Help with defining some of the terms we commonly see

Author: Chris P. Bacon

Fri Feb 15 2019

If you are just starting out you are probably hearing a bunch of words that sound like things you probably should know, but there doesn't seem to be a simple explanation for what those terms mean. Here are a handful of terms that I ran into early on... I will do my best to provide reasonable explanations.

Cryptocurrency
You probably wouldn't be reading this if you had no idea what Cryptocurrency is. Sometimes called cryptocoin, coins, virtual currency, etc... They all imply the same thing. They are currency that has no physical form. It exists purely in electronic format, and is all protected and passed around using encrypted data.
Cryptocurrency has no government or central registry or anything back them up. The value of any coin is determined entirely by consensus. Which is another way of saying, everyone agrees that it's worth this much. How this much is determined is where the exchanges come into play. See further down. The first of these types of currency to really take off and more or less gave birth to the whole phenomenon is Bitcoin. That thing got so popular so fast, and got so expensive so fast, that many people believed that it would be the central currency for the world before long. And it still might, someday. But in my opinion that is not very likely.

What is true, however, is that because there is no government or central authority, cryptocurrencies may out last other types of currency.

Blockchain
For this, I will directly cite Wikipedia:
"The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block"

If you still don't understand this, I understand why. Even to a nerd like me that sounds like gobbledygook. So here is a totally layman's explanation: Blockchain is the digital, distributed, and decentralized ledger underlying most virtual currencies that's responsible for logging all transactions without the need for a financial intermediary, such as a bank. In other words, it's a new means of transmitting funds and/or logging information.
The blockchain is a ledger, no different than what accountants use to track transactions. It is not just one program running off a server. It is distributed across the entire internet - the entire world. And every single transaction is written across the entire network. So no one can go making changes to things that have already occurred. The upshot of this is that it is the single most secure and foolproof ledger system ever created. And that is why it's perfect for handling transactions like cryptocurrencies. For the record, it is also used for a variety of other sorts of transactions that are totally unrelated, like retail loyalty programs, digital IDs, copyright protections, etc...

Wallets
Are pretty much exactly what they sound like. They are a single place to hold your coins. You can gather coins in different accounts all over the internet, but you still want to have a place to keep them.
Wallets can be held on private home computers, on exchanges, mining pools or in some cases, just an account that does nothing but maintain a wallet for you. In any event, you can have any number of wallets for any number of coins. The most important thing to understand is that they are not interchangeable. Each wallet is specific to a particular coin. If you deposit, say, DOGE, in a BTC wallet, your coins will be lost in cyberspace.

Mining
Mining is a process in which people can claim coins as they are created, without having to purchase them. They let their computers to the work for them. The simple explanation for how this works is that a new coin is released into the blockchain, and miners use software to find the coin. Their software then does some of the blockchain ledger work, and as compensation receive part of the coin. Once the entire block is finished, the coin goes to the owner.

This is how the blockchain works, really. All the miners out there are doing all the actual processing. It is how the system is powered.

There is a serious problem with mining as it is today, unfortunately. You'd think that it sounds like a great idea to set up a computer that is idle anyway, and just let the processor chug along solving blocks and earning you money. The problem is that the amount of power required to do this sort of processing is REALLY high. Especially when you consider that the rewards are so little. In order to even get a large enough stake in a mining operation, you need a very powerful processor. Which is why the typical processor in your laptop is nowhere near powerful enough.
Most mining rigs link multiple processors together - and not normal CPUs. They use GPUs. Graphics processors. Those are much faster and much more powerful than a typical CPU. They are also more expensive. They also run VERY hot. They also suck up a lot of electricity!

The obvious downside to all of this is that it costs more for the rig and the electricity than you are able to earn mining the coins. So unless you invest in a REALLY powerful rig, you are wasting your money, not making money.

Altcoin
Many of the larger better known coins are Bitcoin, Litecoin, Etherium, Doge, etc... But there are others. 100s of others, in fact. All those other coins, or alternate coins, are Altcoins.

Companies or individuals create these new coins for all sorts of reasons. Sometimes just to prove that they can. Sometimes because they want to raise capital for their company, but can't get themselves publicly traded. This is very similar to a company having publicly or privately traded stocks, it's just easier and less expensive to get off the ground. The more people own their coin, the more capital the company has to spend in growing themselves.

Exchange
Exchanges are exactly what you think they are. You've heard of the stock market, I'm sure. The big exchanges on the US stock market are the NYSE (New York Stock Exchange), and NASDAQ. Those are the central locations where people can buy and sell stocks. Most transactions take place in the form of "I will give you X amount of US Dollars for X amount of stock shares."

This is precisely what Crypto exchanges are. Only they are WAY smaller. They are also all over the place. And they usually don't have a physical location like stock exchanges. They don't need one. There are 100s if not 1000s of them. They trade anywhere from 10 or 20 to 100s of different coins. And much like stock exchanges, they usually allow their trading pairs to always match up with one of the big coins. So whatever you are trading must be paired with something like Bitcoin, or Etherium, or Litecoin, etc... One of the big ones. You are usually not able to trade between two low-value altcoins.

This is the place where the value of any coin is determined. As people buy more of a coin, the price goes up. As people sell them off, the price goes down. And that is pretty much the entirety of how cryptocurrency prices fluctuate. One other fun thing about these exchanges... They never close. There is no "after hours" trading. They are on 24/7 every day.

Fork
A fork in a coin occurs when somehow a duplicate block occurs for the same transaction, and now there are 2 that are identical. This is clearly a problem, because only one of them can be correct.

Faucet
Faucets are apps or sites that will give you small amounts of coin for free. Usually all you have to do is perform some simple task to prove you are human. There is a full explanation in a full article already written on this site.