25 crypto terms you need to know to understand the jargon

This term comes from the name “alternative cryptocurrency”. As Bitcoin is the oldest cryptocurrency, “altcoin” refers generally to all cryptos other than Bitcoin.

Bitcoin is probably the best-known cryptocurrency. Bitcoin is the world’s first digital currency not issued by a central bank or supervisory authority. Ten years ago, only a small niche group was showing an interest in cryptoassets. An estimated 425 million people worldwide now hold cryptocurrencies. The digital transformation has reached the financial sector, too. Growing institutional acceptance of cryptos such as Bitcoin is playing a key role in this. Lots of institutional investors have entered the crypto market since 2020 and, by May 2023, had accumulated over 7.8 percent of all BTC available. As a result, Bitcoin and other cryptos have developed into a new asset class that’s increasingly well established amongst the wider population and receiving heavier focus from banks.

Blockchain is a database solution that holds information in a form that makes it difficult to change, hack or deceive the system. Blockchain is a sub-type of distributed ledger technology in which interactions are logged with an unalterable cryptographic signature, known as a hash. Blockchain stores transactions in the order they were executed in and creates an unalterable transaction history. That prevents data from being edited or manipulated at a later point.

These two terms are often used synonymously, even though they aren’t the same thing. What they do have in common is that they both represent a particular value, enable payments and can be exchanged. The main difference is that coins are independent cryptocurrencies that don’t require any other platform. Instead they have their own blockchain. Bitcoin, for example, works on the Bitcoin blockchain. In contrast, tokens are based on an existing blockchain and use this technology to provide certain applications. For example, there are tokens that are based on the Ethereum blockchain and provide DeFi services.

DeFi is an abbreviation of decentralized finance and has started playing a much more significant role in recent years. It refers to financial applications that use Web 3.0 and are based on blockchain technology and smart contract programs. As the name implies, the focus is on decentralization, and users manage their transactions themselves. This means that functions previously performed by financial service providers are now partly or fully replaced by smart contracts. Smart contract protocols are used to execute transactions.

More information about Web 3.0 can be found in our article “From Web 1.0 to Web 3.0: the fascinating evolution of the Internet.”

The ledger is a register where executed transactions are logged. Distributed ledger technology (DLT) is a database located in several places simultaneously. The opposite to a DLT is a centralized database. Distributed ledger technology manages transactions through decentralization across various people and locations. This means that no central authority or central server are needed to validate transactions or check for any manipulation. That’s revolutionary as, for the first time, no intermediary is needed, such as a bank when making payments. 

Ethereum is a blockchain platform that enables developers to create and implement decentralized applications using smart contracts. Ethereum is now a well-known and popular solution: since its creation, the Ethereum blockchain has attracted a growing community of developers, opening up a wide range of possible uses. Measured by market capitalization, it’s the biggest smart contract blockchain. Ethereum has its own cryptocurrency called Ether (ETH), which is required to execute smart contracts and transactions on the platform. Ether can also be used as a digital payment method and is traded on the major crypto exchanges. In this respect, Ether is comparable to Bitcoin as a digital asset.

Fiat money is a payment method issued by central banks and other banks. Fiat currencies, such as the Swiss franc, euro and US dollar, are not tied to commodity prices, but are instead based on confidence in the value of the money. They differ from commodity money, which has an intrinsic value, such as precious metals (gold and silver), salt or mussels. These goods don’t just have an exchange value, but also value in the form of the items themselves. Although cryptocurrencies, just like fiat currencies, can be used as a payment method and a form of investment, there’s a clear difference: cryptocurrencies aren’t issued by a central authority, but are instead based on a consensus algorithm and cryptography to ensure secure transactions.

Go to the article “What is fiat money?”. 

A hash is a fixed sequence consisting of letters and numbers. It is generated by using a mathematical algorithm on data sets (e.g. data, messages or files). A key aspect of hashes is their uniqueness. Even a minor modification to the data set results in a change to the hash value. Hashes can be used to verify that data sets have remained unchanged during transmission or storage. In the world of cryptos, they play a key role in storing transactions and creating the blocks in a blockchain.

Originating from a typo by a drunken user on a Bitcoin platform, hodl is now a well-established term on the crypto scene. What’s actually meant is “hold”, which reveals the definition of this term: hodl signifies holding onto cryptocurrencies, even when prices fall or fluctuate sharply, based on the assumption that their value will go up in the long term. The buy and hold approach works in a similar way.

ICO is the crypto equivalent of an initial public offering (IPO), where the shares of a private company go on sale for the first time. In an ICO, however, new coins rather than shares go on sale. An initial coin offering is a popular way of raising capital for companies, foundations or projects wishing to provide products or services related to cryptocurrencies. Investors are interested in ICOs because they obtain a new cryptocoin through their participation – with the hope that its value will rise in future. Initial coin offerings should generally be treated with caution – they are largely unregulated, and many have turned out to be fraudulent. As ICO participation entails high risks, advance research, a basic understanding of cryptocurrencies and sufficient risk capacity are all key requirements that should be fulfilled before deciding to invest.

Meme coins are when cryptocurrencies are developed in connection with memes circulating online. One example is Dogecoin, whose logo features a Shiba Inu, a popular Japanese dog breed. Influencers and communities can give a boost to these cryptocurrencies, which may seem worthless at first glance. This support gives them the potential to gain in value. Due to their lack of functions, meme coins are sometimes also seen as “shitcoins”, but they don’t necessarily have to be if the meme character is of good quality and has subjective value.

Shitcoins are altcoins that are regarded as worthless due to a deficiency. These deficiencies may concern a feature or the blockchain behind the development.

In the case of cryptocurrencies based on the proof of work mechanism, new transactions are validated through a consensus mechanism that requires a lot of computing power – this is also known as mining. Participants who make their hardware available for this purpose are called “miners”. New coins are mined when the computers available complete computational tasks. As there’s no formula for working out the correct solution, it has to be guessed. It generally takes several rounds of guessing and verification before the correct number is found. New coins in the relevant cryptocurrency are issued as a reward for successfully completed tasks. However, the entire process requires vast computing capacity due to the high level of complexity.

NFTs enable the clear identification and trading of both digital and physical assets, such as works of art, music or plots of land. “Non-fungible” means not replaceable, so NFTs are unique assets – in contrast to tokens or coins, for example, which can exist multiple times in the same format. NFTs use blockchain technology to verify the rights of ownership and authenticity of the token and, in turn, the corresponding assets.

Private keys and public keys act as a two-key system: the public key is used to receive transactions in encrypted format, while the private key is needed to decrypt them. The public key is in the public domain and is a bit like an IBAN. Using the same analogy, the private key is like the PIN, which is why it mustn’t be disclosed under any circumstances. Together, the private and public keys provide access to the holdings in the blockchain – in other words, the cryptocurrencies, tokens and other digital assets purchased. Public and private keys are stored in a wallet.

Go to the article "Crypto custody: everything you need to know".

Proof of stake is a consensus mechanism used by lots of blockchains to validate transactions on the blockchain. In a process called staking, validators use the blockchain’s own coins as a security deposit to generate new coins. In return, they get a reward. The validators then bet on the blocks they think will be the next ones to be added to the blockchain. Whoever bets correctly receives a reward, called the block reward, which varies depending on the bet. Using this mechanism, the proof of stake requires less computing power than the proof of work.

Go to the article “Proof of work and proof of stake: a comparison”. 

Like the proof of stake, the proof of work is a consensus mechanism. But the proof of work functions in a different way. It is the consensus algorithm behind the mining – in other words, a method for validating the blockchain by providing computing capacity. It proves that the miners have undertaken the computing work and guessed the 64-character hash required to add a new block to the blockchain. By sharing the solution, other nodes can check if the hash is correct and whether the work required to obtain it has been done.

Go to the article “Proof of work and proof of stake: a comparison”. 

Smart contracts are digital program codes that can be executed on blockchain. They enable the automation of transactions or more complex agreements with no intermediary. Put simply: transactions can be executed as part of the agreement without human intervention. The purpose of smart contracts is to guarantee the legally valid drafting of a contract through technical means. This immediately gives the parties certainty over the result without having to use a third party as an intermediary. Another function of smart contracts is initiating workflows – for example, by triggering downstream actions. This is made possible by “if … then …” instructions on which smart contracts are based.

Stablecoins are cryptoassets pegged to a national currency, a basket of currencies or some other asset. For example, in theory, the USDC is a stablecoin with the USDC/USD exchange rate of 1. The cryptoasset is therefore subject to the same fluctuations as the underlying national currency. This is intended to avoid the price fluctuations typical of cryptocurrencies.

Go to the article “What is a stablecoin?”. 

A wallet is required to manage cryptocurrencies and other tokens. The wallet is a storage space for addresses and public and/or private keys. This means that the cryptos aren’t kept in the wallet, but the wallet contains the details for accessing the cryptos, which are in turn found on the blockchain. Various access details can be stored in a wallet. However, crypto holders tend to opt for several wallets for security reasons. There are various types of wallet, but the two most common are: 

Hot wallets

With hot wallets, the access details are stored online, which means that the wallet is permanently connected to the Internet. There are different types of hot wallet, all of which are easy and convenient to use. Digital storage and password-protected access make hot wallets a popular target for cybercriminals. Users must be aware of the risks involved and always be cautious when using their keys.

Cold wallets

A cold wallet is a physical storage medium not connected to the Internet. Examples include USB sticks, flash drives, hard drives, paper wallets and solid state drives. While offline storage provides better protection against hacker attacks, it isn’t without risks. If the cold wallet gets lost, there’s no back-up, and the stored keys saved in the wallet are also gone forever.