The world of cryptocurrency and blockchain is unsurprisingly technical. When you first step into this world, you will find yourself surrounded with a whole lot of jargon – and the better you are able to use these frequently used terms, the better you will be able to understand how this world works. For this reason, this blog will discuss a few of the most common of these terms. 

Important Crypto Laymen Terms to Remember

  1. Smart Contract:

Smart contracts are also referred to as chaincode and smart properties. Broadly speaking, a smart contract is an agreement that has been codified through a blockchain. Smart contracts consist of code (simple if-then-else and if-then statements). They are created through a code contained inside a blockchain. 

These blockchains store all the data related to their specific smart contracts. They contain the history of the crypto balance in the smart contract, as well as record every transaction ever made. 

A smart contract consists of an internal memory that stores the code. This code is automatically executed as soon as certain predetermined conditions are fulfilled. These conditions can be external or internal to the contract. 

Should a smart contract need an external source to verify if a particular condition (or a set of conditions) has been met, it will turn to an oracle (a knowledge source). An oracle serves as the bridge between the actual world and the blockchain, and could be anything ranging from weather reports to price updates.  A price update, for instance, could be useful for an automated liability contract. The contract could go something like: “if the share price of X falls below $50, sell the stock”. 

It is important to remember that a smart contract enforces, verifies, and facilitates the contract by itself. This means that there is no legal system or outside entity that interprets the agreement or the parties’ intents. In other words, the code itself is the law. 

Benefits of Smart Contracts:

The key benefits of smart contracts are:

  • Autonomy
  • Security
  • Does not require third-party involvement
  • Cost-effective
  • Free of interruptions
  • Error-free and accurate
  • Fast and seamless performance

Use Cases for Smart Contracts:

Smart contracts can be used for a wide range of purposes, including:

  • Digital identity
  • Financial security
  • Financial services
  • Trade finance
  • Governmental purposes
  • Supply chain management
  • Escrows 
  • Clinical trials
  • Mortgage system
  • Trading activity
  1. Consensus: 

A consensus means that two or more parties have come to an agreement about something. Consider a group of friends deciding on a destination for their vacation. If all the friends have agreed to go to Germany, then we can say that the group has come to a consensus regarding the vacation destination. If no agreement is reached, the group might end up splitting. 

As far as blockchain goes, the process of consensus is formalized. Blockchain consensus is said to have been achieved when at least 51% of the total network nodes are in agreement with the network’s next global state. 

Consensus Mechanism:

Jigsaw puzzle with Crypto Laymen Terms

A consensus mechanism (also referred to as consensus algorithm or consensus protocol) allows a distributed system (that is, a network of computers) to operate in tandem and remain secure. 

For many years, consensus mechanisms have helped establish agreements between various enterprise structures, including application servers and database nodes. In the last few years, though, novel consensus mechanisms have been created to enable crypto systems to establish consensus regarding the network state. 

Types of Consensus Mechanisms:

  1. Proof-of-Stake (POS):

In this type of consensus mechanism, the developer of a new block of chain is determined through the creator’s wealth (also known as stake). The POS system does not involve any block record, which is why the miners collect the transaction fee. A POS currency can be tremendously more cost-effective. 

  1. Proof-of-Work (POW):

POW is used to define an expensive and demanding computer calculation called mining. In POW, a miner who solves the mathematical problem is rewarded with a Bitcoin. This means that network miners compete in order to become the first to solve the mathematical problem. 

Other, less common types of consensus algorithms are:

  • Transaction as Proof of Stake (TAPOS)
  • Proof-of-Capacity
  • Proof-of-Burn
  • delegated Byzantine Fault Tolerance (dBFT)
  • Federated Byzantine Agreement (FBA)
  • Practical Byzantine Fault Tolerance (PBFT)
  • Proof-of-weight
  1. POW:

Proof-of-work (POW) is a consensus algorithm responsible for securing a number of cryptocurrencies including Bitcoin. Often, digital currencies have central authorities or leaders responsible for determining the number of owners for a particular digital currency, as well as the amount of that currency that each user possesses. Cryptocurrencies, however, make use of POW, which allows these currencies to work efficiently even without a government or company managing the process. 

To be more specific, POW helps to get rid of the ‘double spend’ issue, which can be quite hard to solve in the absence of a central leader. Double spending can cause an inflation in the overall coin supply, thereby reducing the value of every other user’s coins and making the digital currency pretty much worthless. 

Double spending is a major concern in online transactions since a digital action is fairly simple to replicate. This is why POW is a very important aspect of cryptocurrencies since it makes it almost impossible to double spend a digital currency. As the name suggests, POW is ‘proof’ that a certain user has conducted a considerable number of computations. 

How Does POW Work?

Bitcoin makes use of blockchain – a ledger that records every blockchain transaction ever executed. The blockchain, as you can guess, is a chain consisting of a number of blocks with each block containing a history of the most recent Bitcoin transactions that were stored on it. 

Without POW, it is not possible to add new blocks to the blockchain. A block is created through miners, who are ecosystem participants that execute the POW. Each time a miner comes up with a winning POW, a new block is added to the network – something that happens around every 10 minutes.

Finding POWs is extremely difficult so much so that it requires specialized, expensive computers. A miner will win a Bitcoin every time they find the solution to a mathematical problem. The more problems they can solve, the more Bitcoin they will win. 

So, what exactly is this mathematical problem that the miners try to solve? Bitcoin miners create ‘hash’, which converts an input into a string of seemingly-random numbers and letters. 

The miners’ goal is to develop a hash identical to the current Bitcoin ‘target’. The hash must have an adequate number of zeroes in front of it. The likelihood of getting consecutive zeroes is minimal. However, since miners are spitting out trillions of such computations every second, it takes them around ten minutes to hit the bull’s eye. 

  1. POS:

The second kind of consensus mechanism is called Proof-of-Stake (POS) and is utilized by networks of blockchain to achieve distributed agreement. 

POS requires participants to put up their cryptocurrency at ‘stake’ in order to become part of the network validation. These participants perform the same function as POW miners: developing new blocks and ordering transactions so that the nodes can come to a consensus regarding the network state. 

POS builds up on the POW network and rectifies a number of issues with the latter, such as:

  •  Improved energy efficiency: POS does not require the use of large blocks of energy mining.
  • Reduced barriers to entry: Since POS has lower hardware requirements, participants do not need to invest in elite computer systems to be able to create new blocks. 
  • More immune to centralization: POS creates a greater number of network nodes as compared to POW. 
  • Stronger shard chain support: It is a vital upgrade that will help scale the networks of numerous cryptocurrencies. 

How Does POS Work?

Unlike POW, POS does not require participants to utilize large amounts of computational energy. This is because these participants are chosen at random, and, therefore are not in competition with each other. 

In other words, a participant does not need to mine blocks – if a participant is chosen, they will have to create blocks. On the contrary, if a participant is not chosen, they will have to validate the proposed blocks. The validation is referred to as ‘attesting’ when a participant attests to a block, they are merely approving of that particular block. Participants are rewarded when they propose new blocks or validate the blocks that they have observed. 

  1. Scalability:

In general, scalability refers to a computer system’s ability to handle a greater workload. A scalable system is one that can perform more work as long as it is provided with the right amount of resources (such as greater bandwidth, servers, or computing powers). In contrast, a system with poor scalability is one that, in addition to said resources also requires extra modification efforts in order to handle the increase in workload. 

However, as far as blockchain goes, ‘scalability’ is used far more broadly. For instance, an important blockchain scalability stated that any Bitcoin improvement with regards to transactional cost, bootstrap time, latency, or throughput, can be considered ‘scaling’, and should render the particular Bitcoin system as scalable. 

We can divide Bitcoin scalability into four distinct categories:

Bitcoin Scalability:

This category consists of any solutions that improve Bitcoin throughput by lowering the block interval or increasing the blockchain – as long as it does not change the POW consensus algorithm involved in Bitcoin. 

POW Scalability:

POW scalability involves solutions that are still compatible with the Nakamoto consensus framework, but can achieve better throughputs than the POW algorithm by altering the algorithm. 

Byzantine Fault Tolerance (BFT) Algorithm Scalability:

These solutions involve those based on the BFT algorithm but have a lower message complexity compared to PBFT. 

Scale-Out Blockchains:

These solutions are those that do not require mining/validating nodes to come up with the whole transactional history. The relaxation of this requirement means that the system throughput can grow alongside the network size, leading to better scalability than is possible with the three types of system discussed above. 

  1. Ethereum 2.0:

Ethereum 2.0 (also called Serenity or Eth2) is an upgraded version of the original Ethereum cryptocurrency. The upgrade was created to increase the scalability, speed, and efficiency of the Ethereum network, which will enable it to ease bottlenecks and execute a higher number of transactions. 

However, Eth 2 is not completely existent either. In January of this year, the Ethereum Foundation decided to stop referring to this upgrade as Ethereum 2.0. The reason behind this decision, according to the Foundation, is that Eth2 is an upgrade on the original network and not a completely new network by itself. 

Accordingly, the original Ethereum network (Eth1) is now referred to as the ‘execution layer’ containing the network rules and contracts. Eth2, meanwhile, is called the ‘consensus layer’, and is responsible for ensuring that the devices that contribute to the network are obliging by the network’s rules. 

However, despite these changes, the term ‘Ethereum 2.0’ has stuck with the masses. 

When Will Ethereum 2.0 Launch?

Eth2 will launch in multiple phases, the first of which (the Beacon Chain) went live on the 1st of December 2020. The Beacon Chain added native staking to the blockchain, which will be a key component of the shift towards a Proof-of-Stake consensus mechanism. 

The next phase (called ‘the Merge’) should be launched during the second quarter of this year. As the name suggests, ‘the Merge’ will be responsible for merging the Ethereum main-net with the Beacon Chain. 

The shared chains would be the final Eth2 phase, and will help scale the Ethereum network. Rather than settle all operations on one blockchain, the shard chains will make use of 64 different blockchains to spread these operations. 

The complete Ethereum 2.0 upgrade is expected to happen at some point in 2023, as per the Ethereum Foundation

The Key Difference Between Ethereum 1.0 and Ethereum 2.0:

The primary differences between Eth1 and Eth 2 will be that, while the former uses a Proof-of-Work consensus mechanism, the latter will switch to a Proof-of-Stake mechanism. 

Final Word:

To some up, this guide covered some of the most common technical terms used across the crypto and blockchain space. To learn more about cryptocurrencies, blockchains, and smart contracts, please feel free to check out some of the other blogs on our website.