LESSON 3: A Brief Overview of Crypto Terminology [For Beginners By A Beginner]

For Begginers By A Beginner

What are the Cryptocurrency ‘Proof’ Mechanisms?
There are different ways that computers on the mining network can earn their reward.

• Proof of Work: See Bitcoin.
  Completion of mathematical algorithms to process and confirm transactions.
• Proof of Stake: See Blackcoin.
  Simply hold your coins. The more you have, the more you will be rewarded.
• Proof of Research: See Gridcoin.
  Complete computational scientific research to earn the reward.
• Proof of Capacity: See Burst.
  The more harddrive space you donate to the network, the greater your reward is.
• Hybrid Proof of Work/Proof of Stake: See Decred, Peercoin and Pinkcoin.
  A fairer combination of both aforementioned proof mechanisms. When used alone, PoS often favours the rich or the early adopters of the coin who accumulated much of it. PoW often favours corporations running large ASIC systems, when used alone.
• Proof of Importance: See NEM.
  The size of your stake is considered as well as the frequency that you make transactions and whom you transact with (to promote a healthy economy).

What is a ‘Bubble’?
A ‘bubble’ occurs when people are not buying a commodity to use it but instead solely because they believe the price will rise. This leads to an overpriced asset. Upon realisation that the unworthy service will never reach its falsified value, the bubble bursts and the asset price crashes. The ‘dot com’ bubble is a well-documented example of a bubble that occurred during the vast expansion of internet adoption. Investors blindly pumped money into anything that contained ‘dot com’ in the title and so prices were falsely inflated. Of course, as usually happens, a large proportion of these startup companies failed and the bubble did burst. Bitcoin is prone to being in a bubble state because its price represents nothing, i.e. it is not based on any real world asset such as gold, instead the value is just partially based on desirability and mainly on speculation about its future adoption.

What are ‘Whales’ and 'Pump & Dump' Activity?
Whales are people with enough buying or selling power to significantly influence the entire market. They are generally very wealthy or have simply accumulated a large quantity of the asset from its early days before it came to be highly valued. They are often the cause of pump and dump activity. Such activity thrives on the predictable emotional overreactions of people in response to major price movements in a stock market or cryptocurrency.

• A whale can sell a large quantity of the asset at a very low price, thus clearing the top of the order book and reducing the asset’s price substantially. This makes people panic and sell the asset so to lower the price further. The whale then buys back the asset at an even lower price, hence profiting.
• Alternatively a wealthy whale can buy a large quantity of the asset at a far higher price than current market value. This clears the bottom of the order book and raises the market value of the stock or coin, thus people get excited and rush to buy into the market. This artificially raises the price of the market, at which point the whale dumps their asset, having profited from the pump.

What are Scam Coins and Pre-Mining?
As cryptocurrency algorithms and codes are publicly viewable, nothing prevents anybody from copying the code, making an attractive website and announcing a novel cryptocurrency with many false promises that are not backed by a strong development team (and sometimes not backed by any true intent to develop the product at all). These scam altcoins are commonly referred to as ‘shitcoins’ (as a negative pun on Bitcoin). Often the ‘developers’ will assign themselves a great quantity of the asset to later dump at great profit once the price rises. This is pre-mining.
It is important to note that not all pre-mining is evidential of a scam coin, there are some legitimate reasons for it, such as maintaining a pool to fund development or offer rewards etc.

What are pegged assets and coloured coins?
A pegged asset is an asset whose value is simply locked to the value of a different asset. For example, Tether is a cryptocurrency that is locked to $1. That means however the value of the USD fluctuates, Tether will adjust its value to mirror it. This allows people to have all the benefits of dealing in USD with all the flexibility of working in a blockchain. Pegged exchanges can also allow for the conversion between assets that were otherwise incompatible. BitcoinDark allows for the trading of such pegged assets.
Coloured coins are unofficial currencies within other cryptocurrencies. They are like a very rudimentary and crude form of side chains (discussed in the next lesson). For example, pretend that I have three friends (pfft, I wish), I could say:

“I have just purchased one Bitcoin. I am going to split it into quarters amongst the four of us. Each quarter bitcoin is hereby worth 2000 Calum Coins. Go ahead and trade.”

So long as we all agree on the rules and abide by them then Calum Coins could be used validly within our closed system. The ability of Florincoin to allow users to append a message to their transaction facilitates the invention of coloured coins with ease.

Burning Bitcoins
Burning Bitcoins is where Bitcoins are destroyed by permanently removing them from the market forever. Nxt was generated by ‘burning Bitcoins’ whereby, at the creation of this cryptocurrency, Bitcoins were sent to a particular 'dead' address and the sender was rewarded with Nxt coins - with those Bitcoins then being removed from circulation forever. It is literally taking one cryptocurrency and making it into another (instead of exchanging one for the other).
Counterparty was also made by burning Bitcoins. It has an exchange feature, offers smart contracts and incorporates an innate escrow service (like PayPal) for protected payments. Ripple also works similarly to PayPal. Waves is like Ripple but even more decentralised. Stellar can be thought of like a community-run version of Ripple. We'll discuss many other altcoins in the next lesson.

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This is the third article in my ‘For Beginners By A Beginner’ series for all the fellow newbies trying to understand this crypto world. I personally found it difficult to learn without a central source of information, so here I attempt to offer one. Even if it acquires no attention on Steemit, I hope it remains on Google and is useful to any eager newcomer whom stumbles upon it.
There will undoubtedly be errors and misunderstandings in my text, so do add corrections and additions in the comments section below. If I choose to incorporate them I will reference your username and upvote your comment.

Lesson 1: Introduction to Cryptocurrencies and Blockchain Technology

Lesson 2: Disadvantages of Cryptocurrencies

Lesson 3: A Brief Overview of Crypto Terminology

Lesson 4: Further Uses of Blockchain Technology

Lesson 5: Final Cryptocurrency Opinions & Blockchain Conclusions