New investors to the world of cryptocurrencies are likely to encounter terms and language in articles or forums that can be hard to understand for those less seasoned. This makes learning about cryptocurrencies a lot like drinking from the proverbial fire hose. Blockchain is a newer technology, and once you add in the complexities of investing, it can be challenging to know what everything means.
Here is a review of some terms related to crypto investing that may be helpful for those just starting out.
Airdrops are like supplies dropped from airplanes, but in this case, the supplies are tokens.
Many companies creating new cryptocurrencies will use airdrops as a way to get tasks completed by rewarding the participating community with free tokens. Sometimes airdrops are rewarded to existing investors or people holding specific altcoins. The intention is to get investors to use their coin.
These companies will have specific rules regarding tasks and eligibility to participate. Tasks can include simple tasks such as posting messages in forums and sites like bitcointalk.org. Other common tasks include liking and following the token page on social media.
Generally speaking, there are usually about five of these tasks that must be completed for an investor to be registered for an airdrop. There are several ways investors can learn about existing airdrops taking place. Bitcointalk.org and the Twitter account @airdropalert are two well-known places for finding airdrop information.
Faucets are similar to airdrops but require little to no work to receive tokens. Like airdrops, the purpose is to get investors interested in the coin and give investors the opportunity to learn more about it. Faucets are usually announced the same way and through the same channels as airdrops. Simple tasks such as like a Facebook page or retweeting a message on Twitter is enough to make one eligible for the faucet.
Bounty programs are another way for ICO companies to incentive participants for completing tasks. Some of these tasks, many for the sake of marketing, can be like those for airdrops or faucets. Typically, these are tasks such as liking, sharing and commenting on social media sites.
Bounties are generally the most complex compared to faucets and airdrops, especially outside of routine marketing tasks. Harder tasks may be writing blogs about the token as an influencer, reporting bugs to help developers or translating documents needed in foreign languages.
Forks are common occurrences with cryptocurrencies. Bitcoin alone has had numerous forks over its lifetime, as have other cryptocurrencies like ethereum. Sometimes forks are planned in advance; other times they happen unexpectedly. There are three possible outcomes to forks, whether they be hard or soft forks: one blockchain prevails and the other fails; both blockchains are adopte, or both are adopted but one is favored over the other.
To understand forks, one must understand the differences between types. Here is a quick summary of each.
A hard fork occurs when a new version of the code is introduced to the blockchain, causing the new version to be incompatible with the old version. Hard forks are permanent changes that are preplanned by developers. Nodes, who are people who have a copy of the blockchain, must update their software applications if they want to use the new blockchain. If they continue using the old protocol software, they will only be able to use the old blockchain as it written before the fork.
Examples of bitcoin hard forks include Bitcoin Cash and Bitcoin Gold. All three cryptocurrencies trade independently of each other on separate blockchains and the coin values are not tied to each other.
Soft forks are also a change in the code that results in two incompatible versions of the blockchain. Soft forks are temporary changes that can potentially end in blockchain failures. Soft forks are backward compatible; however, the original chain will only contain blocks from nodes that have not been upgraded. There will not be a permanent change unless upgraded nodes achieve a clear majority. If a consensus is reached by the upgraded nodes, the new code is implemented across the network. Nodes which have not been upgraded will continue to try to validate transactions without any success.Soft forks can be frightening to coin holders because of their unannounced behavior and because transactions on the old blockchain may not get validation from upgraded nodes.
The Lightning Network is a developer solution to slow processing times and high transaction fees associated with Bitcoin. These limitations have prevented the adoption of Bitcoin as a easy-to-use currency for everyday purchases. The Lightning Network speeds up transactions by utilizing payment channels. These channels log transactions off chain. For this reason, miners are not required for transaction validation.
There is some argument as to whether LN is a legitimate solution to bitcoin limitations. Lightning Network creates centralization; something bitcoin is supposed to be against. Additional reading on this subject can be found here.