Guide to Crypto world: everything you need to know
Today, more and more people are actively attracted to the cryptocurrency industry. This is partly due to the global economic crisis of 2020 and partly due to the gradual involvement of big business in this area. However, even those familiar with cryptocurrencies for a long time can't always understand how this or that technology works or what some financial term means. To help solve this problem, we've compiled our own guide to the cryptocurrency world with detailed explanations of each aspect.
Figuratively, the entire crypto industry can be divided into two parts: technological and financial. The first one ensures the very existence of crypto projects and their functioning. The second part is responsible for attracting investors and their money, which allows both developers and investors to earn.
It is a technology for storing and updating data by decentralizing it to multiple servers. The information is stored in blocks that are linked together and cannot be hacked or changed unilaterally. This enables the creation of reliable databases for the long-term storage of information. They are most often used to create a cryptocurrency.
Some blockchains are open, allowing anyone to view the history of transactions or updates. Others are closed, providing additional anonymity for their users.
Validators are those who assist in making a particular blockchain network work. They must have their own server with 24/7 access to the Internet or rent one from some company. The server hosts the software designed to keep the blockchain running. The validator only needs to set it up properly, launch it, and check it from time to time. The validator is rewarded each time a new batch of digital coins is released on the network. His reward is higher than the delegate's.
The validator also gets voting rights, though. Voting is used to make major changes to the entire blockchain network. All cryptocurrency owners whose coins are not traded on an exchange at the time of voting are entitled to vote. In most cases, if a delegate gives his or her coins to a validator, the delegate's vote becomes the validator's vote.
A delegate is a person who is engaged in depositing his digital coins to a validator for staking. He has no ability to use them but receives a small percentage to keep the blockchain network running.
These technologies allow the transfer of digital coins, tokens and NFTs from one blockchain ecosystem to another. Also, the term usually refers to platforms (games, exchanges, etc.) that can be accessed from a computer as well as from a smartphone and tablet.
Know your customer (KYC)
The user identification procedure is performed by various means such as sending an SMS to a mobile number, photographing the ID card, calling a cell phone, etc. KYC is mandatory for all financial institutions. Recently, state regulators started requiring KYC procedures for users of cryptocurrency exchanges as well.
A cryptocurrency wallet is a way of storing digital information that allows you to access cryptocurrency in a particular blockchain. Each wallet has two types of keys: public and private. A public key is visible to everyone and is used to send digital coins to you. A private key allows access to funds and is used to send money anywhere.
Cryptocurrencies are divided into two types:
- Custodial is when the personal keys and their backup are not kept by you but by the developer with whom you opened the wallet. It can be compared to opening a bank account at a certain bank: you can regain access to your money if you lose your password. But hackers can break into the bank system and access your money.
- Non-custodial is when you keep personal keys. Hackers must personally hack into your computer or cell phone to steal the money in such a case. But if you lose or forget the key, access to the funds will be lost forever.
A smart contract is a computer program that executes agreements between the signatory parties. Just like in a conventional contract, a smart contract has multiple parties, the object of the agreement, and the terms and conditions that all signers agree to fulfill. However, unlike a conventional contract, it is written in a programming language. The advantages of smart contracts are:
- Autonomy. Once you execute the agreement, you no longer need lawyers or attorneys to dispute it in court or monitor the fulfillment of obligations. If a smart contract includes a service fee agreement for delivery of goods, then the money is automatically transferred to the courier as soon as the goods are delivered to the customer.
- Speed. Smart contracts can be created for routine business operations like payment automation, energy transactions (thereby removing intermediaries between power plant owners and the end consumer), registration of property owners, etc.
- Security. By registering a smart contract in the blockchain network, the document becomes fully protected from theft, hacking, or alteration. Its physical integrity is also guaranteed as the contract copies are distributed throughout the network, so the document will remain intact if one or more servers are destroyed.
- The main disadvantage is that it cannot be changed once a smart contract is concluded. This requires the programmer who drafts the documents to be very careful when writing all the conditions.
Hash rate is a measure of the power of the mining equipment. The higher it is, the faster the equipment will create new digital coins. Knowing the hash rate of your equipment, you can roughly estimate how much cryptocurrency you will earn in a certain amount of time. You can do the calculations on your own or using an online calculator.
Metaverse is a constantly working digital space where people interact with each other. Simply put, Metaverses can be compared to online games, where all players are on the same terrain and can play, communicate, buy, work, etc. Metaverses are accessed through VR, a virtual reality technology.
A cryptocurrency exchange is a place where you can buy, sell or exchange one cryptocurrency for another. In some exchanges, withdrawal of cryptocurrency into fiat money is available. All exchanges can be divided into two types: decentralized (DEX) and centralized (CEX). The first type of exchanges allows exchanging cryptocurrencies from one owner's wallet to another, which provides a full-fledged transfer of funds. However, its disadvantage is the low transaction speed ranging from several hours to several days. Centralized exchanges conduct exchanges much faster, which is very convenient for traders. But all credits are only credited to your virtual account on that exchange. If the exchange goes bankrupt or is hacked, you can lose all your money.
A liquidity pool is a place where you can exchange one type of crypto asset for another. Liquidity pools can be compared to regular currency exchanges, but with one difference. In case of currency shortages, banks deliver the missing money directly to exchangers, while liquidity pools are replenished through private individuals, i. e., liquidity providers.
Launchpads are platforms that hold fundraising events to finance crypto projects. Their peculiarity is that projects are sponsored by ordinary users, not by professional investors or funds. In return for investing funds, sponsors receive guaranteed allocations to ICOs, i.e., a certain percentage of digital coins that they can buy. The main disadvantage lies in the conditions since you need to invest from $10 thousand to get good allocations.
Presale is the process of selling a certain amount of tokens or digital coins for a new project for initial fundraising. It is usually held for a limited number of investors or venture capital funds.
An ICO (Initial Coin Offering) is a form of raising investment by issuing a limited number of digital coins or tokens. The process itself is similar to an IPO or initial public offering. The main disadvantage of ICOs is the lack of regulation: both professional development teams with well-defined development strategies and scammers, whose main task is to make as much money as possible, can attract investments.
Some teams practice Pre-ICO, the early process of selling tokens or digital currencies at a discounted price.
IEO (Initial Exchange Offering) is a new way to attract investments by issuing a limited number of digital coins or tokens. It replaced the ICO, the main disadvantage of which was riskiness as no one could guarantee that the new assets were not fraudulent. With IEO the release is carried out only after the verification of the project by the centralized exchange, where the launch is made. The advantage of IEO is the verification by more reputable projects, while the disadvantage is the inability to trade on other exchanges and the high launch costs.
IDO (Initial Dex Offering) is the newest way to attract investments by issuing a limited number of digital coins or tokens. Unlike similar ICOs (where there is a high chance of getting scammed or choosing a clearly weak startup) and IEOs (where new assets are issued and traded on only one exchange), IDO offers to place them on decentralized exchanges. The main difference is the lack of clear placement rules, so different projects place their assets under different conditions. The way of raising capital has also changed: if an ICO usually involves a specific digital coin used to acquire new assets, an IDO involves a trading pair that includes an altcoin and a stablecoin. Thus, crypto assets immediately start to be traded on the exchange, while in ICO and IEO it takes time before they can be exchanged.
This is a way to link an asset from real life such as precious metals, real estate, raw materials, etc. with the crypto industry. This is done by creating a token for a particular asset, which is placed either on a crypto exchange or on the website of the token owner. Given that there is no legal regulation of tokenized assets yet, it is only the owner of the token that guarantees that along with the purchase of the token you get the right to an asset. Therefore, only well-known and large companies issue tokens secured with real assets. Usually, small companies and young projects are not trusted.
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