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Here are 6 words that are fundamental to understand if you really want to gain a deeper knowledge of how crypto currencies work. I believe that if you plan on getting involved in this space you don`t have to understand all the technological peaces, but it will certainly be an advantage.

Blockchain

Formal Definition: a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly. (Reference)

Our Explanation: The word Block Chain originates from how the technology mechanism works. Blocks of recorded transaction information, which in Bitcoins protocol are 2MB each in size, are created and added to previous blocks in the Chain. This forms a long chain of blocks with information on every transaction that has happened since the coins creation, thus forming a long, immutable and distributed ledger. It is simply a distributed ledger of information, stored, updated and maintained by thousands of computers worldwide. This information can be anything from the recording of transactions, asset ownership or proof of academic qualifications.

Public and Private Keys

Your public and private key on the Bitcoin Network allow you to claim access to your wallet and they generally look something like this

Public Key: ########################################

Private Key: #############################

Formal Definition: A public key is created in public key encryption cryptography that uses asymmetric-key encryption algorithms. Public keys are used to convert a message into an unreadable format. Decryption is carried out using a different, but matching, private key. Public and private keys are paired to enable secure communication (Reference)

Our Explanation: The most practical way to think about this concept is to compare your public key to your household address on google and your private key as the key used to open your home front door. Everyone can look up your house address on google to see where you live, visit you or mail something to you. However, only you have access to your front door key to get inside. Likewise, you can give your public key to someone so that they can send you a coin. You then use your private key to access what is yours at the public key/wallet/address. When your wallet is created you`ll receive both, make sure you back them up, and keep your private key hidden and safe as this is your key to your wallet.

Cold Storage Wallets

Formal Definition: Bitcoin cold storage is achieved when Bitcoin private keys are created and stored in a secure offline environment. Cold storage is important for anyone with crypto currency holdings. Online computers are vulnerable to hackers and should not be used to store a significant amount of cryptocurrency (Reference)

Our Explanation: I think the above definition explains it well, but essentially, it’s like writing your Facebook password down on a piece of paper or saving it to a USB and then leaving it in a safe place e.g. Safe at home or a vault. Why do this? Well your private key is a lot harder to remember than your Facebook password and losing it may result in financial loss. The alternative to cold storage wallets would be to leave your coins on an exchange, however the exchange can be hacked as it is an online service or if they go bankrupt you may not get access to them again.

Protocol

Formal Definition: In computing, a protocol or communication protocol is a set of rules in which computers communicate with each other. The protocol says what part of the conversation comes at which time. It also says how to end the communication. Simple Mail Transfer Protocol (SMTP), is used for transferring e-mail between computers. (Reference)

Our Explanation: A protocol is basically a set of rules that are laid down and then followed, similar to playing a computer game. There are defined rules that game developers code into the games such as the character not being able to walk through walls, or that if the character is shot the game starts over. Bitcoin has a defined set of rules which govern how the code works and what it can do, what it can`t do and what it must do.

Proof Of Work

Formal Definition: A proof-of-work (POW) system (or protocol, or function) is an economic measure to deter denial of service attacks and other service abuses such as spam on a network by requiring some work from the service requester, usually meaning processing time by a computer. (Reference)

Our Explanation: The proof of work protocol makes use of something called mining. Mining involves downloading a piece of software onto your computer and allowing it to use some of your computing power to break mathematical formulas and in doing so you receive some of that coin as payment. By mining you are essentially helping uphold all the information that is stored in that coin`s ledger as well as adding new transactions that are occurring.

Because there are many computers around the world taking part, the system is not centralised to one building or server, but instead decentralised and thus trying to hack or shut down the system proves difficult. Theoretically one would need to hack 51% of the computers taking part in order to fake a transaction or try do abuse the system in anyway. Note the mathematical algorithms for Bitcoin have become so complex that a normal computer no longer proves useful and now there are entire rooms filled with servers whose sole purpose is to mine crypto currency. This is extremely electricity intensive.

Proof Of Stake

Formal Definition: Proof-of-stake (PoS) is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. In PoS-based cryptocurrencies the creator of the next block is chosen via various combinations of random selection and wealth or age (i.e. the stake). (Reference)

Our Explanation: So like with proof-of-work, the aim of proof-of-stake is to uphold and ensure that the network it`s self is distributed or decentralised as well as having an economic mechanism to disincentive bad apples from trying to take down or hack the system. The difference with proof of stake is the huge reduction in electricity consumption.

The proof of stake system would no longer involve massive computers but instead be based on staking your current holdings on the network, the block rewards would then depend on the type of proof of stake that the crypto uses. The network selects who gets the next block reward either randomly, or by the size of the stake or various other factors. Ethereum will be making use of the Casper staking method. Note there are some coins with a hybrid model of proof-of-work and proof-of-stake.

Disclaimer: Please note that the above is all my opinion and that I am not a qualified adviser of any sort. I do have a bachelors in finance and economics, but am providing this information purely as a means of interest. Please also note that if you are investing, that it is extremely risky and that you should not invest more than you are prepared to lose