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July 11, 2022

Top 15 crypto terms you should know

Crypto has many existing jargons, and new ones are always coming up. We understand it may be hard to keep up with terms used in this industry. However, some terms are more important than others and are essential in navigating the crypto world. Hence, we’ve selected the top crypto terms which we think are quite important to learn and hold on to 

Top 15 Crypto terms you should know

Airdrop

An Airdrop is a marketing stunt that involves the distribution of free tokens to the public. Airdrops are popular in crypto; most projects often use this tactic and even allocate a portion of their tokens to this end. Of course, not for free, as potential recipients will be asked to do some marketing, like a gig, a retweet, comments, likes, and shares across social media to boost the project’s popularity. 

Altcoin and Shitcoins

Altcoins are coins that are not Bitcoin or alternative coins to Bitcoin- including Ethereum. Yes, Ethereum is also an Altcoin. Bitcoin was launched in 2009, then in 2015, Ethereum followed suit, but then the number of coins and tokens has since multiplied- there are more than 19,000 cryptocurrencies existing today and many of which are expected to collapse. Most Altcoins are forked or created by improving existing cryptocurrencies like Ether and BTC.

So, what then are Shitcoins?

They are altcoins that can depreciate to the point of being worthless. Shitcoins do not solve problems and provide little value; their prices are often based on speculation, prone to scams, and are generally considered bad investments. Some Shitcoins have an infinite supply and are typically held for short-term gains, bought and dumped at intervals leading to sharp price movements.  At this time, tokens like SafeMoon, Dogelon Mars, Baby DogeCoin, Floki, and  Shiba Inu can all be considered Shitcoins.

  • All Shitcoins are Altcoins but not all Altcoins are Shitcoins

AMM

Automated Market Maker; an underlying protocol that powers decentralized exchanges and relies on mathematical formulas or algorithms to price assets. Unlike centralized exchanges, which need market makers like flovtec to provide liquidity and constantly quote buy and sell prices, AMMs automatically balance the liquidity pool, quoting the buy and sell orders. The underlying formula determines the price of assets based on the number of tokens in the pool.

DAO

Decentralized Autonomous Organization; DAOs are not governed by a central authority but by their members, with rules encoded as a smart contract on the blockchain. Anyone can join a DAO as they are completely decentralized, with a governance token giving DAO members voting rights in the network. Every DAO is different, with its own unique goals and objectives. DAOs allow strangers to collaborate and build projects together, using an open-source code that ensures transparency and almost eliminates the need for trust. Also, a number of blockchain companies like Uniswap have or are transitioning to DAOs.

The first DAO- “The DAO,” was launched in 2016 on the Ethereum network. Its objective was to eliminate investor manipulation and human error by automating decision-making using open-source code. Although, the DAO effectively died when its token was delisted from Kraken following the incidents of hacking- which led to millions in losses and subsequent disagreement among investors. The DAO, at the time of launch, had raised more than $150 million in Crowdsales.

Governance Token

These are crypto tokens that offer holders voting rights in a network. Most projects are launched as DAOs- with a decentralized governance structure where members have equal rights and vote on proposals to make decisions. 

Any token holder can utilize their token to make proposals like partnerships to build, products to develop, and budget spending. So, other holders can vote to determine the organization’s decision. Of course, the more tokens you hold, the more say you have in governance. DeFi projects like Curve, Compound, and Uniswap utilize CRV, COMP, and UNI, respectively, as their governance tokens.

HODL

Hold On for Dear Life; is an investment strategy that involves holding an investment for an extended period. There is a funny story around about the history of HODL-not HOLD. GameKyuub was a senior member of the Bitcoin forum launched by Satoshi Nakamoto to discuss bitcoin and questions around it. In December 2013, the half-drunk trader had mistakenly misspelled “Hold,” writing “I AM HODLING” instead. 

GameKyuub admitted that he is often at the losing end of trades and he was a bad trader, but at that time, he will hold on to his BTC.

BTC crashing, why am I holding? I’ll tell you why. It's because I'm a bad trader, and I know I’m a bad trader”. 

Afterward, "HODL" became a meme and spread all over the internet.

Liquidity

Liquidity refers to the ease with which an asset can be sold without affecting its market price. It is a good measure of the health of a market. Unlike real estate or rare artwork, which are more difficult to find buyers and hence tagged “illiquid,” digital assets like BTC and ETH can easily be sold as there is always a good level of interest in these tokens. 

Also, smaller tokens are generally illiquid, and executing trades with these tokens without a significant price impact is quite difficult. Hence illiquid tokens have larger Bid-Ask spreads- the difference between the lowest price a seller is willing to sell and the highest price a buyer is willing to purchase.

Liquidity is essential for traders as well as investors. For illiquid assets, you may not be able to exit at your desired price due to a lack of sufficient buyers and sellers, leading to high slippage - which occurs when there is a large difference between your preferred and final trade execution price.

Another term related to liquidity is liquidity pool

Liquidity Pool

This is a collection of funds locked in a smart contract to provide liquidity to DEXs. Decentralized exchanges use liquidity pools to provide liquidity which is essential to the crypto market. Without liquidity, the market or even DEXs are essentially dead. Unlike centralized exchanges, which rely on liquidity providers, DEXs depend on liquidity pools to provide liquidity automatically, reduce slippage, and eliminate illiquidity.

So how does it work? Users earn returns from transaction fees by depositing their crypto into liquidity pools, often termed yield farming. Once deposited, tokens can be easily traded at ease when users connect their wallets to a DEX. The price of the tokens is determined using automated market makers (AMM). 

Market Maker

This is a firm or individual who quotes the buy and sell price for a tradable asset to facilitate liquidity- also known as liquidity providers. This is primarily done on a centralized exchange like Binance and Coinbase. Market makers provide much-needed liquidity to sustain any crypto token, constantly buying and selling tokens regardless of market conditions. 

Like flovtec, a MM’s objective is not necessarily to make a profit but to provide the smallest Bid-Ask spread, achieve liquidity goals, fill up the order books, and ensure the overall health of the market to attract investors. 

Non-Fungible Tokens (NFT)

These are digital assets demonstrating ownership of art, music, and other collectibles stored on the blockchain. Unlike Cryptos, they are non-fungible, not divisible or interchangeable, and are simply a certificate of ownership. Although they may be considered illiquid, they are also a store of value and are often sold on NFT marketplace like OpenSea and Foundation. Almost any digital object can be minted on the blockchain as an NFT.

NFTs allow brands, artists, and organizations to connect with their audience uniquely, and they open up a lot of possibilities for the Metaverse. Cryptokitties and Cryptopunks built on Ethereum are some of the first projects which allowed NFTs to become mainstream.

Proof of Stake

A consensus mechanism that selects validators based on their holdings of a particular crypto token. Unlike proof of work, miners are replaced by validators who create new blocks and verify transactions. These validators are chosen by the amount of tokens they stake in the network- if they behave badly, they lose their stake. Proof of stake is energy efficient and requires potential validators to deposit a minimum stake in the network; for example, Ethereum requires validators to deposit 32 ETH into the contract amid other conditions. 

Proof of Work

A consensus mechanism that involves solving complex mathematical puzzles to verify transactions and create new blocks. In the proof of work method, which is employed by Bitcoin and Ethereum, miners compete to be the first to find a nonce, which is hashed to obtain a target block hash and earn the right to create a new block. They are often rewarded with BTC, which halves every four years.

Proof of work is arguably the most secure consensus mechanism as potential hackers will need to have an unfeasible 51% of the computational power to gain control of the network. Critics lament that Mining is energy-intensive, with a high-carbon footprint, and poses a threat to the environment.

Security and Utility Token

A security token is a digital representation of ownership of an asset or a company; used to raise funds. They may also be described as a digital form of traditional securities issued via an ICO. Every physical asset can be tokenized, including securities like shares, equity, and bonds, through a process of Tokenization. Security basically refers to any financial asset that can be traded and is regulated by a government agency, like the SEC in the US.

A Utility token, on the other hand, allows the holder to use or access a product or service; for example, Filecoin can be used to pay for file storage space. Utility tokens are different from security as they do not offer any form of ownership and are issued via a Token Generation Event (TGE). Other utility tokens are Golem, Siacoin, and Civic.

SHO

Strong Holder Offering; a fundraising mechanism where investors are chosen based on criteria like their activity in the network. In SHO, individuals who have strong hands and can hold on to tokens for longer periods are considered- they may have millions of dollars in transaction volume, active liquidity providers on a DEX, or held a competitor token for at least six months. SHO is a product of DAO maker- a launchpad for crypto projects 

Stablecoin

A cryptocurrency with lower volatility that relies on another asset for its value- this could be the US dollar, Gold, another cryptocurrency, or even the use of an algorithm to control supply. Stablecoins are meant to minimize the price volatility of crypto and provide a good entry point for new users. They are often pegged to the fiat US dollar so they can be traded 1 to 1. Fiat-backed cryptocurrency, USDT, has one of the largest market caps. 

Staking and Yield farming

Staking allows users to earn interest by locking up their crypto for a fixed period. It helps to secure the network, and users can stake using liquidity pools. Staking is also applicable in the proof of stake (POS) method of consensus, where potential validators are required to have a stake, and a fixed amount of crypto, to be chosen to verify transactions and create new blocks.

Yield farming is an investment strategy in DeFi that involves lending your crypto to generate returns. This crypto provides much-needed liquidity for DEXs and crypto lending platforms like compound and Aave. It may seem similar to staking, but in Yield farming, you provide two tokens to the liquidity pool, unlike staking, where you provide a single token.

Wrapping up

Thanks for making it this far! The list is by no means exhaustive; in subsequent posts, we shall highlight a few more terminologies that you will need to master and navigate the crypto space.

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