Crucial Blockchain Phrases for Any Investor
When investors first dive into the world of blockchain investing, they quickly learn that there are a lot more technical terms than on the normal market.
These terms can prove challenging to grasp, and a lack of understanding sometimes frustrates new crypto enthusiasts.
But there is no reason for that.
Understanding the various terms of the cryptocurrency market is important. And not understanding them shouldn't dissuade you from participating in a multibillion-dollar market.
In order to help new investors get their bearings, we put together this “Top Crypto Terms” article.
With this article, you'll be introduced to three of the most important terms in the blockchain space.
Whether you're looking to become a serious blockchain investor or you just want to have some great new technical terms to flash at the next family gathering, this email was meant for you.
Blockchain Term #1: Smart Contract
It usually isn’t long before a new digital currency investor stumbles on the term “smart contract.”
Essentially, a smart contract helps individuals exchange money, goods, or information without having to use a middleman. Smart contracts allow for exchanges to be transparent and fair.
And today, we can use smart contracts to create a world defined by simple and fair exchange.
Let’s look at an example.
Say you’ve just signed the lease to a new apartment.
According to that lease, on the first of every month, you owe $1,000 for the apartment.
In a world without smart contracts, paying this bill would be a hassle.
You’d have to write a check and mail it. If your rent is late, the landlord has to deal with the tricky issue of getting a late fee. All of that is unpleasant.
With smart contracts, you wouldn't have to deal with any of it.
If you and your landlord entered a smart contract saying you will pay that much on a certain date, as soon as that date comes around, the smart contract would allow for that money to be taken directly from your account and delivered to the apartment complex.
For the renter, this removes a lot of hassle. For the rental company, it could prevent late fees and track down multiple tenants. And there is another benefit.
Say you want your security deposit back at the end of the renting period. That security deposit could be held in the smart contract, untouchable to both you and your apartment complex, until the end of your lease.
Now, the application I just explained is a fairly basic one.
In fact, smart contracts can be used for a lot more than just this reason.
They can be used to make supply chains more efficient, returning an item automatically if something goes wrong during the shipment. They can be used in financial contracts to make sure one side doesn't get cheated.
In this way, smart contracts could change the world. Now on to our next term...
Blockchain Term #2: Mining
While many investors will never become digital currency miners themselves, it's still important to know what digital currency mining is.
Well, without digital currency miners, many of the current cryptocurrencies on the market wouldn't be able to function. This includes the world's most famous digital currency, Bitcoin.
These digital currencies rely on a validation method known as Proof of Work, or PoW.
Here's how it happens.
In order to verify the millions of transactions that could be taking place on the Bitcoin blockchain, digital currency miners work to solve algorithms.
When they solve an algorithm, the latest transaction is added to the blockchain.
The digital currency miners do this because they get a “block reward” in the form of Bitcoin.
Early digital currency miners could have made a fortune mining Bitcoin.
Today, it is a bit harder, since the algorithms that need to be solved have gotten more complex. This means miners have to invest more in their task.
All that said, there would be no Bitcoin without the miners.
Today, many blockchains are trying to move past the miner model. This includes Ethereum, whose team is working to launch a different transaction validation method called Proof of Stake (PoS).
You can read more about Proof of Stake in our exclusive Ethereum resource page.
Blockchain Term #3: The Hard Fork
The final crucial term any digital currency investor should know is “hard fork.”
Hard forks are when changes are made to a blockchain's code that result in a whole new version of that blockchain.
This happens because the old version of the code is no longer compatible with the newer version. They are dramatically different and should be treated as such.
This is important for digital currency investors because hard forks sometimes present the opportunity for free income.
To explain this, let's look at Bitcoin Cash. Bitcoin Cash was the result of a hard fork of the Bitcoin code.
Leading up to the hard fork, the Bitcoin community was torn. They were unsure how to deal with a major issue impacting the Bitcoin network: block size and scaling.
A large portion of the Bitcoin community wanted to attempt a less drastic fix to the problem.
A smaller portion of the community wasn't satisfied with this approach. So changes were made, and the result was a new Bitcoin, Bitcoin Cash.
But here is where things get tricky. All investors who held Bitcoin before the creation of Bitcoin Cash could have gotten Bitcoin Cash for free.
Well, even though Bitcoin Cash and Bitcoin are dramatically different digital currencies, they still come from the same root, and investors would have both.
This paid off handsomely for Bitcoin investors, who were given free Bitcoin Cash depending on where they were storing their Bitcoin tokens during the fork.
That's all we have for this week's email. If you'd like to continue to expand your digital currency knowledge, make sure to check out our digital currency resource pages.