If you are new to the world of Non-Fungible Tokens and cryptocurrency, you are in for a treat.
Many everyday words take on a new but similar meaning. Consider the word “desktop”. I knew it as a place to store old receipts, important notes, and the occasional doughnut. Microsoft’s version of desktop isn’t the physical desktop that we know, but the concept of storing documents on my desktop makes sense. Ironically, both my computer and physical desktops are a mess.
In this post, we’ll get into some of these terms, and more importantly, we’ll cover why they are important to you and the NFT world.
Exchange – an exchange (or more appropriately, a Crypto Exchange) is a marketplace where you can buy and sell cryptocurrencies and NFTs. If you have purchased or sold shares of stock, the crypto exchange is similar in concept. Not only can you buy crypto using US dollars or Euros (also called fiat) through the exchange, but you can convert one cryptocurrency for another, like bitcoins for doge. Exchanges vary with respect to services offered and coins and tokens they will handle. It could be easier to shift between exchanges; it’s possible but not straightforward to do. Exchange transfers will be a topic in the future.
Exchanges are essential to NFT’s because most NFT purchases are completed using cryptocurrencies. And to purchase that cryptocurrency, you will need an exchange to complete the transaction. Exchanges also complete the US Government required Know Your Customer (KYC) guidelines.
Wallet – just like the hunk of leather stuffed in your purse or back pocket, a Crypto wallet is where you store your assets. Instead of paper bills and pictures of your dog, your wallet stores the location of your crypto assets on the blockchain. You can share your public address with someone and they can send cryptocurrency or NFTs to your wallet. If you have set up a relationship with an exchange, you can purchase crypto to store in your wallets. Wallets come in many forms and your selection is based on your security preferences and assets.
Blockchain – A blockchain is a distributed database shared among computer network nodes. If that isn’t clear, another way to describe a blockchain is that it’s an extensive list where multiple folks can view a verified copy. The blocks on the chain are storage locations that are filled with information (your crypto or NFT purchases), and once a block is filled, the blocks are linked together. The blockchain ensures two key benefits; 1) everyone can see every transaction, and 2) no one entity controls the list of transactions. This unlimited oversight is the basis for the trust in the blockchain.
Blockchains are important to NFT’s and cryptocurrencies because they securely track every transaction. The concept of storing the information in multiple locations is referred to as decentralized.
Proof of Work (PoW) uses mathematical processioning (also called crypto mining) to solve complex problems and is the basis for Bitcoin. Miners operate energy-intensive computer hardware to solve mathematical calculations faster than other miners, and as a result, receive newly minted crypto. In addition to Bitcoin, popular PoW protocols include Litecoin and Dogecoin. PoW is important for NFT’s because when you transfer an NFT, the smart contract (computer code) is completed when another computer verifies that transaction. NFT transactions are secure and trusted because of PoW.
Proof of Stake (PoS) is an alternative to PoW and uses a network users’ financial stake (called a stake) in the network to verify transactions. Staking is essentially owning coins and holding them for a period of time. Proof of Stake resolves critical PoW blockchain problems, such as poor speed, expensive equipment, and high energy consumption. Rather than having miners validate transactions, PoS networks utilize validators that are required to “commit” tokens that serve as collateral.
Like PoW, Proof of Stake is important for NFT’s because when you transfer an NFT, the smart contract (computer code) is completed when another computer verifies that transaction. NFT transactions are secure and trusted because of PoS, without the computational demand.
We’ll continue to highlight our glossary of terms to explain why they are important to the NFT world. Up next “How to easily buy NFT’s”.
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