Crypto Vocab You Need To Know

Crypto Vocab You Need To Know

All of the big & confusing crypto words explained in simple English.

web3:¬†web3 uses the¬†blockchain¬†to create a newer, "decentralized" version of the internet that allows for more trust, security, & user ownership. web3 will look very similar to what we have now, but it will be a better experience with better incentives (and won‚Äôt be controlled by big tech companies). ‚Äúweb3‚ÄĚ is an umbrella term for every industry that uses blockchain technology:¬†cryptocurrencies,¬†decentralized finance¬†(DeFi), NFTs, DAOs, & more. Just how the internet democratized modern information to anyone around the world, web3 will democratize modern financial structures to anyone around the world.

Blockchain: blockchains are like a database. They efficiently & reliably track the transaction history without using a 3rd party. For example, let’s say you want to send money to a friend. With a financial institution, you both need to have a bank account, wait a few days for the payment to process, & pay 0-2% in transaction fees. With blockchain, you both need a wallet (which anyone can get), wait a few seconds, and pay a fraction of a penny in fees. Blockchains could be a more inclusive, efficient, & cheap alternative to current systems.

Crypto:¬†crypto is an abbreviation for¬†cryptocurrencies. Some people also use it to describe the entire blockchain industry (just like they use ‚Äúweb3‚ÄĚ)

Cryptocurrencies: cryptocurrencies are digital representations of value. They can ensure value because they use blockchains. So, you can’t just copy and paste a cryptocurrency like you can a piece of text. Bitcoin, Ethereum, and Dogecoin are all examples of cryptocurrencies. Each has a different purpose & use. Some (like Bitcoin) aim to be an alternative currency. Others (like Ethereum) act as fuel & oil to facilitate their ecosystem of applications. Cryptocurrencies are pieces of value that move as fast as the internet - which unlocks tons of opportunities.

Decentralized Finance (DeFi):¬†decentralized finance (‚ÄĚDeFi‚ÄĚ for short) replaces the institutions in today‚Äôs financial system with code. In DeFi, instead of the financial institution,¬†blockchains¬†act as the 3rd party guaranteeing a transaction will happen (ex: a loan will be paid). It won‚Äôt completely replace traditional finance (TradFi). But, many aspects of TradFi will be disrupted because code is more efficient, reliable, and inclusive than big institutions.

Bitcoin: Bitcoin is a digital asset and a payment system. It aims to be an alternative currency, so people can buy and pay without using a bank or credit card company. It also aims to be a storer of value, so people can safely keep their wealth without having to rely on a bank. Bitcoin was the first ever cryptocurrency and blockchain. It pioneered the underlying technology that has powered the entire crypto & web3 industry. Learn more here.

Ethereum: Ethereum is a blockchain platform that software applications can be built on top of. Ethereum supports any type of application. These applications run exactly as programmed. Because no one owns Ethereum, no 3rd parties can change the rules of the platform. Applications can range from lending protocols (which Burst uses) to social networks.

Protocols & Smart Contracts: Protocols & smart contracts are blocks of code that blockchain applications run. Basically, they outline the rules for how an application works & execute them automatically. Those rules could be used to gate access a piece of content or to lend crypto a stranger. Anything that could be run by software could be a smart contract. Once deployed on the blockchain - nobody can control it, the rules cannot be changed, and it will always run the same way.

Lending Protocol: A lending protocol allows two people to securely borrow and lend money without the need for a 3rd party. Normally, you would have to write out a contract with rules that can be enforced by law. Lending protocols are enforced automatically by code. Compound is a lending protocol that Burst uses. Using Compound, the borrower puts up collateral into the protocol in exchange for a loan. If they cannot repay the loan with interest before the due date, their collateral is automatically liquidated by the code.

Stablecoins: Stablecoins are cryptocurrencies that aim to keep the same value as fiat currencies (like the US Dollar). Stablecoins are valuable because they allow anyone in the world to access & use valuable currencies. They give you the benefits of blockchain and DeFi (global inclusiveness and efficiency) without the volatility of most crypto assets. There are two types of stablecoins: algorithmic & asset-backed. Algorithmic stablecoins use code to maintain a certain price. They are more decentralized but also more risky because they are not backed by anything. On the other hand, asset-backed stablecoins are backed by real-life assets like currencies or gold. They are more centralized but also more safe. We also refer to them as "digital dollars".

$USDC: $USDC is an asset-backed stablecoin. Burst earns interest by lending out USDC to borrowers. For every 1 USDC, they have 1 US Dollar to back it in their treasury. It is the 2nd biggest stablecoin by market cap ($65 Billion).

APY: APY (or Annual Percentage Yield) represents the interest you make per year. If you deposit $1000 at 5% APY, you will have $1050 at the end of 1 year.

Overcollateralized: Collateral is the asset a borrower puts up to take out a loan (ex: house or money). In traditional finance, the loan is usually undercollateralized - so the collateral is worth less than the loan. In DeFi (and Burst), the loan is overcollateralized - so the collateral is worth more than the loan. If the borrower cannot pay back the loan, their collateral is automatically liquidated by the smart contract.