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HODL, Hot Storage, Defi: A glossary for crypto newbies

Amy C. Arnott  |  04 Aug 2021Text size  Decrease  Increase  |  
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If you're new to the world of cryptocurrency, it's easy to get lost in a sea of incredibly complicated information, and some sources can be more reliable than others. I've written a couple of introductory articles on bitcoin, Ethereum, and ether. The glossary below explains some of the basic terms. I've also included a list of recommended sources at the end of this article.

Bitcoin (network): a decentralised ledger and Internet-based payment system.

Bitcoin (currency): a digital currency that supports peer-to-peer payments and transactions.

Block: a package of digitally recorded data; a group of transactions.

Blockchain: a transparent, permanent ledger that registers every transaction and cryptographically links together a series of blocks in a way that prevents modifying previous blocks. Blockchain is also the underlying technology that powers bitcoin and other cryptocurrencies.

Cold storage: a type of long-term cryptocurrency storage that involves storing currencies entirely offline to reduce the risk of theft and hacking.

Consensus algorithm: the process used to establish agreement on a single data value across a decentralised network of computers. In a blockchain, consensus algorithms are used to establish agreement on the contents of new blocks.

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Cryptocurrency: a digital, decentralised currency generated through a process of solving complex cryptographic puzzles.

DeFi: the entire field of decentralised finance applications, covering many key pieces of financial infrastructure that are evolving to become more decentralised and open instead of relying on intermediaries. DeFi represents a paradigm shift from traditional financial systems to new models that rely on built-in, programmable, and interconnected protocols.

Dogecoin: a Shiba Inu-themed cryptocurrency originally created in 2013 as a joke or satirical comment on the speculation surrounding digital currencies.

Ether: the native currency used by the Ethereum platform. In addition to serving as a digital currency and store of value, ether is also used to fuel computing power on the network, execute smart contracts, and compensate the miners who validate and verify transactions to add to the blockchain.

Ethereum: a decentralised global computer network that supports smart contracts and peer-to-peer applications.

Ethereum 2.0: a major technology upgrade that has been approved by the Ethereum community and is currently being implemented on the Ethereum blockchain. One of the major changes involves changing the security architecture from proof of work to proof of stake.

Fiat currency: a form of money or medium of exchange established by government regulation that has no intrinsic value, such as the U.S. dollar after President Nixon decoupled it from the gold standard in 1971.

FOMO: short for "fear of missing out," an emotional reaction to high returns earned by other investors that can lead to higher asset prices and speculative bubbles.

HODL: short for "hold on for dear life," originally a typo on a late-night message board thread that has become shorthand for investors who advocate holding cryptocurrencies for the long term on despite any short-term volatility. Newer crypto investors often attempt to take advantage of short-term price moves, but it's generally agreed that short-term trading often underperforms the HODL strategy.

Hot storage: a method of cryptocurrency storage that uses public and private keys for security and uses either a browser extension wallet or an app wallet. Because these wallets are always connected to the Internet, they expose users to a nonzero risk of being hacked.

Miners: people who run computers to solve algorithms that process and validate all transactions on the blockchain.

Open-source: source code (the basic instructions used to write a computer program) that is freely available for users to modify and redistribute. Open-source code allows anyone around the world to discover work that has already been done, improve on it without asking for permission, and send it back to the original developer (open collaboration). In this way, open-source code repositories that are interesting or otherwise important are constantly improved by people all around the world, similar to how Wikipedia pages are edited and improved over time.

Private key: a series of random characters (difficult to guess and similar to a password) that shows you have access to bitcoins or other cryptocurrencies in a specific wallet and can be used to verify ownership through a cryptographic signature. An owner of a private key can use a one-way function to generate a public key that is verifiably theirs but cannot be used to discover the private key. This is the basis for how one might verify ownership with a cryptographic signature.

Proof of stake: a system in which people can lock up, or stake, a certain amount of cryptocurrency to help validate transactions on the network. In exchange, they receive staking rewards. Because mining power is granted randomly based on the number of coins held in a node, it reduces the number of computations required to validate transactions.

Proof of work: a system that involves using a high-powered computer to test a series of algorithms, or hashing functions, to validate and confirm transactions. It relies on trial and error to generate a random series of numbers and letters until the program comes up with one that matches the original value. Proof of work is highly secure, but also massively inefficient because it requires so much computing power and electricity. Cryptocurrencies using proof of work generally use roughly 1,000 times more electricity than those secured by proof of stake.

Satoshi Nakamoto: the pseudonym for the person or people who envisioned and described Bitcoin in a white paper published in 2008. Satoshi was a member of the original “cypherpunk” community in the 1990s, which originally conceived of cryptographically secured currencies. Publication of the Bitcoin white paper release is widely considered to be a response to distrust of major financial institutions following the global financial crisis in 2008.

Smart contracts: contracts that include terms of agreement that automatically execute when the terms are met, eliminating the need for intermediaries such as attorneys and banks.

Trustless system: a system that relies on digital verification and algorithms instead of personal trust (knowing the person on the other side of the transaction) or relying on an intermediary such as bank, attorney, or payment processor.

Wallet: a method of storage (either virtual or in hardware form such as a USB stick) that allows users to store private keys for cryptocurrencies, enabling users to send and receive coins.

Recommended Sources

  • Bitcoin White Paper. The original white paper, "A Peer-to-Peer Electronic Cash System," published by Satoshi Nakamoto in 2008, is available on Bitcoin.org, which also includes other educational resources.
  • Coinbase. Coinbase's Learn tab offers a broad range of helpful articles, including beginner's guides, questions and answers, tips, and tutorials.
  • CoinDesk. CoinDesk’s Learn Center provides educational content on cryptocurrencies and the broader blockchain ecosystem.
  • Consensys.net. Consensys.net's Knowledge Base includes a helpful Blockchain Glossary for Beginners.
  • Ethereum.org. Ethereum.org provides a wide range of content related to Ethereum, ranging from introductory to advanced.
  • Gemini Trust Company's Cryptopedia is a free platform designed to help individuals understand cryptocurrencies.
  • "The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment Professionals." A paper by Matt Hougan and David Lawant published by the CFA Institute Research Foundation. While written for professional investors, the paper isn't overly technical and provides a good overview for other audiences, as well.
  • Investopedia. Investopedia's goal is to simplify complex financial information, and the site includes both educational content and news coverage on cryptocurrency-related developments.
  • Wikipedia. Wikipedia's decentralised content model is often mentioned as an inspiration for DeFi, and the site does an excellent job explaining crypto-related concepts. 

 

is a portfolio strategist for Morningstar.

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