Blockchain and Cryptocurrency: Words to Know

The world of blockchain and cryptocurrency has grown exponentially.

Here is a small guide for navigating technical terms and definitions. Both for those who want to understand something more, and for those who want to buy cryptocurrencies or hold digital assets.

What is a blockchain

A blockchain is a distributed database ledger that can be read and modified by multiple nodes (servers) on a network.

In the absence of a central body, each change made to the registry is validated by a consensus algorithm between nodes.

When the information is updated, the new data is sent to all existing databases (ie network nodes).

The correctness (or incorrectness) of the information is then confirmed by all nodes of the network, according to a method called consensus (we will talk about it shortly).

The most interesting application is the recording of transactions, as evidenced by its debut with the virtual currency Bitcoin.

How does the blockchain work

The word blockchain is translatable as a chain of blocks.

Each block contains information and is accompanied by a timestamp, which is an exact time reference, and a “code” (called a hash) that identifies the immediately prior block of information.

Thus, each block of information is related to the previous part and placed precisely in time, forming a sequential and unmodifiable “chain”.

Because the information in the blockchain is safe

Thus, information protected by encryption, tracks all the history of transactions involving money (bitcoin and cryptocurrencies, but nothing prevents their use with other currencies), goods, real estate, and services.

The principle “everyone knows, so it is” True” means that at any time and in real time it is possible to validate a transaction (downplaying: who are these bitcoins for?).

This makes transaction management (and thus payment, sale, any transfer of ownership, etc.) more efficient: exchanges added to the registry through approval (i.e. confirmation of different network nodes, which share the same information) it is really complicated to process data afterwards, or cancel A transaction that occurred in the past or modified.

Consensus models on the blockchain

There are many consensus models on the blockchain, but the two main ones are:

proof of workIt is a model that depends on solving complex mathematical problems and requires certain expenditures of energy to be solved. for example Bitcoin.

proof of stake: A model based on the payment of cryptocurrency funds (with a view to pledge), what is called staking in terminology.

In the process of verifying the sincerity of transactions, transaction auditors put real assets as collateral: to become an auditor, it takes a lot of assets. In other words, putting capital at risk.

If a node on the network proves successful, it will earn new cryptocurrencies for each validation.

The most popular cryptocurrency that uses Proof of Stake is dotted And Solanabut also Ethereum trending towards this model.

A distributed and collaborative approach

Bitcoin and many other classic cryptocurrencies contain within them a revolutionary idea: decentralize the currency, freeing it from the control of central banks.

With a distributed system, centralized systems and related costs are eliminated. In fact, it is a shift to a new paradigm, the long-term effects of which we do not know, and distorts the traditional monetary policies of central banks.

For crypto purists, this is an advantage: there is a need to radically change the paradigm.

For the more traditional, cryptocurrencies represent a threat to the monetary sovereignty of nations and a gift to tech giants. Hence the huge interest in CBDCs (which, however, have little to do with blockchain).

What is a token?

A token is a digital asset on the blockchain, created to support a crypto project that regulates participation, ownership, and voting rights.

In the DeFi area, these projects are currently mostly backed by the Ethereum network.

The concept of a token can also affect blockchains and other networks that allow the use of smart contracts.

Types of tokens

What is Stablecoin?

A symbol whose value is associated with a fiat currency (dollar, euro, pound, yen, etc.).

What is a non-fungible code?

NFT, a unique token and representative of a property right, like art.

What is a smart contract?

A smart contract is a program that is automatically executed by the blockchain when a certain situation occurs, censorship-resistant and unstoppable, that regulates relationships and transactions between multiple parties.

With a smart contract, it is possible to automatically transfer resources and/or tokens from one address to another on the blockchain.

A smart contract runs independently when the conditions expected in its programming language are met. In this sense, the smart contract is a guarantor for all parties involved.

However, any software bugs can make corrections very complex.

What does DeFi mean?

Decentralized finance (DeFi) refers to a new type of financial system whose operation is subject to smart contracts.

Traditional brokers are being replaced by smart contracts that act as guarantors and implement the terms agreed between the parties.

Which no longer depends on the presence of intermediaries, but uses smart contracts as intermediaries and guarantors of the parties’ contracts: in a simplified way, they are software running on the blockchain.

The term decentralization has a meaning: you do not need a permit to access this system, it is free from censorship and always active.

But where can DeFi be used?

Decentralized finance can find different applications (technically speaking, we are talking about protocols), and here are some of them:

  • The exchangeAnd i.e. applications that allow you to decentralize and switch from one token to another, such as Uniswap or Curve;
  • credit And Lending
  • Options and Derivatives
  • insurance

What is my sword?

Centralized finance (CeFi) is traditional finance that relies on intermediaries that guarantee obligations between the parties.

The CeFi model can also be found in the crypto world: Coinbase, for example, is organized as a central company, even if it operates in the cryptocurrency world.

CeFi is a financial system based on the presence of central brokers that can also provide exchange and custody services: in addition to Coinbase, we can also cite Binance or Kraken as examples.

These platforms manage cryptocurrencies and fiat currencies and allow you to switch between currencies. In order to process funds, they must be regulated and, by definition, centralized companies.

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