Cryptocurrency Terms: A reference for business

Blockchain and digital assets have only been around since 2009. It is understandable, therefore, that many who are new to the asset class feel overwhelmed when they come across some of the strange - and often quite technical-sounding - terms being thrown around by crypto experts.

As we've discussed elsewhere, we don't believe crypto requires any kind of specialized knowledge or skills. All that's needed is a little bit of vocabulary. This list has been prepared to make learning these words and phrases easy.

For ease of reference, we have grouped the terms into five categories: crypto basics, custody, decentralized finance (DeFi), and technical terms.
Crypto Basics
A cryptocurrency is a digital asset the ownership and transaction records of which are stored on a blockchain. Not issued by a central authority, cryptocurrencies are classed by HMRC as "Exchange Tokens."

Cryptocurrencies are by definition decentralized. This means that they can be traded between users without an intermediary (P2P). They can also be bought or sold on cryptocurrency exchanges. Common examples of cryptocurrencies are Bitcoin (BTC), Litecoin (LTC), and Ripple (XRP).

The simple way to define blockchain is as a distributed list (ledger) of cryptocurrency transactions. Unlike bank ledgers, which are stored on centralized databases, blockchain records are distributed across, and validated by, large global networks of independent users and "miners" (see below).

Blockchains get their name from the "blocks" that make up their fundamental structure. Each block is composed of transaction data, a timestamp, and a hash of the previous block. New blocks reinforce previous blocks and are confirmed by a consensus of network participants via some pre-established protocol.

The term "token" is typically used to refer to digital assets that are developed on top of existing blockchain networks. Unlike cryptocurrencies, tokens may be issued by central authorities, such as companies carrying out fundraising through some form of decentralized finance (DeFi - see below). Tokens can be issued to represent any of a number of things, including discounts on a company's products, shares in a company, or even the whole ownership of some real-world object.

Bitcoin was the first digital asset issued on a blockchain network. As a result, it is the first cryptocurrency. Today, Bitcoin is considered to have two primary use cases: to store value ("digital gold") and to make payments ("means of exchange").

Bitcoin, like other cryptocurrencies, can be divided into smaller units. Each unit, called a Satoshi, is equivalent to a one hundred-millionth (0.00000001) of a single bitcoin. Satoshi (or Satoshis) are named in honor of the mysterious "inventor" of Bitcoin, Satoshi Nakamoto.

The term Altcoin is frequently used to refer to any cryptocurrency or token other than Bitcoin. The term is falling out of fashion as new applications of DeFi rise in popularity and as Bitcoin loses its perceived dominance among cryptoassets.

A stablecoin is a token which has a stable value in relation to some other asset. Most well-known stablecoins, like Tether (USDT), are pegged to the value of national currencies. Others are backed by commodities, such as precious metals, or have equal values to other cryptocurrencies..

Most stablecoins are collateralized, which means some financial institution, company, or organization maintains custody of backing assets. Non-collateralized stablecoins, like DAI are a more decentralized option. DAI maintains a stable value not through the purchase and custody of a backing asset, but through algorithms that control the market supply of tokens.

Ethereum is a blockchain network which issues the second-most popular cryptocurrency in terms of market cap, Ether (often called Ethereum). Beyond its role as a ledger of transactions, the Ethereum network facilitates the implementation of smart contracts.
Through the smart-contract functionality, Ethereum has become the most popular network on top of which to issue "upper level" tokens.

The developers of these tokens try to comply with ERC token standards, such as ERC-20 (used for most fungible tokens like utility tokens and stablecoins) and ERC-721 for NFTs (non-fungible tokens). Tokens that comply with these standards can be more easily integrated with various crypto tools, such as wallets.

A cryptocurrency exchange will likely be your gateway into the blockchain world. Exchanges are businesses that allow users to purchase cryptocurrencies or tokens in exchange for fiat currency, to trade these digital assets for other digital assets, or to withdraw funds as fiat currency.

Decentralized exchanges (DEXs) also do exist. These exchanges facilitate the peer-to-peer trading of cryptoassets. Since these organizations only exist on-chain, they can be only be used to trade crypto for crypto, not for fiat.

Non-fungible token (NFT)
Mostly simply put, a non-fungible token is a digital representation of a unique asset. The basic technical structure and issuance of an NFT resembles that of other tokens but for certain differences in the code that gives the individual token its identifiability. In other words, while one unit of a cryptocurrency is indistinguishable on a surface level from another unit of the same cryptocurrency, no two NFTs are the same.

Non-fungible tokens are still in their early days, but they are already being used to facilitate the transfer of ownership of things like the rights to art, music, and digital media. New, interesting, applications of this technology are appearing in the media on a nearly daily basis.

White paper
When Satoshi Nakamoto first announced Bitcoin, it was through the publication of a white paper. Teams that are launching cryptocurrencies and tokens have followed in this tradition to this day. Initially, white papers were semi-technical ethical manifestos that outlined the infrastructure behind the proposed crypto asset and its idealistic purpose.

Over the last few years, though, white papers have morphed into something more akin to a prospectus, providing information relating to the project's potential profitability and chance for adoption. These documents can be quite useful for investors, even well after the crypto asset's initial issuance (through an ICO, STO, or other event). That said, before token purchase, it is recommended to also extend one's research to less biased information sources.

Fiat currency
'Fiat' is the economic term that members of the crypto community generally use to refer to non-blockchain currencies that are issued by national governments. Fiat currencies by definition are not backed by any kind of asset, such as gold or silver.

Mining is the process by which cryptocurrency or token transactions are confirmed by network participants on a blockchain. Consequently, this is also the process by which cryptocurrency is issued ('minted').

Most mining today follows the proof-of-work protocol (defined below) and involves the trading of computing power for coins or tokens. Mining is also the process by which a blockchain network becomes more secure with time.

Now an acronym, HODL came into existence as a misspelling of the word "hold," and has since become a meme. Today, there exists a movement of "Hodlers" who follow the "hold on for dear life" philosophy, never selling assets even in extremely bearish markets.
A cryptocurrency wallet is a device, service, or program which stores the public and private keys or crypto users. These keys are used to sign off on the smart contracts (see below) that govern crypto transactions and other blockchain functions.

Several kinds of wallets have been in use since the initial issuance of Bitcoin in 2009. These include paper, software, and hardware wallets. Our team of security experts would be happy to help you consider your options.

Public key
Anybody who wants to send assets to your wallet will need to know your public key.. Think of this key as your "coordinates" on the blockchain network. An alphanumeric string, your public key can safely be shared with other crypto users.

Private key
You can think of your private key as the "password" to your wallet. It is necessary to enter this alphanumeric code in order to carry out crypto transactions. You should never share your private key with anybody.

A seed phrase is a 12-word list that can be used by a cryptoasset user as a kind of backup. Should the user be blocked out of their wallet owing to device loss, damage, or user error, the seed can be entered into the software to regain access. Also called a "recovery" seed, this list of words should be copied by hand onto a piece of paper and stored in a secure location

Paper wallet
In the early days of cryptocurrency, users would often print out their private and public keys to a piece of paper. This paper would be referred to as a paper wallet. For security reasons, this "hot" form of key management is rarely used today.

Software wallet
Perhaps the mostly commonly-used crypto custody solution, software wallets enable users to store their keys on the cloud. The software wallet user is enabled to access their assets through a traditional username and password, instead of having to constantly keep track of alphanumeric public and private keys. Software wallets with two factor authentication are not uncommon.

While the backend of these systems is generally quite secure, there always exists the risk of vulnerabilities on the client side, such as malware or user error. Software wallets are usually considered to be a "warm" form of key management - relatively safe but not the best way to store large sums long-term.

Hardware wallet
Large sums of cryptocurrencies and valuable cryptoassets are generally recommended to be held on a hardware wallet. These are physical devices - protected by advanced cryptography - that enable users to store wallet keys offline. This form of custody is considered to be "cold" storage.

Hardware wallets are frequently a part of enterprise-grade crypto custody strategies, with backup keys stored in bank vaults or other secure locations. These devices are also popular with retail users and usually feature easy-to-use digital displays.

Multisignature wallet
A multisignature (multisig) wallet requires the input of multiple private keys to sign and send transactions. Blockchain transactions are irreversible, so the creation of a multisig wallet serves as an excellent safeguard against user error.

Multisig wallets are frequently created and maintained by businesses that want to ensure that funds are never under the control of just a single person: if one stakeholder in a company is unable to submit their private key, other stakeholders remain able to access funds.
Decentralized Finance
Decentralized Finance (DeFi)
Decentralized Finance can be best defined as a movement that aims to integrate blockchain technology into the financial industry in such a way that removes barriers for individuals and inefficiencies for businesses. DeFi is often used as an overarching term to refer to all the various applications of distributed ledgers.

Just as cryptocurrencies enable person-to-person transactions, DeFi is intended to remove the middlemen from as many financial services as possible. As of today, decentralized finance has been applied to fundraising, lending, payments, donations, retirement planning, and overall has proven that blockchain is about much more than just bitcoin.

Utility Token
HMRC defines utility tokens as assets that are issued by a company which has committed to accepting the assets as payments for goods or services in the future. These tokens are frequently issued as a form of fundraising or as a kind of digital coupon and loyalty reward.

Important to note is that even though a token might have a stated use case that makes it seem like a utility, it can still be used in such a way that makes it subject to capital gains taxes. HMRC - along with other tax authorities in other jurisdictions - pays attention to how the token is used, not to its stated purpose in the white paper or other documents.

Initial Coin Offering (ICO)
Initial coin offerings are fundraising events during which utility tokens are offered for sale to investors. ICO projects usually accept major cryptocurrencies in exchange for newly-minted tokens, and certain projects also accept fiat currencies.

ICOs are usually public events but private token sales are not uncommon. Many jurisdictions have put regulatory frameworks in place for ICOs and billions of dollars have already been legally raised by businesses all over the world through these token distribution events.

Security Token
According to HMRC, security tokens are cryptoassets which entitle the owner to particular rights or interests in a business, such as a share in ownership, in profits, or in the future repayment of a sum of money. While these tokens are recognized as securities in many jurisdictions, the crypto community is still waiting for more clarity regarding the regulation of this new asset class.

Security Token Offering (STO)
Security token offerings are fundraising events during which security tokens are offering for sale to investors. This new form of crowdfunding requires the fulfillment of much more stringent compliance requirements than is required for utility token sales (ICOs). Best estimates indicate that about a billion dollars have been raised during STOs so far, and the crypto investment world expects regulatory frameworks for these events to be implemented in a number of jurisdictions quite soon.

Know-your-customer (KYC) is a mandatory process in many jurisdictions during which financial service providers establish the identity of clients. Virtually all crypto-fintech services - including exchanges, lending platforms, and crowdfunding events (ICOs, STOs) - require KYC identification.

This part of onboarding can be relatively complicated when it comes to onboarding businesses to services like exchanges.Often, the compliance departments at these exchanges respond slowly to client requests and onboarding can take weeks. Here at AlterCap we can accelerate this process and facilitate ultra-fast onboarding to our broker partner, ALTERXE.

Compliance with anti-money laundering (AML) laws is a big part of the KYC process. AML compliance usually involves checking any submitted identity information against various kinds of blacklists.

Similar to AML compliance, anti-terrorist funding (ATF) laws are a part of the KYC process that compares client identity information to sanctions lists.
Transaction fee
The vast majority of blockchains charge a small fee to anyone carrying out a transaction on the network. The money collected from these fees rewards miners for confirming transactions. On most blockchain networks, the transaction fee is determined through supply and demand and many wallets give users the option to set their own fee. If a user sets a fee below the market rate, their transaction is very likely to take longer to process. A fee paid above the market rate may lead to the transacting being carried out more quickly.

The term gas refers to the fees charged on the Ethereum network to carry out a transaction or execute a smart contract (defined below). This is a payment in exchange for the network's computing power and is charged in ETH. Like transaction fees on other blockchain networks, rates are determined by supply and demand.

QR code
A QR code is a way that public keys are often visualized in order to facilitate easy crypto payments. Using any of a number of free online platforms, crypto users can create a QR code that represents their public key. Anybody can then scan that code with their crypto wallet and send funds to that key.
Technical Terms
Distributed Ledger Technology
Distributed ledger technology is the technical term most commonly used to describe blockchain technology. Some users of cryptocurrency argue that DLT is more broad than blockchain and can be used to refer to other forms of distributed storage of transaction data, including in the form of lists distributed across private networks.

Smart contract
A smart contract is an agreement between two or more parties that has been written as code and stored on a blockchain network. The code and network consensus allow for the automated settlement of contract terms and the distributed blockchain makes records permanent and publicly visible.

Cryptocurrencies like Bitcoin are the result of the execution of simple smart contracts. Platforms like Ethereum enable companies and organizations to carry out more complicated operations on blockchains. Innovations in this space are expected to automate much of the economy.

Proof-of-work (POW)
In any large network, it is necessary to have some kind of mechanism that keeps participants honest. Proof-of-work is a consensus algorithm on many blockchain networks that serves this purpose. In very basic terms, in order to carry out a transaction, the user must prove that they have the funds necessary.

On blockchain networks, this proof is provided through the validation of the transaction by other participants on the network, termed miners. On networks that use proof-of-work, the proof is found by comparing your transactional data to a hash, a process which consumes the validator's - the miner's - computing power.

Proof-of-stake (POS)
The above-mentioned proof-of-work protocol consumes enormous amounts of energy. Proof-of-stake creates a kind of 'virtual machine' where power on the network is not determined by actual computing resources, but by the number of tokens held by the miner.

A fork is any change in the basic code of a blockchain. Changes in this code alter how the transactions are validated on the network. There exist two kinds of forks: soft and hard. Soft forks are generally small changes to the protocol that do not change how even previous transactions would be validated. Hard forks, on the other hand, are not backwards compatible. They fundamentally change validation procedures.

Hard forks result in the issuance of a new token. Token holders will find two tokens - a new one and a "classic" one in their wallet. Sometimes, groups of people choose to continue to use the "old" network. Bitcoin Cash is a notable example of such a phenomenon.

If you are interested in exploring cryptocurrency diversification options for your business, we are here to help. We have helped dozens of businesses get started with Bitcoin and are almost certainly familiar with your jurisdiction and industry. You can contact us here.