The cryptocurrency industry has become one of the best-performing and fast-growing sectors in the financial market. In total, the value of all digital currencies in the market has grown to more than $1 trillion. Bitcoin alone is worth more than $680. If it was a company, it would be the 10th biggest firm in the world. In this article, we’ll look at some of the top terms you need to know in cryptocurrency.
S&P 500 vs. BTC, ETH, and LTC
DeFi stands for Decentralized Finance and is one of the most popular yet least understood terms in the blockchain industry.
DeFi is an industry powered by blockchain that aims to disrupt the traditional financial industry.
In the current system, banks and other financial institutions operate in a relatively centralized method. They also face substantial regulations. As a result, the industry has become relatively static. For example, it is difficult for a UK resident to borrow money from an American bank. It is also almost impossible for US residents to trade companies listed on the London Stock Exchange (LSE).
Therefore, the DeFi industry is changing this using blockchain. For example, some DeFi products enable people to borrow money and even earn interest through the blockchain industry.
These platforms differ from other peer-to-peer marketplaces because no one controls them. No one sets interest rates. Instead, the rates are set according to the market demand and supply. Further, the process of borrowing and investing is relatively easy for people from around the world. Examples of these platforms are Aave, Maker, and Compound.
There are other DeFi segments. For example, DeXes are decentralized exchanges that aim to make it easy for people to invest in global assets. These include Uniswap, Sushiswap, and Curve Finance. Also, there are derivatives, payments, and assets. The chart below shows the growth of the DeFi industry through their total value locked (TVL).
DeFi Total Value Locked (TVL)
Proof of stake (POS)
In 2020, Ethereum launched its biggest upgrade on record in its attempt to become more efficient. The process involved moving from the so-called proof-of-work (PoW) to proof-of-stake (POS). In proof-of-work, new Ethereum tokens were generated through the mining process where computers solve complicated mathematical calculations. This process is known for its complexity and high power consumption. Also, the process is relatively slow and inefficient.
The proof-of-stake is a consensus mechanism that requires miners to stake their tokens to become a validator in the network. For example, in the Ethereum network, validators are required to stake about 32 ETH (worth about $48,000). After becoming a validator, they are selected randomly to create blocks and verify the authenticity of other blocks.
It is a relatively genuine process since the network can penalize a validator for colluding or by going offline. Today, other popular blockchain projects like Polkadot, Chainlink, and Cardano use the proof-of-stake process.
In traditional assets like stocks and commodities, you can either be a trader or an investor. A trader is only interested in short-term gains, while investors are only interested in long-term gains. A good example of a long-term investor is Warren Buffett, who has invested and held companies like Coca-Cola for decades.
HODL is a slang used in the blockchain industry to represent people who buy cryptocurrencies with a long-term view. Unlike traders, they are not interested in short-term profits because they see the big picture.
A good example of people who HODLed are those who bought Bitcoin in its early days, rode the wave to the 2017 high of almost $20,000, back to $3,700, and back to $42,000. In total, those people have generated some of the best returns in the world. For one, Bitcoin used to sell for less than $1 in 2009.
To HODL a cryptocurrency, we recommend that you do your research and invest money you can afford to lose. That is because cryptocurrencies are well-known for their volatility.
Hot and cold storage
You have probably heard about hot and cold storage in crypto. In most cases, the two terms are talked about when there is a security lapse. In general, hot storage refers to any cryptocurrency that is stored or connected through an internet system. Therefore, if you have cryptocurrency in an online wallet, that is known as hot storage.
Cold storage, on the other hand, refers to when you store crypto in an offline wallet. There are several types of cold storage, including paper wallets, sound wallets, and hardware wallets. A hardware wallet looks like a flash drive and they are often sold by many vendors.
Many online exchanges store most of their cryptocurrencies in cold storage. Such storages are preferred because they cannot be stolen. However, the biggest risk is losing a password, losing the storage device itself, or even an accident.
A hot storage is preferred because you can use the currencies stored there to spend. However, these wallets are usually relatively risky because they can be hacked.
A common characteristic for cryptocurrencies is that they are usually highly volatile. It is not uncommon for the price of Bitcoin to lose and gain more than 2,000 points in a single day.
Stablecoins help to solve this by backing each of the coins by one or more currencies or commodities. For example, Tether is the biggest stablecoin in the world. It backs each coin with a dollar. Therefore, as you can see below, the coin tends to be relatively stable, unlike Bitcoin.
Tether price performance
Other popular stablecoins are Goldcoin, which is backed by gold and TrueUSD.
The blockchain industry is relatively wide. For one, there are now more than 4,000 active cryptocurrency products in the world. New terms are also coming up almost every day. Therefore, we have not even scratched the surface in the terms we have described here. We recommend that you spend a lot of time reading news and the upcoming books on the industry.