Everything you were afraid to ask about, defined in one place
An airdrop is a delivery of coins or tokens to wallet addresses. This delivery is made by the issuer of the coin or token, usually to promote or raise awareness of its crypto asset. Airdrops are usually made without payment or other consideration, or in exchange for an actor service in furtherance of the promotion (for example, posting about the currency on social media platforms). While some airdrops are conducted for legitimate purposes, others have been used to facilitate fraudulent activity.An atomic settlement is the instant and simultaneous completion of a series of transactions. Often used in the context of cross-currency payments or transfers of assets such as securities, a key feature of an atomic settlement is that no transaction in the series can be completed unless all are completed at the same time. In other words, either all transactions occur or none occurs. The purpose of making transaction settlement “atomic” is to prevent different transactions from interfering with one another.
The ability to use atomic settlements is one of the key potential benefits to using distributed ledger technology to execute transactions with costs and in time periods that are significantly lower and shorter than currently required. As one example, the New York Federal Reserve’s “Project Cedar” tested the viability of atomic settlements of cross-border payments in illiquid currency corridors. In those tests, the settlement time for these payments was reduced from two days to ten seconds. Read the New York Fed’s full Report on Project Cedar.
There are two types of exchange traded funds (ETFs) that provide investors with indirect exposure to price changes in bitcoin—spot bitcoin ETFs and bitcoin futures ETFs.
The price at which the spot bitcoin ETF trades is based on the price of bitcoin at any given time.
On the other hand, a bitcoin futures ETF invests in, and trades based on, the price of bitcoin futures. Bitcoin futures are separate derivative instruments that allow investors to purchase bitcoin in the future at predetermined prices (effectively allowing investors to wager on the future price of bitcoin).
The first bitcoin futures ETF was approved by the US SEC in October 2021, and several others have been approved and begun trading since. However, to date, the SEC has not approved a spot bitcoin ETF (though several have applied).
Outside of the United States, several countries (such as Canada, Germany and Switzerland) have approved spot bitcoin ETFs.
A cryptocurrency mixer (also known as a tumbler) refers to a service that can increase the anonymity of certain cryptocurrency transactions. A mixer acts as a type of middleman that mixes together cryptocurrencies from different sources before returning other cryptocurrencies (of the same type, but with different unique blockchain identifiers) to those sources.
There are two types of cryptocurrency mixers: centralized mixers (companies that operate the black box mixer and earn fees by matching/swapping cryptocurrencies) and decentralized mixers (protocols that allow a large group of users to pool cryptocurrencies for redistribution).
Cryptocurrency mixing services have been criticized as facilitators of criminal activity, such as money laundering, and are illegal in some jurisdictions.
DAOs are a form of digital-native business that can be organized to do just about anything: management of a crypto protocol (MakerDAO), investment (MetaCartel Ventures), art collection (PleasrDAO), or even completion of a single purpose (ConstitutionDAO). The key distinguishing feature of a DAO—beyond its digital roots—is its decentralized and autonomous governance structure.
Hyper-democratic by nature, DAOs are not historically creatures of state law, unlike the predominant forms that most businesses take—corporations and limited liability companies. Also unlike corporations and limited liability companies, DAOs do not have boards of directors, managers or executive management; instead, in a DAO’s purest form, decisions made by tokenholders are implemented with self-executing smart contracts. While shareholders and bylaws are the backbones of a corporation, the foundations of a DAO are its tokenholders and smart contracts.
DAO membership is derived from ownership of the DAO’s token and is often permission-less. As with most crypto-tokens, these are typically freely tradeable on decentralized exchanges or earned by performing actions the DAO seeks to encourage, such as providing liquidity.
Smart contracts, a type of program stored on a blockchain, allow DAOs to forego many of the management and other authority structures of a typical organization by automatically executing actions when certain conditions are met, without the need for intermediaries. Rules of the organization are made by members and encoded in smart contracts. Among other things, these rules control the DAO’s treasury and spending. Rules can be changed by vote of the membership.
A hash is an encrypted string of alphanumeric characters that registers a unique place on a blockchain. The string of alphanumeric characters has a fixed length and structure that is generated when an input string of any length—such as a block of transactions on a blockchain—is run through a mathematical algorithm called a cryptographic hash function.
Hashing is performed by the nodes of a blockchain and is a one-way function—if you put the same data in, you will arrive at the same unique string, but you cannot reverse the function and decipher the input data based on the hash.
While hash functions have been used in cryptography for decades, they are used in blockchains for a number of key purposes, including to derive addresses for users, to keep track of particular transactions, to store large amounts of data more economically and, importantly, to connect blocks in a blockchain (i.e., each block contains a hash of the previous block). Different blockchains may use different hashing algorithms—Bitcoin, for example, uses the SHA-256 hash algorithm.
HODL
An acronym widely used in crypto circles that stands for “Hold On for Dear Life.” Originally a typo in a bitcoin message board posting, crypto enthusiasts have adopted the misspelling as a statement of belief in crypto assets as long-term investments and as an encouragement to others in the face of highly volatile crypto-asset markets.
WAGMI
Another acronym widely used in crypto discussions that stands for “We’re All Gonna Make It.” Similar to HODL, WAGMI is often used to reflect positivity and enthusiasm for crypto assets in general and camaraderie with others in the crypto community.
The Merge was the joining of the original version of the Ethereum blockchain (which was initially launched in 2015 and used a proof-of-work consensus mechanism) with its new proof-of-stake consensus layer. The Merge was executed on September 15, 2022.
The Merge represented the official switch to using proof-of-stake as the mechanism for block production on the Ethereum network. Despite the change in the consensus mechanism, the entire transactional history of Ethereum remained unchanged.
Pig butchering is a type of fraudulent scheme in which victims are lured into digital relationships to build trust in order to steal money, often in the form of cryptocurrency.
These multi-step schemes often begin with unsolicited contact by the fraudster and attempts to build an online relationship using fake social media profiles and data mined from the victim’s digital life. Over time, the fraudster will steer conversations toward investment-related topics before eventually convincing the victim to invest in cryptocurrency platforms where funds can be redirected and stolen.
The graphic name for this type of scheme comes from the weeks- or months-long process of “fattening” the victims prior to the theft of their funds.
Regulators such as FinCEN have highlighted red flags in these schemes and ways investors can protect themselves from becoming victims.
A private key is a long string of alphanumeric characters or code used in cryptography, similar to a password. In the context of crypto assets, private keys are used to authorize transactions and prove ownership of a crypto asset.
A private key is an integral part of using or transacting in crypto assets, and the encryption at the heart of a private key is critical to protecting those crypto assets from theft and unauthorized access. That said, a private key can literally unlock access to your cryptocurrency, so it is important to carefully manage access to your private keys. As the saying goes, “not your keys, not your crypto.”
A Proof of Reserves (PoR) is an independent audit and a public-facing attestation of a custodian’s reserves, matched up with a proof of user balances (liabilities).
A PoR audit is conducted by a third party that seeks to verify that a crypto custodian holds the assets it claims to on behalf of its clients.
In performing a PoR, the auditor takes an anonymized snapshot of all balances held and analyzes it using a Merkle tree, a cryptographically secured (i.e., tamper-proof) method of verification of assets on reserve that is designed to maintain privacy.
In the wake of the collapse of FTX, there have been increasing calls for crypto exchanges to implement PoR’s.
Ripple
A blockchain-based digital payment network. One of Ripple's main functions is to serve as a payment settlement system that is used by financial institutions to settle cross-currency transactions.
XRP
The native digital token of the Ripple network. XRP serves as a mechanism of exchange between two currencies or networks, and is used as a temporary settlement medium that allows transactions to settle on the Ripple network in an average time of three to six seconds (according to Ripple).
Spot bitcoin ETFs and futures-based (or derivatives-based) bitcoin ETFs are both investment products that can provide investors with exposure to changes in the price of bitcoin (i.e., the underlying asset). However, the type and structure of this exposure differs among them.
Spot bitcoin ETFs directly hold bitcoin and are designed to reflect the “spot,” or current price of bitcoin.
On the other hand, derivatives-based bitcoin ETFs use financial instruments like futures contracts to replicate bitcoin's prices. However, they do not directly hold bitcoin. Instead, the ETFs hold bitcoin derivatives -- financial agreements through which a party will buy or sell bitcoin at a specified price on a pre-determined date in the future.
As of November 3, 2023, US regulators have yet to approve a spot bitcoin ETF for the United States, even though many spot bitcoin ETFs already exist outside the United States and many of the world's largest traditional asset managers have made applications to the SEC for a US version. (Numerous futures bitcoin ETFs have been approved in the United States.) However, the US SEC recently lost a court case related to its rejection of an application for a spot bitcoin ETF, which has raised expectations that a spot bitcoin ETF may be approved for the US market in the near-future.
A stablecoin is a digitally native medium of exchange that seeks to maintain a stable relative value. A type of cryptocurrency, a stablecoin is designed to achieve price stability through linking its market value to a reference asset, most often the US dollar. By linking or “pegging” to this more stable reference asset, the stablecoin can then be used in scenarios where price stability is the primary objective, such as for peer-to-peer or cross-border payments, in the on-chain trading of other digital assets, and in collateralized lending and other DeFi services.
However, while all stablecoins offer the promise of stability in price, not all are able to achieve this outcome.
Stablecoins generally fall into two broad categories: custodial and non-custodial (or “decentralized”). Each broad category can also have sub-categories. For more on stablecoins, check out our piece on the collapse of TerraUSD and the road ahead for stablecoins.
Staking cryptocurrencies is a process that involves committing crypto assets to support a blockchain network and confirm transactions. Crypto assets are “staked” by depositing them with a protocol in exchange for rewards.
The purpose for the staking varies by protocol, but the most common form of staking is within the proof-of-stake consensus mechanism (an alternative to proof-of-work) used by certain blockchains to verify new blocks of data that are added to the network. In a proof-of-stake protocol, stakers perform the exercise of validating new blocks of transactions to be added to the network. The staked assets are at risk and will be lost if the staker processes fraudulent transactions; as a result, each validator’s stake acts as an incentive to ensure the security of the network. In exchange for the committed tokens, validators receive rewards denominated in the native cryptocurrency.
A token standard is a template and set of rules that provides the outlines and requirements for a particular type of smart contract. These rules describe the type of data that the token/smart contract should contain, the actions the token can perform, and the type of operations a token holder can take with respect to that token. A token standard can also provide guidelines for the creation, issuance, deployment, transfer, destruction, and other attributes of tokens on their underlying blockchain.
Some common token standards used on the Ethereum blockchain (the most widely used blockchain protocol for smart contracts) are known as ERC-20, ERC-721, ERC-777, and ERC-1155. Newer token standards still in development include ERC-3643.
The overall value of digital assets deposited or staked in a decentralized finance (DeFi) protocol.
TVL is a form of fundamental value analysis for a particular DeFi protocol (or for DeFi overall) and has emerged as one of the most widely-used metrics for evaluating and comparing protocols.
TVL is used to assess the levels of capital being used in a protocol, as well as its popularity and near-term viability.
For comparison to another commonly-used financial metric for companies: The ratio of a protocol’s market capitalization (i.e., the total market value of all of a protocol’s tokens in circulation, measured at current market prices) to a protocol’s TVL is analogous to a traditional public company’s price/book ratio (i.e., the company’s market capitalization divided by the net book value of the company’s assets on its balance sheet).
A “wallet” is a hardware device or software program that contains cryptocurrency keys (i.e., the passwords used to access and manage ownership of crypto assets).
Cold Wallet
A cold wallet is a cryptocurrency wallet that is not connected to the internet. These include paper wallets (where the private keys used to manage the wallet are written on a physical piece of paper and accessible only to the holder of the paper), offline desktop wallets (where the private keys are stored on a computer that is never connected to the internet) and modern hardware wallets (where the private keys are stored on a small USB stick that is protected by a PIN that must be keyed physically). Cold wallets are considered more secure than hot wallets because stealing from a cold wallet would require physical possession of the wallet (together with any PINs or passwords needed to access the wallet).
Hot Wallet
A hot wallet is a cryptocurrency wallet that is connected to the internet. These include web-based wallets, mobile wallets, and online desktop wallets. Hot wallets are easy to use because the private keys necessary to manage the wallet are stored together with the wallet online. However, they are the most vulnerable to attack for the same reason. Savvy users are unlikely to hold significant amounts of cryptocurrency in hot wallets.
A Wrapped Token can (typically, but not always) be redeemed (or “unwrapped”) for the asset to which it is pegged. Wrapped Tokens typically require a custodian—an entity that holds an equivalent amount of the asset as the wrapped amount. Custodians for this purpose can be a vendor, a multisig wallet, a DAO or a smart contract.
A zero-knowledge proof is a cryptographic technique that allows the sharing of cryptographically encrypted information while keeping the underlying data private, including personally identifiable information that may be part of the data.
Blockchains are generally designed to be transparent, with each node able to see and download all data stored on the ledger. Zero-knowledge proofs allow the use of private datasets in applications (such as smart contracts) without revealing the underlying data. As a result, zero-knowledge proofs are generally considered to offer greater privacy in blockchain transactions.
In general, in a zero-knowledge proof, one party (the prover) can prove to another party (the verifier) the truth of a statement without sharing the statement’s contents or revealing how the prover discovered the truth. The proof works by having the verifier ask the prover to perform a series of actions that can only be performed accurately if the prover knows the underlying information.
A few applications where zero-knowledge proofs can be used include money transfers and identity authentication.
Writing on the Wall, Translating ‘Crypto’ Terms with Mayer Brown
From Airdrop to Wrapped Token, our illustrated glossary, “Writing on the Wall, Translating Securities with Mayer Brown,” has been updated with additional digital assets and cryptocurrency terms. Check out our “featured” list for the crypto terms and the full list of terms.