With so much lingo in the cryptocurrency space, it can be overwhelming to grasp the essentials at times. After getting an idea of the basic terminology, now is the time to look at some more technical concepts.
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Technical Lingo Galore
The cryptocurrency industry has no shortage of technical lingo. In fact, there are a lot of technical aspects one needs to know about to hold any sort of conversation with like-minded individuals. The following terms should offer a better understanding of the intricate nature of these ecosystems.
One of the primary discussions taking place in the cryptocurrency space is how a centralized approach poses issues. The term centralized refers to having a central point, either physically or otherwise.
For a network, a central point can refer to a database with records or a specific server controlling data flow. A central point poses a significant security vulnerability that needs to be removed. Creating a literal “point of attack” is one reason why data breaches and other hacks continue to run rampant.
As the name suggests, decentralized is the complete opposite of centralized. It refers to a state in which there is no central point of failure. Instead, data is distributed over as many servers or users as possible. Achieving a higher degree of decentralization will lead to better security in the cryptocurrency world.
One way to achieve decentralization is by relying on nodes capable of storing and processing network data. Bitcoin, for example, has thousands of network nodes to ensure the network remains operational without interruptions.
Running a cryptocurrency node can be done with any computer or by using a Virtual Private Server (VPS). The latter approach is more convenient but will also lead to more centralization, as it requires a third party’s infrastructure.
Bitcoin does not have supernodes, but the concept does exist on specific blockchains. A supernode is responsible for validating transactions on a network leveraging the proof-of-Stake consensus mechanism. A supernode is also known as a masternode, allowing users to earn rewards for providing network support.
A network such as Ripple – and soon Ethereum 2.0 – relies on validators to process network data at a higher throughput. Such a validator has an active ‘stake” in the network financially yet is also rewarded for validating transactions. For Ethereum 2.0, anyone can become a validator by contributing at least 32 ETH to the network.
Proof Of Stake
Rather than opting for Proof-of-Work consensus like Bitcoin, specific networks use Proof-of-stake. It does not require miners to generate new network blocks. Instead, users need to stake cryptocurrency on the network to validate transactions. In return for doing so, they will receive staking rewards.
Depending on whom you ask, proof-of-stake may be more efficient than Proof-of-Work.
Delegated Proof Of Stake
A slight variation on the traditional Proof-of-Stake approach is Delegated Proof-of-Stake or DPoS. It uses supernodes to validate transactions instead of regular users staking coins. Running a supernode on a DPoS network often requires much more coins and capital.
A rather intriguing aspect of cryptocurrencies is their fungibility or lack thereof. More specifically, fungibility determines if something can be interchangeable with something else. To be given this label, the currency needs to have the same value everywhere. A complicated status to attain, given the volatility of cryptocurrencies.
One of the core components of cryptocurrency networks is the hash. This cryptographic function decrypts information to create network blocks. Bitcoin miners, for example, decrypt hashes to mine a block. A hash is a complex mathematical puzzle that can increase or decrease in difficulty, depending on network conditions.
No cryptocurrency network can exist without achieving consensus among its users. This consensus pertains to agreeing on the blockchain regarding whether exchanges of value or data have taken place. Without an agreement, transactions and data exchanges are not valid.
It may happen that a cryptocurrency network will undergo a hard fork. It represents a crucial change at the technology level that introduces upgrades or changes for all users. A hard fork will require all users, exchanges, nodes, and other service providers to upgrade their associated software supporting the network. Failure to do so can result in a blockchain split, such as Bitcoin and Bitcoin Cash.
Changes to a cryptocurrency network can also occur through a soft fork. This is a less intrusive change, which is backward compatible with exchanges, nodes, and other operators running an older version of software supporting that specific blockchain. Soft forks can occur regularly, and it remains advised for all users to upgrade their software sooner or later.