Shifting Financial Marketing into Gear
Top Crypto and Digital Asset Definitions Every Financial Services Marketer Should Know
It’s hard to fathom that little over a decade ago, people were asking, “what does crypto mean?” What was once a fringe currency theory has skyrocketed into a mainstream juggernaut.
Bitcoin first introduced its platform and ICO (initial coin offering) in 2009. By October 2021, the crypto global market cap topped $2.6 trillion. In addition, a recent Skynova survey found that 32% of all U.S. businesses have adopted crypto as part of their payment structure.
Like it or not, virtual currency and blockchain technology growth is impossible to ignore.
Top Crypto Glossary of Terms
An address is a string of numbers and characters that represent the location of a wallet. Imagine a mailbox on your property with a house number. The mailbox represents the wallet that can send and receive cryptocurrency. The property represents the specific location on a blockchain on which that wallet (or mailbox) resides. The address is like a house number connected to the mailbox (wallet) and property (blockchain).
An altcoin is any cryptocurrency coin other than Bitcoin (BTC). The name is derived from “alternative” and “coin.” As of January 2022, Altcoins make up approximately 40% of all cryptocurrencies.
This original cryptocurrency (BTC) has developed momentum since its inception in 2009. However, its growth chart resembles a roller coaster ride experiencing fluctuations from as low as $30,000 to as high as $60,000 in value. Although it remains among the highest value cryptocurrencies, it is still widely considered a volatile asset.
Bit rot is the process by which data degrades as storage media or hardware ages through wear and tear. Bit rot can also describe a scenario where data becomes inaccessible because the tools to access it no longer exist.
In a decentralized network, distributed ledger technology (DLT) stores data in “blocks,” chained together in sequential order. These records are immutable, with no single person retaining control. Once data is entered, it cannot be reversed. This way, transactions are permanently recorded and can never be altered, deleted, or destroyed. This is the foundation on which cryptocurrency exchanges and trading is built.
In the same way central banking systems have historically removed currency from circulation to alter its purchasing power, digital assets can also be removed from circulation. For example, a Cryptocurrency is “burned” when sent to a wallet address that can only receive but not send transactions. In this way, tokens are permanently removed from circulation.
Coinbase is a trading platform, wallet service, and crypto exchange that facilitates purchasing, selling, and exchanging of over 100 cryptocurrencies. Coinbase hosts over 89 million users with over $278 billion in assets.
A virtual or digital currency that uses blockchain technology and a decentralized distributed ledger mechanism. Because cryptocurrency is decentralized and secured by the process of cryptography, its features are inherently anti-counterfeit and cannot be manipulated by a government or centralized authority.
Decentralization centers on the principle of democratization of assets and validations. For example, in a traditional banking system, the bank is a central authority that monitors, records, and facilitates transactions between parties.
In a decentralized system, people transact directly with one another in a network where several authorized validators, or nodes, authenticate and approve the transaction. In other words, a middleman or central figure is unnecessary to the process.
One might liken distributed ledger technology to a digital democracy, where there is power and safety in numbers. In a classic centralized network, such as a central bank or financial institution, a central authority serves as a record keeper communicating transaction reporting to each participant.
Conversely, in a decentralized network, each node generates its own records, distributed amongst each node of the network that processes every transaction. Each node votes on those transactions to arrive at a consensus using standardized mechanisms such as proof of authority (PoA), proof of work (PoW), or proof of stake (PoS). The ledger is updated, with each node holding an identical transaction record.
Digital Gold has two different meanings, so we’ll cover both for clarity. Crypto, like Bitcoin, is sometimes referred to as digital gold because of its ability to provide a store of value like actual gold. Digital Gold Currency refers to crypto backed by physical gold reserves stored in insured vaults purchased online through an e-wallet.
Ethereum is a blockchain-powered platform featuring a nexus of decentralized apps (dApps), Smart Contracts, and its native cryptocurrency called ether (ETH). Currently, it is second in volume only to Bitcoin. The secure nature of Ledger Distribution and Smart Contract mechanisms lend this platform its stability, allowing Ether (ETH) to accumulate value.
A crypto exchange is a digital marketplace, much like a brokerage platform, where you can access the tools to purchase and sell digital currency.
Fiat is a currency whose 1) value is backed by the stability of its government and economy, 2) is declared legal tender, and 3) is not backed by gold. Before 1971, most currencies’ value was established by the gold reserves that backed them. As a result, Fiat is vulnerable to inflation.
Blockchain technology and ledger distribution are genuinely democratic. When the miners of a network (users) decide to change the rules or functionality of blockchain memory, they must all unanimously agree to its changes. When consensus is reached, and a rule is changed, a “fork” in the road is created to indicate a change in protocol or digital format. The software is updated to reflect the changes.
Ethereum quantifies the cost of performing a transaction on its platform as “gas.” Gas fees and prices are paid in Ether (ETH) and designated in fractions called gwei.
A hash is a unique string of letters and numbers of a fixed length. It is a way of encrypting information for security and speed in computation. Transactions are taken as an “input” and run through an algorithm that takes an input of variable length and creates an output of fixed length called a hash. This makes it nearly impossible to reverse engineer for theft or fraud.
A hot wallet is a type of digital storage that enables users to store, send, and receive tokens. Hot wallets use private keys to sign transactions and verify ownership of blockchain addresses. It is connected to the internet, which poses a greater risk for cybersecurity and theft issues than cold storage or custody methods.
Mining is tantamount to the mathematical computation that nodes, or auditors, do to verify the legitimacy of transactions. Miners can earn tokens and fees for solving complex mathematical equations using a proof of work consensus algorithm. It was invented to keep users of virtual currency platforms honest and prevent fraud. Using a mining rig, crypto miners are rewarded with tokens for verifying blocks of transactions, which are added to the blockchain by solving “hashing” equations.
NFTs (Non-Fungible Tokens)
Money, including cryptocurrency, is “fungible,” which means it is identical and can be traded for similar items of the same value. For example, one bitcoin can be traded for another, dollars for dollars, and so on. NFTs (Non-Fungible Tokens) differ in that they have a unique digital signature. One NFT (Non-Fungible Tokens) cannot be traded for another, even if they are a similar type of product, like artwork, a music recording, an event ticket, or a video clip.
PEER TO PEER
In a decentralized system, peer-to-peer is the exchange of digital assets or currencies between individuals without the intercession of a central authority.
Like a password, a private key is a secret number used to identify and verify ownership and control of tokens which helps protect users from theft and fraud.
PROOF OF AUTHORITY (PoA)
Typically, this happens through a proof of work or proof of stake algorithm, but those methods are lengthy and criticized as non-scalable. Proof of authority is considered a more efficient variation of Proof of Stake. In place of users putting up tokens as collateral, users “stake” their identity and reputation.
PROOF OF WORK (PoW)
Proof of work requires miners to solve complex mathematical problems to validate transactions on a blockchain and prevent fraud. It requires tremendous energy to drive this consensus mechanism which is why Proof of Stake and Proof of Authority were adapted to overcome the inefficiency of (PoW).
PROOF OF STAKE (PoS), STAKING
Created as an alternative to the energy and cost consuming Proof of Work mechanism, in a proof of stake currency holders offer up a certain amount of their own tokens or coins as collateral for the opportunity to become a validator. This is called staking.
Next, qualified validators, or miners, are selected randomly to validate transactions. The proof of stake mechanism greatly reduces the energy and effort required to validate transactions and keep platforms secure.
Named after its creator, Satoshi Nakamoto, Satoshi represents the smallest unit of Bitcoin. Proportionally speaking, 100 million Satoshi’s make up one Bitcoin. Because cryptocurrency increases in value over time, it is necessary to assign units that make up a coin so that it can be broken up into smaller units of measurement to accommodate smaller transactions. Similar to how a U.S. dollar can be broken up into variations of quarters, dimes, nickels, and pennies.
A Stablecoin is a cryptocurrency that derives stability from its backing by a commodity or reserve asset such as the U.S. dollar or gold. Stablecoin is gaining traction in the crypto community because it helps to offer a measure of stability compared to general cryptocurrency, which can experience wild swings in value.
Tokens are a variation of cryptocurrency that represents an asset, a store of value, an investment, or a purpose such as fundraising or crowdsourcing. They reside on their own blockchain. Where digital coins are a form of money, tokens can be assigned a price or value.
A virtual currency is a unit of digital value issued privately by its developers that is largely unregulated and completely decentralized. Virtual currencies increase the velocity with which value can be traded since it happens online and doesn’t require a centralized authority to transact. Unfortunately, as a result, this also increases threats such as fraud, theft, or hacking.
These terms are standard, while some will shift over time and financial marketers must remain aware of the shifting trends. Learn more about crypto marketing services and be sure to subscribe to the Engine 39 Newsletter to receive our monthly crypto marketing tips and trends.
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