Crypto and Blockchain Definitions
Understanding these common terms may help you make sense of the exciting new world of blockchains and cryptocurrency.
The blockchain is based off of an older technology most people aren't aware of called cryptography, the hash (aka Merkle Tree/data structure) was the original base, where the nodes (or leaf) of the block of data.
Blockchain is essentially a decentralized database that keeps track of all the transactions on the network. It's composed of numerous blocks and each block contains information about a transaction. If someone tries to add an illegitimate transaction to the network, it will be rejected by everyone else who has access due to cryptographic hash functions which allow users on the network to verify if a transaction is legitimate. A blockchain is a publicly, and sometimes private, available ledger that anyone can see because it's decentralized and transparent, but each person who has access to the ledger will only have part of it since they will only be able to see the transactions relevant to them. Most people think of cryptocurrency when they hear about blockchain, but the technology actually has other uses as well.
Cryptocurrency is just a digital currency that uses cryptography to secure transactions and create new units. There are many different types of cryptocurrencies such as Bitcoin, Litecoin, Ethereum, Ether, Dogecoin, and Monero etc. Cryptocurrencies don't have a centralized authority and instead operate on a decentralized blockchain which also makes them more secure since malicious hackers can't just steal the entire blockchain and run away with it. Certain cryptos have a blockchain, these are called ‘coins’, when other projects or apps use a blockchain and may use their coin in order to run their project that probably have a utility or a functionality purpose, they may also create an ‘alt token’, which is essentially the projects ‘coin’.
This is the process of securing data by effectively transforming readable information into an unreadable format such as code. Cryptography has been around for hundreds of years, but cryptography used in digital currency is generally very different from other types of cryptography.
Symmetric-key cryptography was more than likely the only encryption until 1976. Where the key(s) are mutually shared by the person that sends the transaction, and the person that would receive the transaction. An example of this would be where you receive an encrypted email, by which you need a series of text to unlock the hidden message.
Public keys, also known as symmetric keys, created around 1976 by Whitfield Diffie and Martin Hellman, show that a public key no longer has to be kept private, unlike the private key. The public key could be used to view a file as it is a shared key. The basic concept of a crypto wallet, where one can send and receive ‘crypto’.
Proof of Work (POW)
Proof of work is a system that requires users to perform some type of work in order to show that they are honest members of the network. In cryptocurrency, this usually comes in the form of processing power which users dedicate to solving cryptographic hash functions so they can receive rewards for helping maintain the blockchain's integrity and security. Proof of work might be able to prevent artificial inflation by making new coins cost more to produce, thereby keeping a lid on excessive monetary inflation. Cryptocurrency mining is a common example of POW.
This is the process by which new coins are created. Mining takes place on a cryptocurrency network where users dedicate their computer processing power to solve cryptographic hash functions, which are essentially complex mathematical problems. The first miner to correctly get the correct answer is rewarded with a block of new coins and transaction fees from everyone else who decided to dedicate their processing power as well.
A cryptocurrency wallet is a digital wallet that can store the public and private keys that let you access your funds and carry out transactions. Since cryptocurrencies aren't controlled by any authority, there isn't any bank or credit union that will hold onto your money for you, which means you're responsible for the security of your own coins. This means having a secure wallet that won't get hacked, so a lot of people choose to store their coins in an offline wallet on a USB stick or hard drive for extra security. However, this can come at extreme risks, such as losing or damaging the external drive.
A smart contract is effectively an advanced type of traditional contract, but with computer programming language, that self-executes when certain conditions are met, sometimes also has a robotics function in the computer world. Cryptocurrency's decentralized nature makes it easy for smart contracts to exist without the need for a centralized third party because users validate transactions on the blockchain, making them trustless and secure. Smart contracts can be used for a variety of different transactions and, in the future, it is likely that they will replace the traditional mortgage process because it is more secure and efficient, as smart contracts may hold actual terms of a real contract, such as jurisdiction and offers, acceptance and consideration.
Hashcash is a proof of work system that was first implemented in the 1990s as part of an anti-spam scheme. The technology behind Hashcash is also sometimes used to verify cryptocurrency transactions based on their individual hashes and code. This is the method used by Bitcoin, although it has largely been replaced by more sophisticated types of proof.