a blockchain is made up of three layers. 1. Design goals, 2. Implementations and 3. Instances. Each layer has additional properties that belong to it.

Token:

A token is a digital identity for something that can be owned.

Tokenisation/Tokenization:

The process of issuing a blockchain token, specifically a security token, that digitally represents a real tradable asset.

Utility Token:

A digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency sold utility tokens as a method of fundraising for the start-up.

Wallet:

A wallet is a file that contains a collection of private key.

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