Crypto enthusiasts know the importance of knowing, by heart, some of the most important terms in this universe.
And if it’s true that the most basic ones are well assimilated, it could also been said that there are others that are not so ingrained. That said, we have prepared a list of 5 terms that we think you should keep in mind in order to master the world of cryptocurrencies.
Market Cap measures the relative weight of a particular cryptocurrency. It is calculated by multiplying its price with the total number of coins mined.
This formula has some volatility due to price changes, however, it is still a good indicator of a given cryptocurrency project’s performance. In other words, the higher the market capitalisation, the more likely the project is to be stable. Conversely, a low market capitalisation leaves the project more vulnerable to market fluctuations.
Cryptocurrencies can be divided into three market cap tiers. High capitalisation cryptocurrencies have a market cap above $10 billion. If the value of the metric does not exceed that amount, but is above 1 billion, we are dealing with a mid-cap cryptocurrency. Finally, if the market cap value is less than 1 billion euros, it is a low-capitalisation cryptocurrency.
A contract without intermediaries. This is how you can summarise Smart Contracts, which operate transactions automatically. All the conditions of the contract are fulfilled automatically and instantly without having to go through a bureaucratic process that could be long… and expensive.
Smart Contracts are unalterable, making each intervening party comply with what has been determined, and they are secure since they’re stored within the Blockchain, which has the ability to prevent fraud and ensures that these contracts are not lost.
PROOF OF WORK
Proof of work is a decentralized consensus mechanism in which each block is mined in the network by a group of individuals or nodes. It has this name because the probability of a block being mined increases with the amount of work used in this process.
In the extraction (hashing) of a block there’s a competition between ‘miners’ in order to solve, as quickly as possible, complex computational puzzles. Smart Contracts are unalterable, making each intervening party comply with what has been determined, and they are secure since they’re stored within the Blockchain, which has the ability to prevent fraud and ensures that these contracts are not lost.
If so, the extracted block is considered Proof of Work and the miner will receive their reward in the form of cryptocurrency.
PROOF OF STAKE
Proof of Stake (PoS) is a consensus mechanism used for blockchain validation. The PoS algorithm uses a selection process to find a node that will become the validator of a given block. This selection is done through factors such as the richness of this node.
In this system, blocks are built (rather than mined) by blockchain nodes that must provide a certain amount of cryptocurrency as part of their stake. The higher the stake, the more likely those nodes are to be selected.
When selected to build a certain block, the node checks whether the transactions within it are valid, and if they are, it will add the block to the blockchain. In return, this node will receive transaction fees associated with future transactions from this block.
Since blockchain is an open source and the code is freely available, there is room for change or improvement. That’s where forks come in, which are changes within the blockchain made by the introduction of new cryptocurrencies.
There are two types of forks. Hard forks and soft forks.
Hard forks are a radical change in software. They occur in the face of a radical change that requires all users to upgrade to the latest version. Nodes from the previous version will no longer be accepted in the new version.
In soft forks, the old nodes will continue to recognise new transactions as valid, but any blocks that can be mined will be considered invalid by the updated nodes.
Hash is a process in which a fixed-size output is generated from a variable-size input. The final result is called a hash. This process is done using a hashing algorithm, such as SHA-256.
Thanks to hashing, each block has an original identification, with specific information, such as the nonce (the value required for miners to create the block), the blockchain version number, among others, distinguishing it from the other blocks inserted in the network.
HOW HASHING ALGORITHMS WORK
Here, then, are some of the most important topics in the world of cryptos. Hopefully you have learned something new and this knowledge will propel you towards success.