Explore additional crypto concepts and reference common terminology
In this bonus module, we cover additional cryptocurrency topics that beginners often ask about, and provide a handy glossary of common terms. The topics include stablecoins (a key part of the crypto ecosystem), NFTs (non-fungible tokens), and DeFi (decentralized finance). Finally, a comprehensive glossary is provided to clarify the many acronyms and jargon in the crypto space.
This module serves to broaden your exposure to important concepts in the cryptocurrency world and also functions as a reference section for terminology you'll encounter as you continue your crypto journey.
Stablecoins are a type of cryptocurrency designed to maintain a stable value, typically pegged to an external asset like a fiat currency (most commonly the US dollar). Unlike Bitcoin or Ethereum, which can experience significant price volatility, stablecoins aim to provide the benefits of cryptocurrencies without the price fluctuations.
One of the first and most widely used stablecoins, pegged 1:1 to the US dollar. Tether claims to be backed by reserves including cash, commercial paper, and other assets.
A regulated stablecoin backed by fully reserved assets, issued by Circle and Coinbase. USDC is audited regularly to verify its dollar backing.
A stablecoin issued by Binance in partnership with Paxos, also pegged to the US dollar and backed by reserves.
A decentralized stablecoin that maintains its peg through over-collateralization with other cryptocurrencies, managed by the MakerDAO protocol.
These stablecoins maintain their value by holding reserves of the fiat currency they're pegged to. For every stablecoin issued, there should be an equivalent amount of fiat currency held in reserve. Examples: USDT, USDC, BUSD.
These stablecoins are backed by other cryptocurrencies, typically over-collateralized to account for price volatility. For example, $150 worth of Ethereum might be locked as collateral to issue $100 worth of stablecoins. Example: DAI.
These stablecoins use algorithms to automatically adjust supply based on demand, attempting to maintain a stable price without direct collateral backing. These are more experimental and have seen notable failures, such as the collapse of Terra USD (UST) in 2022.
Stablecoins serve several important functions in the cryptocurrency ecosystem and are increasingly finding use cases in traditional finance as well:
Stablecoins provide a "crypto-dollar" that traders use to move in and out of volatile positions without converting back to fiat currency. This allows traders to quickly respond to market conditions without the delays and fees associated with bank transfers.
Example:
If Alice sells Bitcoin during a market crash, she might put the value into a stablecoin like USDC to hold her funds in crypto without worrying about further price drops – essentially "parking" in a stable value until she decides to reinvest.
Stablecoins enable cheaper and faster cross-border transactions compared to traditional banking systems. Sending USDC to someone abroad is typically quicker than a wire transfer and often involves lower fees, especially for larger amounts.
Example:
A business in the US can pay a supplier in Southeast Asia by sending USDC, which arrives in minutes rather than days, with transaction fees of just a few dollars regardless of the amount being sent.
Stablecoins are foundational in decentralized finance (DeFi) applications. They serve as the base currency for lending, borrowing, and yield farming activities, allowing users to earn interest or take loans without exposure to cryptocurrency volatility.
Example:
Bob deposits USDC into a DeFi lending protocol like Aave or Compound, earning interest paid by borrowers. The interest rates are often higher than traditional bank savings accounts, while still maintaining the stability of a dollar-pegged asset.
While stablecoins offer many benefits, they also come with certain risks that users should be aware of:
Stablecoins bridge the crypto and traditional finance worlds by representing fiat in digital form. They combine the stability of traditional currencies with the speed, accessibility, and programmability of cryptocurrencies. As the crypto ecosystem continues to evolve, stablecoins play a crucial role in making digital assets more practical for everyday use and financial applications.
For more information on stablecoins, visit Investopedia's guide: "Stablecoins: What They Are and How They Work"
NFTs, or Non-Fungible Tokens, are unique digital tokens that represent ownership of a specific item or asset, verified on a blockchain. Unlike cryptocurrencies such as Bitcoin or Ethereum, which are fungible (meaning each unit is identical to every other unit), NFTs are unique and cannot be exchanged on a one-to-one basis.
The term "non-fungible" is key to understanding NFTs: it means that each token is one-of-a-kind and has distinct characteristics that make it different from any other token. This uniqueness is what makes NFTs suitable for representing ownership of specific items, whether digital or physical.
NFTs are created ("minted") on blockchain networks, with Ethereum being the most common through its ERC-721 and ERC-1155 standards. Other blockchains like Solana, Flow, and Tezos also support NFTs.
Each NFT contains metadata that defines what it represents, such as a link to a digital image, video, or other content. The NFT is governed by a smart contract that defines its properties, including ownership rights and transferability.
Many NFTs are programmed so that the original creator receives a percentage (typically 5-10%) of the sale price each time the NFT is resold on the secondary market. This creates ongoing revenue for artists and creators.
NFTs are typically bought and sold on specialized marketplaces like OpenSea, Rarible, and Foundation. These platforms allow users to browse, bid on, and purchase NFTs using cryptocurrency.
While digital art and collectibles brought NFTs into the mainstream, the technology has a wide range of potential applications:
The most well-known use of NFTs is for digital art and collectibles. Artists can create and sell their work directly to collectors, with blockchain verification ensuring authenticity and provenance.
Notable Examples:
Here's what an NFT might look like on a marketplace like OpenSea, showing the artwork, metadata, and transaction history:
A unique digital artwork from the CryptoArt collection. This piece represents the fusion of traditional art concepts with blockchain technology.
Blue
Abstract
Uncommon
0x1a2b...3c4d
1234
Ethereum
10%
0.5 ETH
While NFTs represent an innovative technology with many potential applications, there are important considerations to keep in mind:
While the initial NFT boom of 2021 has cooled, the technology continues to evolve and find new applications. The concept of verifiable digital ownership that NFTs enable is likely to persist and develop in various industries, from entertainment and gaming to supply chain management and identity verification. As the technology matures, we may see more practical, utility-focused applications emerge beyond the speculative art and collectibles market.
For more information on NFTs, visit Britannica's guide: "NFT: Non-Fungible Token"
Decentralized Finance, or DeFi, is an umbrella term for blockchain-based financial services that operate without traditional intermediaries like banks, brokerages, or insurance companies. Instead, DeFi applications use smart contracts on blockchain networks to enable peer-to-peer financial transactions and services.
DeFi aims to create an open, permissionless, and transparent financial system that anyone with an internet connection can access, regardless of their location, wealth, or status. This represents a significant shift from traditional finance, which relies on centralized institutions and often has barriers to entry.
Self-executing code that automatically enforces the rules and conditions of an agreement. Smart contracts eliminate the need for intermediaries by automatically executing transactions when predefined conditions are met.
DeFi applications are built on blockchain networks, with Ethereum being the most prominent. Other networks like Binance Smart Chain, Solana, and Avalanche also host significant DeFi ecosystems.
Digital wallets like MetaMask, Trust Wallet, or Coinbase Wallet that allow users to interact with DeFi applications directly from their browser or mobile device.
Cryptocurrencies designed to maintain a stable value, often pegged to fiat currencies like the US dollar. Stablecoins are widely used in DeFi for lending, borrowing, and as a store of value.
| Feature | Traditional Finance | DeFi |
|---|---|---|
| Accessibility | Requires bank accounts, credit checks, identification | Open to anyone with an internet connection and crypto wallet |
| Intermediaries | Banks, brokers, clearinghouses | Smart contracts and protocols |
| Operating Hours | Business hours, weekdays | 24/7, 365 days a year |
| Transparency | Limited visibility into operations | Fully transparent, verifiable on blockchain |
| Control | Institutions control your assets | Users maintain control of their assets |
The DeFi ecosystem encompasses a wide range of financial services and applications. Here are some of the major categories and prominent examples:
DEXs allow users to trade cryptocurrencies directly with one another without a central intermediary. Most DEXs use automated market maker (AMM) models, where liquidity is provided by users who deposit their assets into liquidity pools.
Popular DEXs:
These platforms allow users to lend their crypto assets to earn interest or borrow assets by providing collateral. Interest rates are typically determined algorithmically based on supply and demand.
Popular Lending Protocols:
Yield farming involves moving assets between different DeFi protocols to maximize returns. Liquidity mining refers to earning additional tokens as rewards for providing liquidity to a protocol.
Examples:
DeFi platforms can create stablecoins pegged to fiat currencies or synthetic assets that track the value of real-world assets like stocks, commodities, or indices.
Examples:
DeFi insurance protocols provide coverage against smart contract failures, hacks, or other risks in the DeFi ecosystem.
Examples:
Bob's DeFi Journey:
This example illustrates both the potential benefits of DeFi (higher yields, composability between protocols) and the risks (if ETH's value drops significantly, Bob's collateral could be liquidated). It also demonstrates how DeFi allows for more complex financial strategies than would be possible in traditional finance for most individuals.
While DeFi offers exciting possibilities, it also comes with significant risks that users should be aware of:
Despite the risks, DeFi represents a significant innovation in financial services. By removing intermediaries and creating open, programmable financial protocols, DeFi has the potential to increase financial inclusion, reduce costs, and enable new financial products and services that weren't possible before.
As the technology matures and more robust security practices are implemented, DeFi could evolve into a more stable and accessible financial system that complements or even transforms traditional finance. However, users should approach DeFi with caution, thorough research, and a clear understanding of the risks involved.
For more information on DeFi, visit Coinbase's guide: "What is DeFi?"
The cryptocurrency world is filled with specialized terminology, acronyms, and jargon that can be confusing for newcomers. This glossary provides definitions for common terms you'll encounter in the crypto space.
A string of letters and numbers serving as a destination on a blockchain for payments, similar to a bank account number for cryptocurrency. It's derived from a public key.
Example: 1BoatSLRHtKNngkdXEeobR76b53LETtpyT (a Bitcoin address)
Any cryptocurrency that isn't Bitcoin. The term is short for "alternative coin."
Examples: Ethereum, Litecoin, Dogecoin, and thousands of others
A collection of transaction data that is added to the blockchain. Each block contains a reference to the previous block, creating a chain of blocks (hence "blockchain").
A distributed ledger technology that records transactions across many computers in a way that ensures security, transparency, and immutability. It's the underlying technology for most cryptocurrencies.
Keeping cryptocurrency offline to protect it from hacking or theft. Hardware wallets and paper wallets are common forms of cold storage.
The method by which a blockchain network agrees on which transactions are valid and should be added to the blockchain. Common mechanisms include Proof of Work (PoW) and Proof of Stake (PoS).
The practice of secure communication techniques used to protect information. In cryptocurrency, it involves techniques like hashing and digital signatures to ensure only the rightful owner can access their coins.
An organization represented by rules encoded as a computer program that is transparent, controlled by its members, and not influenced by a central authority.
The principle of distributing power away from a central authority. In cryptocurrency, it means the network is run by many nodes/users globally rather than a single company or government.
A peer-to-peer cryptocurrency exchange that operates via smart contracts, letting users trade directly from their wallets without a central operator or order book.
Examples: Uniswap, SushiSwap, PancakeSwap
Financial services and applications built on blockchain technology that operate without traditional financial intermediaries like banks or brokerages.
Government-issued currency like USD, EUR, or JPY. Often used in crypto contexts to mean "traditional money" as opposed to cryptocurrency.
A split in a blockchain network, creating two separate versions of the blockchain with a shared history. Forks can be "soft" (backward-compatible) or "hard" (not backward-compatible).
A blockchain transaction fee. On networks like Ethereum, users pay "gas" (denominated in ETH) to compensate miners/validators for processing their transaction. Gas fees can fluctuate with network demand.
The first block of a blockchain. For Bitcoin, the genesis block was created in January 2009 by Satoshi Nakamoto.
A fixed-length string of characters generated from a variable-length input using a mathematical function. Hashing is fundamental to blockchain security and mining.
A slang term in crypto meaning "Hold On for Dear Life" – i.e., keep holding your coins and don't sell despite volatility. Originated from a misspelling of "hold" in a forum post, it's now an investing meme to urge confidence in long-term value.
Verification process required by regulated exchanges where users must provide identity documents. It's an anti-money laundering measure. Non-KYC platforms (like some DEXs) typically don't collect this info.
A collection of funds locked in a smart contract, used to facilitate trading by providing liquidity to a market. Liquidity pools are fundamental to many DEXs and DeFi applications.
The process by which certain blockchains (like Bitcoin) create new coins and validate transactions. Miners use computational power to solve cryptographic puzzles (Proof of Work), and the winner updates the blockchain and earns a reward.
A unique digital token that represents ownership of a specific item or asset, verified on a blockchain. Unlike cryptocurrencies, each NFT has distinct characteristics and cannot be exchanged on a one-to-one basis.
A computer that participates in a blockchain network. A node typically keeps a copy of the blockchain and helps relay and verify transactions. Some nodes (miners or validators) also add new blocks to the chain.
A secret alphanumeric key that allows you to access and spend your crypto. It should be known only by you – anyone with your private key can control your funds. Often represented by a 64-character hex string or kept as a 12-24 word seed phrase for wallet backup.
Example: e985...3fe (never share this!)
The cryptographic key that you can share with others, often used to generate your address. It works with the private key in a keypair – the public key allows others to verify your digital signatures (to confirm transactions were signed by your private key).
The smallest unit of Bitcoin, equal to 0.00000001 BTC. Named after Bitcoin's creator, Satoshi Nakamoto.
Self-executing code deployed on a blockchain that runs when certain conditions are met. They enable complex applications like DeFi and NFTs. For instance, a smart contract can be programmed to hold funds in escrow and release them automatically when a date or condition is reached.
A cryptocurrency designed to maintain a stable value, usually pegged to fiat like USD. It achieves stability through various mechanisms (reserve backing or algorithms).
Examples: USDC, USDT, DAI
The process of participating in a Proof of Stake blockchain by locking up tokens as collateral to help secure the network and earn rewards. Staking is an alternative to mining that requires less computational power.
A "coin" often refers to a cryptocurrency that is native to its own blockchain (e.g., BTC on Bitcoin, ETH on Ethereum). A "token" usually refers to a crypto asset that uses an existing blockchain (e.g., ERC-20 tokens on Ethereum like LINK or SHIB).
A software or hardware tool that stores your crypto keys (not the coins themselves, which live on the blockchain) and lets you send/receive crypto. Can be "hot" (online) or "cold" (offline hardware). It manages your addresses and signing of transactions.
A vision of the internet built on decentralized protocols, typically incorporating blockchain technology, cryptocurrencies, and token-based economics. Web3 aims to reduce reliance on centralized platforms and give users more control over their data and digital assets.
Slang for an entity (individual or organization) that holds a very large amount of a cryptocurrency. Whales have the ability to influence the market with their trades due to their size.
Example: Someone with 30,000 BTC would be a Bitcoin whale
The practice of moving crypto assets between different DeFi protocols to maximize returns. Yield farmers often chase the highest yields across various platforms, which can involve complex strategies and multiple tokens.
This glossary is designed to be a reference that you can return to whenever you encounter unfamiliar terms in your cryptocurrency journey. The crypto space is constantly evolving, with new terms emerging regularly, but understanding these fundamental concepts will provide a solid foundation for navigating the ecosystem.
Remember that learning about cryptocurrency is an ongoing process. Don't be discouraged if you don't understand everything at once – even experienced crypto users are constantly learning about new developments and concepts in this rapidly changing field.
In this bonus module, you've explored additional important concepts in the cryptocurrency ecosystem:
These bonus topics complement the core modules of the course, providing you with a broader understanding of the cryptocurrency ecosystem and equipping you with the knowledge to explore these areas further if they interest you.