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Welcome to our guide to the 50 words you need to understand if you want to understand crypto. You can read lesson one here if you missed it.
OK, let’s get cracking.
What It Means: If you make a deposit at a bank, the teller will record it in their ledger alongside all other transactions. Well, a lot of cryptocurrencies — Bitcoin, most notably — use a record-keeping ledger too; a decentralized, virtual one. It’s called the blockchain.
The blockchain is made up of a network of computers all around the globe (nodes) that are inextricably linked, each with an identical copy of the ledger. When a transaction happens, each of those computers or nodes independently updates and verifies it from blocks of data — which are strung together in a chain comprised of every transaction that’s ever occurred.
A Little More Context: Cryptocurrency features an incredible amount of computation, information storage, and data; that’s because it’s encrypted, hence the name. Picture a medieval monastery. The monks are tasked with recording the local village’s history — births, deaths, who sold land to who. When the new record keeper takes over, they rely on the quill-scribbled transactions on the pages that came before — kind of like the stack of mathematical proofs that each form the links in the blockchain. The biggest difference is the blockchain is decentralized, almost like there are virtual monks all around the world recording and verifying the same transactions for the public to view in open source code. So, every time you purchase or exchange crypto, picture those record keepers, all simultaneously recording and verifying the transaction against each others’ notes.
Why It Matters: Every verification along the chain is public — which means anyone can view any date and time-stamped transaction at any time; transparency equals security. That lets you know that the NFT artwork you’re purchasing belongs to its original artist, or that a business hasn’t double-charged you.
How To Use It in a Sentence: Veronica knew her money transfer went through, because it was verified by the blockchain.
What It Means: Simply speaking, “DeFi” is short for “Decentralized Finance.” It’s crypto’s version of financial services — business that lend and borrow money and enable all sorts of other transactions from investments to trades — except that unlike traditional financial services, DeFi doesn’t require a middleman like a bank or government to function.
A Little More Context: When you go to a bank to take out a loan, you’re going to a central location (the bank), that is protected and regulated by a larger institution (the government). The money that’s given to you will be tracked for repayment by that government, the bank, and whatever other institutions are deputized to make sure you pay it back.
DeFi is the elimination of those systems. Because the blockchain is public, and verified by computers all around the globe, its financial transactions don’t require a centralized state or corporation and can instead take place directly between individuals. Replacing those institutions are smart contracts (i.e., computer code) that do the work the institutions normally do. You can, theoretically, become your own bank.
Why It Matters: Crypto enthusiasts describe DeFi as one of crypto’s earliest use cases. If you have internet access, you’re a click away from taking out a loan. No more waiting until 9 a.m. Monday when your local bank opens; it’s permissionless access, allowing users to take control of their own finances instead of being restricted by traditional gatekeepers.
All you need to participate in DeFi is a crypto wallet. Because you don’t need to provide an ID, it appeals to some people who value privacy. But that also comes with risk. While transactions are transparent, there isn’t the built-in accountability that comes with a regulator eyeing every transaction. Its newness is both its appeal and its limitation: finance can be done better, but it doesn’t always turn out that way.
How To Use It in a Sentence: After years of the frustration of corporate banking systems, Henrietta was relieved to have the opportunity to explore the world of DeFi.
What It Means: A term of art that means to hold crypto as an investment long term.
A Little More Context: Like many great online memes, HODL was born from a misunderstanding — actually, a misspelling. It dates back to 2013, a time when Bitcoin was mostly traded by early adopters. The price of Bitcoin, thanks to rumours of a pending Chinese pushback on cryptocurrency, fell a stunning 39 percent over the span of one morning. An early influential Bitcoin trader joked he was drunk and that he was “HODLING”— he wasn’t going to sell. It was a typo, but the HODL stuck, and even developed its own acronym: you are now Holding On (for) Dear Life.
Why it matters: HODL became not just an investment strategy, but an overarching philosophy for die-hard crypto investors. The idea is that while other investors are constantly trying to time out the market for Bitcoin (or other cryptocurrencies), the best investing strategy has historically been to buy and … wait. (For instance, timing the stock market leads to inferior returns more often than not.) If you believe in the promise of a coin, the idea goes: let everybody else freak out about the current price. You’re in it for the long haul. You HODL.
How To Use It in a Sentence: The price of coins in Joe’s crypto wallet has plunged this week, but he’s not getting nervous — he’s HODLING.
What It Means: The process of being rewarded with cryptocurrency by validating transactions on the blockchain.
A Little More Context: So, you consider yourself a prospector, eh? If you want to earn some cryptocurrency without purchasing it, you can be a miner. Your first question might be: why is mining required at all? Well, remember how the blockchain requires people all around the world who update transactions on that ledger? Well, people need some sort of incentive to do that — hence the payout. The process is called mining.
Miners use software that solves complex mathematical equations, which requires an application-specific integrated circuit (ASIC) to run through all the possible permutations to find the correct answer. Each equation, or puzzle, is unique to each block on the chain. The program crunches through all those permutations until it spits out a hash, or a string of letters and numbers, that proves it has solved the transaction. That proof is then shared with all the other nodes to confirm their ledgers match.
Once everyone’s on the same page, that transaction gets thrown onto the ledger, the cryptocurrency reward is claimed by that miner, and miners start work on new blocks.
Why It Matters: Mining can be lucrative for people who are dedicated. Not in the move-to-California-and-buy-a-pickaxe way. But it often requires expensive computing hardware (and knowing that mining is energy intensive and could be contributing to the ravages of climate change). But it’s a revolutionary system — you’re participating in a network of crowd-sourced verification and transparency, creating an alternative to traditional financial systems — that’s helped make crypto appealing.
How To Use It in a Sentence: Tom spent all day mining new crypto. It paid off, but his computer is now on fire.
WALLETS (hot and cold)
What It Means: A wallet is where you store your crypto assets. Unlike the wallet in your pocket, it’s not made of pleather, and it can be used to interact with the blockchain directly (like making a transaction or using a DeFi application).
A Little More Context: They’re called wallets because they store your money and pay for stuff. But they’re also kind of like your digital ID — instead of a username or password, they’re what allows you to interact and transact with anything built on the blockchain.
Because so much of crypto revolves around security and safety, there are two different kinds of wallets. A “hot” wallet is where you keep the money that you’ll use for day-to-day transactions, but not all your savings. Hot wallets are always connected to the internet. The other kind, a “cold” wallet, is harder to access but more secure. A “cold” wallet allows funds to be stored offline and requires a specific key to access it. If a “hot” wallet is your debit card, your “cold” wallet is the money you have stashed in a safe.
Earlier, we talked about HODL and why some folks think the wisest strategy is to hang onto their cryptocurrency assets for the long term. If you’re going to do that, a “cold” wallet may be your best bet (just don’t forget your key). You don’t need to carry around your life savings with you, but you do want to know that your assets are secure and available if you need them.
Why It Matters: Without a wallet, you can’t buy an NFT, for instance, or invest in a decentralized autonomous organization, or DAO. More important, wallets make the decentralized part of DeFi possible — because they remove, or at least largely remove, banks and other centralized intermediaries from the money-storage equation. And that’s a big selling point for a lot of crypto users, who tend to be a bit dubious of banks, to put it mildly. With a crypto wallet, meanwhile, you and you alone have the keys — which also means the responsibility for holding and safeguarding your coins falls on you, for better or worse. Wallets are far from foolproof: thieves have hacked wallets and stolen millions upon millions of dollars’ worth of coins in recent years. The other catch is that sometimes people you’d actually want to access your coins can’t: families have failed to unlock wallets belonging to recently deceased loved ones, so consider sharing your keys with at least one other trusted person.
How To Use It in a Sentence: Mike transferred some ETH from his cold wallet to his hot wallet in order to purchase a fresh new XCOPY NFT.