Ecosystem Basic Expressions
Cryptocurrency: is a new type of asset which uses the blockchain technology. As of mid 2021, there are more then ten thousand cryptocurrencies, but not all are created equal. Some try to be currencies, some are entire ecosystems and others are mere tokens of these ecosystems. All of it is explained in the sections below.
Blockchain: is a Distributed Ledger Technology. Meaning it's a decentralized system to store and transfer value and information without needing central authorities, by keeping a (mostly) complete record of transactions since the very first transaction in a sequence of "blocks" with grouped transactions (hence the name, chaining blocks: Blockchain). Bitcoin was the first implementation of such a technology but now there are many variations and different implementations of it, with different characteristics, levels of decentralization and consensus algorithms (such as Proof of Stake and Proof of Work).
Bitcoin: is the first cryptocurrency, ever. It was created in 2009 by someone aliased Satoshi Nakamoto as a peer-to-peer payment system. It spawned a plethora of other 1st generation crypto, such as Litecoin and Bitcoin Cash. It continues to be the largest crypto to date by market cap. It has a hard cap to how many bitcoins there can be, at 21 million.
Satoshi: is the first alias of the creator. But it's also a denomination of the smallest fraction of Bitcoin one can have. Which is 0.00000001 BTC.
Lightning Network: is a new protocol built over Bitcoin's blockchain, as a layer 2 scaling solution (see bellow). It works by creating bidirectional channels between users for fast and inexpensive transactions. Its development started in 2015, and it's still ongoing (although you can already use it for some time now).
Ethereum: is the first cryptocurrency to implement generalized smart contracts to the blockchain technology. It's currently (2021) the second largest crypto by market cap, and has thousands of tokens in its ecosystem.
ERC20: is the main Ethereum standard today for tokens. There are other standards out there, such as ERC21 and ERC721, but the vast majority of tokens use ERC20. For the everyday user, it's not an important thing, but the term may pop up now and then in your searches.
Cardano: is a third generation cryptocurrency smart contract platform that focuses on solving three main issues with the industry today: Scalability, Interoperability and Sustainability, in a peer-reviewed research way. In the section bellow, I'll present more Cardano-specific terms.
IOHK / IOG: is the company name that develops Cardano.
Charles Hoskinson: is IOG's CEO.
Altcoin: is the term used for any cryptocurrency that is not Bitcoin itself, including all of its forks and clones.
Smart Contract: is basically a digital contract that can execute terms automatically based on algorithms and conditions programmed within it. It allows, for example, the construction of decentralized exchanges, lending platforms, voting systems, identities systems and much, much more. Any set of actions that has clear terms of execution can be turned into a smart contract, and evolve into a whole ecosystem.
Token: is a type of cryptocurrency that represents an asset or a specific use on the blockchain. It exists within a specific blockchain. Meaning, there are Ethereum Tokens, Cardano Tokens, NEO Tokens, etc. Some tokens co-exists in more then one blockchain project, but this is not so common as of 2021 for a majority of tokens.
ICO: stands for Initial-Coin Offering. They are similar to IPOs (Initial Public Offering), which also serve to raise capital to develop an idea/company. ICOs do it by selling tokens, IPOs do it by selling company stocks.
NFT: stands for Non-Fungible Tokens. Fungibility means having no difference in trading a good or an asset for another individual good or asset of the same time. Like trading currencies: there's no difference to trading 50 dollars, if you're going to get another 50 dollars back. They represent the same value.
Now, non-fungibility means the good or asset is unique, like works of art, or a ticket to a specific seat in a Madonna concert (for instance). When you combine non-fungibility with blockchain and smart contracts, you get NFTs. Which is perfect for expanding the concept of non-fungibility to the digital realm.
Mining: is the process of solving a hard mathematical problem in order to be granted the right to produce a block.
Every time a node produces a valid block, all the other miners start solving the next mathematical problem. For a full understanding of this mechanism and its details without requiring a mathematical background, I recommend this video from 3Blue1Brown.
The more computational power a node (or a group of nodes, called mining pool) has, the more chances it has to "discover"/write a block. Because of this, there is an incentive to acquire large amounts of equipment to mine, which has contributed to components shortage and very large energy consumption. Bitcoin alone at one point consumed as much energy as the whole country of Argentina.
Network Fees: is the fee one pays to icentivize block production. This fee is obligatory in most blockchains, at least in practice. On some blockchains, like Bitcoin's and Ethereum's, you can set the amount of fees you want to pay in order to be put higher or lower on the list of transactions trying to go through. Over on Cardano, the fees are somewhat fixed (currently about 0.17 ADA per transaction), but configurable by protocol parameters, and can be a little bit higher if you want to send more tokens or execute contracts in a single transaction.
Ecosystem Advanced Expressions
Layer 2: is a term used to describe any protocol that settles transactions outside the blockchain, while keeping it fast, secure, and preferably with lower cost. Imagine that the blockchain itself is a first layer for transactions, which maximizes transparency and decentralization. But often times, specially with Bitcoin and Ethereum (as of mid 2021), the first layer simply doesn't have enough capacity to support all of the transactions simultaneously, leading to high fees (5~40 USD for each transaction) and slow transactions. There are different solutions being developed that can be called a Layer 2 scaling solution, like Bitcoin's Lightning Network, Cardano's Hydra, and Ethereum's Rollups for example.
Test Net: term used to describe a test blockchain, usually with "testNet" tokens which hold no value at all. It serves to test new updates, code, smart contracts or software without risking real life funds.
Main Net: term used for the actual blockchain being used in the day-to-day. When updates/forks are concluded in here, it's for real.
Hard Fork: is when the blockchain splits, never returning to become one again. Essentially creating another blockchain which share the same history as the original, but going to a completely different way (in terms of transactions, and sometimes also in terms of software rules and system parameters). Although, in order for both chains to survive, they need to be supported by block producers (usually miners) and by the community overall. Usually, one chain eventually dies — but sometimes the secondary project keeps on living. (for example, Bitcoin Cash, Bitcoin Gold, Ethereum Classic, Banano, Dogecoin, etc etc).
Soft Fork: is when the blockchain goes through an update, but without forking into a whole other blockchain. It's much more similar to a software update. Sometimes older versions are compatible, but lacking some functionalities. Other times, all the nodes are obligated to update in order to keep transacting.
Node: is how a software running the protocols of any given blockchain is called. It can be block producing nodes (such as miners, and stake pools) and normal full-nodes (normally wallets, or oracles) who only check if the transactions are valid (but doesn't try to produce any) by keeping record of the whole blockchain.
Oracle: External entity who focuses on gathering data from the real world. It can be prices of goods, indexes, fact-checking, supply chains, and much more. As long as it can be verified by someone (with varying degrees of decentralization), it can be put in an Oracle.
DAO: is the acronym for Decentralized Autonomous Organization. It both means a specific organization — which you can learn more about in here — and a broader term to define any decentralized organization that is autonomous.
DeFi: is short for Decentralized Finance. It's a term to describe decentralized organizations focused on finance solutions, like lending & borrowing, exchanges, tokenized assets, bundled investment assets, etc.
Proof of Work: is the first blockchain consensus algorithm invented, also known as PoW. Meaning, it's how the blockchain selects who is going to write the actual transactions of the network. It works by letting anyone write a transaction, as long as it follows some ledger rules while also solving a hard mathematical problem (this whole process is called mining). Without these conditions, the transaction is invalid and is not accepted by other nodes.
ASICs: is a specialized hardware, optimized to process a set of computations (in this case, mining). Not all blockchains require ASICs to mine it. Ethereum, for instance, uses GPU mining. Some blockchains use CPU mining.
Proof of Stake: is another consensus algorithm (also known as PoS) similar to Proof of Work, but instead of using computational power to decide who's going to write a block at any given time, it uses staking power. Stake is any quantity of a token expressing a monetary value.
There is a lot of variation on the details of how this works in different Proof of Stake blockchain protocols, but generally it's a group of people delegating (automatically or manually) their tokens (Stake) to Stake Pools, which are the miners equivalent from PoW, and these pools then write the blocks. The frequency in which they do so is directly proportional to how much stake they have delegated to them.
In other words, it's abstracting the concept of buying loads of hardware and spending energy to mine a coin, into simply staking the value directly. The main advantage of PoS over PoW is that it is much more energy efficient (usually more then a thousand times more efficient). Which makes it possible to do a lot more things, like processing more complex contracts, or running parallel chains simultaneously, etc.
Protocol Parameters: is a set of parameters which determines the characteristics of a given blockchain project. There are many parameters that can be configured (through hard or soft forks, with or without a voting/governance aspect), like block size, transaction fees, PoW algorithm, ledger rules and much, much more.
Cardano: is a third generation cryptocurrency smart contract platform that focuses to solve three main issues with the industry today: Scalability, Interoperability and Sustainability. It's meant to be a platform for other tokens and systems to thrive in an open and decentralized environment, with governance, scalability and programability tools built-in into the protocol itself. Every line of code of the Cardano protocol was first theorized in peer-reviewed papers, then scrutinized by programmers and other companies in order to create high-assurance code standards.
ADA: is the name of the first and main token of Cardano. It's meant to represent the blockchain itself, and functions like any other token. You can use it to send and receive transactions, smart contracts can interact with it, it's also used as one of the incentives for running Stake Pools. A good parallel is: ADA is to Cardano what ETH is to Ethereum.
Staking: is the act of delegating your ADA (your Stake). The delegator stakes their ADA to a Stake Pool in order to earn rewards, and help secure the blockchain through Cardano's Proof of Stake implementation — Ouroboros.
Stake Pool: is an entity that accepts delegation in order to increase its Stake. It does so in order to produce more blocks, as described in the Ouroboros section. The stake pool's main job is to secure the network and write transactions to the blockchain. To differentiate themselves, the pools has some tools at their disposal and metrics they must oblige to, such as:
• being Mission-Driven Pools — meaning they choose to do more than the bare minimum, like developing things for the community, or, like us at AIDa Pool, evangelizing Cardano, making educational content and/or donating part of the profits to a good cause.
• Pledge: Is the amount of "skin in the game" a pool has. Meaning, how much ADA the pool operators are signaling as the minimum amount they're going to keep staked at the pool. If they keep less ADA as the pledge amount that they have set, the pool automatically stops producing blocks (hurting both rewards for the Pool Operators, and Delegators). It also lightly influences how much rewards the pool gets (vs other pools with lower pledges). This factor is influenced by a network parameter.
• Performance: is a metric that goes from 0 to 100%, and measures how efficient the pool is being at minting blocks. If they produce every block they get the chance to, the performance is 100%. Every missed opportunity to produce a block decreases this measure. The higher, the better, as it directly affects rewards.
• Saturation: is a parameter determined by how much stake there is at the pool. It goes from 0% to infinity. The more stake a pool has, the more it saturates. If it goes above 100%, it hurts the pool's rewards for the delegators. It act as a limit to how big a pool can get, in terms of stake size. The actual ADA amount a pool can have before it saturates is correlated to the K parameter, learn more about it bellow.
The Static Fee is a fixed amount of ADA, that then goes to the pool. The minimum amount a pool can set for the Static fee is 340 ADA. (But it can be as high as they want).
The Margin Fee is a % of the amount of ADA that goes to the pool, after the Static Fee is applied. It can be as low as 0%, and as high as 100% (leaving no rewards to the delegators). Generally, this value ranges from 0% to 5% at most pools. We, at AIDa Pool, set these two fees to the minimum at first, learn more about our fee structure here.
Bare in mind that in a year the difference between a margin fee of 1% and 3%, if you've staked 10k ADA with the pool, is about 11 ADA in rewards (515 ADA vs 504 ADA respectively).
Rewards: are the incentive for the delegators to choose a pool that operates with at least minimum conditions (trustworthy and good performance), and for the pools themselves to operate well. The rewards are generated through a decreasing inflation model (similar to Bitcoin's), in which new ADA is slowly added to the economy through rewards, but capped at 45 billion ADA in total, to ever exist. The network fees that are paid to make a transaction are also added to the rewards from the pool (which is how the network will finance itself when the inflation ceases to exist). Rewards are distributed and calculated as follows:
• First there is a calculation of how many blocks the pool has produced. The more blocks they produce, the larger the rewards.
• From here, 20% goes to the Treasury.
• Then the pool gets their cut, with first discounting the Static Fee, then the Margin Fee.
• What's left is for the delegators themselves, distributed proportionally by how much relative stake they have in the pool. (So if your stake represents 10% of the pool size, your rewards will be 10% of the delegators rewards).
• The annual return should average to about ~5%.
Ouroboros: is the name of Cardano's Proof of Stake consensus algorithm. It works by dividing the world into epochs (which lasts for 5 days each). Then, for every epoch, it'll randomly select some pools to manage the network during these 5 days (based on the size of each pool. the more stake a pool has, the more chance it gets to write new blocks). The pools' responsibility during this time is to secure the network, write transactions to the blockchain, calculate rewards from the last epoch, and assign the list of pools for the next epoch.
It's all done in a way where one group doesn't fully control any process, nor can it exploit the process without being cast out.
a0 paramenter: influences how much of a factor pledge is.
K parameter: states how many fully saturated pools there can be at the same time. Meaning it directly influences the "maximum" ADA there can be delegated to a pool without sacrificing rewards. It started at 150, now it is set to 500. In the future it's going to be set to 1000, meaning there'll be at least a thousand pools producing blocks every epoch.
Network fees: states how much ADA is needed to make a transaction on Cardano. It's currently set to be ~0.17ADA per transaction (but it may be a little higher, if you send multiple tokens or execute contracts in a single transaction, since it's actualy a per byte price).
Treasury: is a decentralized system for financing the protocol. The money stored in here can be used to develop all sorts of projects, voted on Catalyst by ADA holders.
Catalyst: is Cardano's voting center, funded by the decentralized Treasury. Currently it's a mobile app with a connection to the blockchain, but in the future you'll be able to vote directly from your wallet. In here, you can vote on a large amount of proposals: network changes, projects to be developed or marketing endeavours for example. Anything can be funded through here, as long as it's approved by the community.
Hydra: is Cardano's layer 2 protocol. Contrasting most other blockchains' Layer 2 solution, Hydra was thought from the ground up to work as seamlessly as possible with the main protocol. It's still not implemented, but there are already some peer-reviewed papers and tests done for real-world performance. It works by using the Stake Pools as additional hubs for faster, cheaper transactions with overall more throughput for the network, with the more pools you add to it. It's been stated that each Stake Pool is capable to add up to 1000 transactions per second with Hydra implemented.
Marlowe: is Cardano's visual programming language. It's meant for people that have good ideas for smart contracts, but don't necessarily have deep coding skills without sacrificing basic security standards. It's also good to build prototypes on.
Alonzo: is Cardano's upcoming upgrade to smart contracts. It's already happening in phases (with a testnet already in place being used), and is scheduled to be concluded by Q3 of this year.
Wallets are software and/or hardware equipment used to manage your keys. To use any cryptocurrency or blockchain technology, you always have two keys:
Public Key: is used as your address/alias. Meaning, its purpose is to identify the wallet (not necessarily linking it to a real-world entity, hence, most public keys are pseudo-anonymous — the moment someone links the public key to an existing entity, be it a person or a company, it's not anonymous anymore).
Private Key: is basically your password. It enables you to move funds from the wallet, and also enables you to access the wallet itself. Most private keys are encrypted in some form or another, generally into a sequence of 12~25 words. So if anyone knows these sequence of words, they gain full access to your wallet.
A wallet can exist in 2 forms: cold and hot.
A cold wallet is a wallet that doesn't connect to the internet, thus being unable to being externally compromised (via malware for instance). It includes paper wallets and hardware wallets. And also software wallets, but ONLY IF you put it in a device that doesn't connect to the internet (a dedicated notebook or a Raspberry Pi for example):
• A paper wallet is just your private keys (usually encrypted with a sequence of words, and/or with a QR code to facilitate transactions) printed, or written down, to a piece of paper, metal or other resistant materials.
• A hardware wallet uses a physical piece of hardware to store and encrypt your private keys, and it's the most secure wallet type.
• A cold software wallet stores the private key in your mobile or desktop device. Remember to keep them offline, or else it isn't a cold wallet anymore.
A hot wallet is when you use a software wallet in a device that can connect to the internet (and because of that, it's easier to use in the day-to-day). This wallet also stores the private key in your device, which can be mobile or desktop.
There's also browser wallets, which can act as both hot and cold wallets. Meaning, some browser wallets store your encrypted private keys in the cloud or in your device (hot), and some browser wallets just act as an interface, but the private keys themselves are stored separately. Some browser wallets offer both solutions.
Yoroi: is a light-weight browser and mobile wallet for Cardano.
Daedalus: is a full-node software wallet (meaning, it stores the whole blockchain on your device), which can be used in conjunction with a paper and hardware wallets. Currently, only a desktop version is available. There's also a Flight version that is meant for early tests of new features. Eventually, all features move to the main Daedalus software.
Metamask: Probably the most common Ethereum wallet. It's a browser wallet.
Trezor: is a hardware wallet device brand for Cardano and a lot of other cryptos in general.
Ledger: is also a hardware wallet device brand for Cardano and a lot of other cryptos in general.
Exchange: is a platform where people can trade assets. The traditional exchanges trade only normal investment assets (bonds, stocks, ETFs, etc), but there are a few who trade crypto as well. Nowadays, there are a plethora of exchanges specialized in cryptocurrencies. Beware though, not all exchanges are created equal, some are more trustworthy than others. I recommend checking coinmarketcap website to check the best exchange for you.
Some of the highest volume exchanges you'll encounter in there: Binance, Coinbase, HuobiGlobal, Kucoin, Kraken. For Real (BRL) currency, the biggest exchanges are: Binance, Mercado Bitcoin and NovaDAX.
CEX: stands for Centralized Exchange. Meaning it's an exchange controlled/managed by a company.
DEX: stands for Decentralized Exchange. Meaning, it's an exchange that uses smart contracts to transact the trades between users. Sometimes there is an entity responsible for the exchange's maintenance, so they are, in practice, semi-decentralized.
Not your keys, not your coins: is a common phrase within this community. It means that you should take great care with your private keys. If you don't control your private keys, you don't actually control your cryptocurrency (in case the exchange gets hacked, or your account from the exchange gets hacked). Always try to keep most of your crypto in a wallet, not on the exchange.
KYC/AML: stand for Know Your Customer and Anti-Money Laundering respectively. They are standards for governments' compliance to avoid black market and illegal practices getting in contact with exchanges and ICOs.