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3Factor Authentication is a triple layer security measure. Liquidity Exchange is the only cryptocurrency exchange to implement this, to date. Members must input their credentials, password, and behavioral identification. 




Short for Advanced Encryption Standard, AES-256 is a symmetric block cipher used by the American government to encrypt sensitive data. AES-256, named for its key length of 256 bits, is practically unbreakable using current computing power, making it the strongest existing encryption standard.


Advanced Persistent Threat (APT) is an adversary with sophisticated level of expertise and significant resources, allowing it, using multiple attack vectors, to generate opportunities for incursions.


Alpha and beta are parts of an equation to predict the performance of stocks and investment funds. Alpha and beta are measures used to compare and project returns. Alpha is the excess return on an investment after adjusting for market fluctuations. Beta is a measure of volatility compared to a standard, like the S&P 500; as such it is a good indicator of risk. The equation is:  y = a + bx + u       Where:

•          y is the performance of the stock or fund

•          a is alpha, which is the excess return of the stock or fund

•          b is beta, which is volatility relative to the benchmark

•          x is the performance of the benchmark, which is often the S&P 500 index

•          u is the residual, which is the unexplained random portion of performance in a given year.


Money laundering is, of course, disguising funds from illegal activities (like drug sales or terrorist funding) as legitimate income. In past years, crypto assets were vulnerable to exploitation as a means for money laundering because of transactional anonymity, ease of use, and the ability to send valuable assets across international borders nearly instantly. AML is a set of international laws to curtail laundering by criminal organizations or individuals by converting cryptocurrencies into real-world cash.


Arbitrage is when traders simultaneously buy and sell financial assets in different markets (such as New York and Chicago, for example) to take advantage of temporary (often momentary) differing prices for the same asset and make a profit.


According to Oxford English Dictionary, AI is “the theory and development of computer systems able to perform tasks that normally require human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages.”  AI governance is not related to government regulation, but to internal quality control. AI governance is the standards and legal framework for monitoring and evaluating algorithms and other internal mechanisms for effectiveness, risk, bias, return on investment and other critical characteristics.



One hundredth of a percent may be written as 0.01% (1/100th of a percent) or 0.0001 in decimal form. In spoken communication, we call it a basis point, or bip for short.


Please see Alpha and Beta.


Binance, founded in 2017, is the world’s largest cryptocurrency exchange in terms of daily volume, where various cryptocurrencies can be traded. It is registered in the Cayman Islands, but is a virtual exchange, not a physical place like NY Stock Exchange.


Introduced in 2009, Bitcoin is considered the first decentralized digital cryptocurrency. As of 2022, it remains the most popular and highly valued asset of its type.


A blockchain holds an online ledger of all currency transactions, providing a secure data structure for the ledger. Copies of the ledger are maintained by the entire computer network. As each new ledger block is generated, it must be verified by each computer node before being confirmed, to reach consensus among the nodes. This process makes the falsification of transaction history records virtually impossible.


A blockchain is a series of recorded transactions. A block is 1 megabyte (MB) of transactions. The number of transactions - possibly thousands - in a block depends on the complexity of the transactions. A block is a digital ledger, or accounting record, of transactions, maintained by miners. A chain is, of course, a group of blocks. Integrity of the ledger is maintained by consensus of a peer group of miners who are anonymous to each other. Each miner operates a node. According to, blocks on Ethereum are committed approximately once every fifteen seconds.


A buffer overflow occurs when the volume of data exceeds the storage capacity of the memory buffer. As a result, the program attempting to write data to the buffer overwrites memory locations. 


Burning is when a specific amount of cryptocurrency is permanently removed from circulation.  Funds for permanent removal from the market can come from the team’s reserves, or as part of a buyback in which coins can be bought from the market and then destroyed.  Token burning decreases supply without affecting demand.  Under the law of supply and demand, a decrease in supply should increase buy pressure and incentivize investors to hold.




In contrast to DeFi, Decentralized Finance, CeFi is Centralized Finance. Throughout history, the US has used a centralized finance system.


Please see Crypto Coin.


Clickjacking is an attack that tricks a user into clicking a webpage element which is invisible or disguised as another element.  Typically, a user clicks a link that appears to lead to one place, but instead directs them to the attacker’s chosen destination — most often for malicious purposes. Clickjack is a portmanteau word composed of “click,” for selecting a computer link, and “hijack,” for transporting a user to an unintended destination.


Clique proof of authority is a consensus protocol compliant with Ethereum. This proof of authority means that only approved signers can seal the blocks on the blockchain.


Collateral is security backing a loan or an asset; pooling is a technique in which an institution makes collateral available to a counterparty without assigning it to a specific transaction.  Pooling minimizes or eliminates the risk of counterparty failure.

CONSENSUS MECHANISM says that blockchains like Ethereum “are in essence distributed databases, the nodes of the network must be able to reach agreement on the current state of the system.”  The integrity and security of the blockchain system are maintained by independent, unrelated node operators agreeing unanimously on the state of the system. 


CREST is an international not-for-profit accreditation and certification body that represents and supports the technical information security market.


Counterparty is a legal and financial term referring to the other party in a contract or transaction.  Counterparty to buyer is seller; counterparty to seller is buyer. Counterparty risk, therefore, is the risk to each party of a contract that the counterparty will not perform its obligations.  Digital assets with conventional collateralization, especially collateralization by fiat currency, are particularly susceptible to counterparty risk. Decentralized systems based on open blockchains, like Liquidity, are designed specifically to eliminate counterparty risk.


Cross-Site Scripting (XSS) is a type of attack that occurs when a cyber-criminal uses a web application to send malicious code, usually a browser side script, to an unsuspecting end user. Flaws that permit these attacks are fairly common in sites with user interactivity. 


This is an item of value in digital format which uses cryptography. Crypto assets have three main types: cryptocurrencies, security tokens, and utility tokens.


Coins and tokens are usually used interchangeably, as synonyms, to mean units of digital cryptocurrency. In Liquidity Ecosystem, coins and tokens are the same thing. In some systems, however, a technical (some would say hyper-technical) distinction is made between the two terms. In some systems, a coin is the currency native to the platform, as the coin Ether is native to Ethereum, whereas a token is a currency built by an outside user on the platform, the way Liquidity Coin is built on Ethereum. Under that stricter definition, Liquidity would be a token, not a coin. However, it bears repeating that in Liquidity, coins and tokens mean the same thing.


Crypto is an intangible, digital currency system, so-called because it uses highly sophisticated encryption (cryptography) to create new units of currency and to secure/verify exchange transactions.


Cryptography is communication through code, and has been practiced in different cultures for thousands of years. Today, most people associate the word with the blockchain, which uses advanced, heavy computer encryption to maintain the security of transactions in virtual currency, like Bitcoin.



A DAO is a non-hierarchical organization run by a peer group of investors. They establish their own rules, often pool resources, and execute decisions using smart contracts on a blockchain. A DAO has been described as a venture capital group with no board of directors.


A Decentralized Exchange is where digital assets may be bought, sold, and traded.


DeFi is a general term for financial services recorded on public blockchains. Transactions are direct and peer-to-peer, without intervention by any central authority like a bank, government, federal reserve, credit card company, etc.


Applications on the blockchain using crypto tokens and smart contracts without traditional intermediaries or central authorities (banks, governments, federal reserve), to facilitate consumer autonomy.


A DDoS attack is a cyberattack on a server, service, website, or network which floods it with internet traffic. The aim is to overwhelm the website or service with more traffic than the server or network can handle. 


In general, a digital asset is anything created, traded, and stored in a digital format. In the context of blockchain, digital assets include cryptocurrency and crypto tokens.


DLT is the underlying technology of the blockchain, based on the concept of a decentralized network of computer nodes.




The equation says that the total amount of money that changes hands in an economy equals the total money value of goods that change hands. The Equation of Exchange suggests that inflation will be proportional to changes in the money supply. 

M × V = P × T, where:

M = the money supply, or average currency units in circulation in a year

V = the velocity of money, or the average number of times a currency unit changes hands per year

P = the average price level of goods during the year

T = an index of the real value of aggregate transactions



ERC-20 is a type of token which has become the technical standard for all smart contracts on the Ethereum blockchain.


Ethereum is a decentralized, open-source blockchain with broad functionality. Its native cryptocurrency, Ether, is the second largest cryptocurrency (after Bitcoin).  However, Bitcoin is limited to supporting a currency, whereas Ethereum, with its smart contracts and decentralized applications (dApps) is designed as a platform for a nearly infinite variety of applications. As the most actively used blockchain, Ethereum is also the platform for Liquidity.


ERC is a blockchain-based asset with similar functionality to Ether or Bitcoin. It can hold value, and be sent and received.  ERC-20 has become the technical standard for all smart contracts on the Ethereum blockchain. ERC stands for Ethereum Request for Comment, and 20 is the proposal identifier. ERC-20 is a common standard for creating tokens on the Ethereum blockchain.


As puts it, “The Ethereum Virtual Machine is the global virtual computer whose state every participant on the Ethereum network stores and agrees on. Any participant can request the execution of arbitrary code on the EVM; code execution changes the state of the EVM…The Ethereum protocol itself exists solely for the purpose of keeping the continuous, uninterrupted, and immutable operation of this special state machine; it's the environment in which all Ethereum accounts and smart contracts live. At any given block in the chain, Ethereum has one and only one 'canonical' state, and the EVM is what defines the rules for computing a new valid state from block to block.”


An exchange traded fund (ETF) is a group of securities that trade on an exchange just as a stock does. ETFs are similar to mutual funds, except that they trade throughout the day, whereas mutual funds trade once each day. As a result, ETFs are more liquid than mutual funds, and some say, more cost-effective. ETFs can bundle diverse vehicles, like stocks, commodities, bonds, and recently, cryptocurrencies.



A protocol is a set of rules to communicate between systems in a network. For example, HTTP or HTTPS protocols are used to open web pages, and POP3 or IMAP and SMTP protocols are for sending and receiving emails. Applications, the software programs we use, like Facebook and Amazon, are built on protocols. Whether a protocol is “fat” or “thin” depends on the amount of data and control distributed between the underlying protocol or the applications built on that protocol.


Fiat is the physical money, in paper and coins, issued by sovereign governments. Fiat is a Latin-derived word meaning “order” or “decree,” and describes money whose value is set by and backed by a government.  In contrast, representative money is a form of currency that shows the intent to pay, such as checks or credit cards, backed by money in a bank account.


Fluid is the proper name for NFT digital assets in the Liquidity protocol.


A fractional share is a portion of an equity stock that is less than one full share. High share prices in some securities — sometimes over $1,000 per share — had the effect of shutting out individual investors and making shares available mostly to institutions. Fractional shares are offered for sale to promote retail investment.


Fungible means interchangeable, or able to be replaced by another identical item.  For example, a unique work of art is never fungible, but generic items like cash or gold are indistinguishable from one another and can be replaced easily. 




GameFi is a combination of the words “gaming” and “decentralized finance.” GameFi involves play-to-earn (P2E) games based on blockchain technology, and features a marketplace and a token economy.


Gnosis is an open-source, decentralized forecasting tool constructed on the Ethereum platform. Gnosis, in turn, provides an infrastructure to enhance creation of diversified market predictor apps. Gnosis aims to: 

1.         provide the world’s most efficient forecasting tool

2.         offer custom information searching

3.         set the accepted standard for prediction assets.

Gnosis also has a cryptocurrency (GNO) based on Ethereum. 




An HSM is a dedicated crypto processor specifically designed for the protection of the crypto key lifecycle. 


A hardware wallet is a physical device for cryptocurrencies that stores private keys, enabling users to securely store crypto assets.



Hashing is an algorithm performed on data, such as a file or message, to produce a number called a hash. The hash is used to verify that data is not modified, tampered with, or corrupted. 


Heartbleed is a security vulnerability in OpenSSL (secure communications over computer networks) that enables attackers to steal sensitive data like login credentials, personal data, or even decryption keys. 


A Hockey Stick on a graph shows a sudden and extremely rapid growth trajectory after a long period of slow linear growth. It is so named because the line on the graph is shaped like a hockey stick.


HTTP stands for Hyper Text Transfer Protocol.  HSTS stands for HTTP Strict Transport Security. It is a web page header that convey details to the browser to enforce security settings.




This means the first issuance of LNX by the relevant Issuer.


Internet of Value is seen to replace the current Internet of Information. In this web evolution, value will move and be exchanged as information is exchanged today.

ISAE 3402 

International Standard on Assurance Engagements (ISAE) 3402 is an assurance standard to report on risk management, as well as the controls and services provided to customers by service organizations. 


ISO is the set of International Standards; this particular one covers management of information security.




Know Your Customer is a set of standards used within the investment and financial services industry to verify customers, their risk profiles, and financial profile. Know Your Customer refers to a financial institution's obligation to verify the identity of a customer in accord with anti-money laundering laws. US Financial Crimes Enforcement Network (FinCEN) established minimum KYC requirements, and  Securities & Exchange Commission (SEC) requires that a new customer provide detailed financial information before opening an investment account. At the time of this writing, the cryptocurrency market is not required to use KYC standards, although many organizations do, because they respect the standards and wish to show transparency and compliance with federal standards.  Liquidity Ecosystem strictly adheres to Know Your Customer standards in all business practices.




LDAP is a code injection technique used to exploit web applications which could reveal sensitive user information and modify info represented in the LDAP data stores.


Old school, or traditional TV, is known as linear, meaning that a program can only be seen at the particular time and on the particular channel where it is distributed by broadcast, cable, or satellite. Linear is the opposite of connected TV, which allows internet and wireless streaming at any time on demand.


Liquidity has been defined as the ease with which a cryptocurrency can be converted to fiat cash or other types of coins. Lack of Liquidity has been a stubborn problem in blockchain and cryptocurrency industries.  The product family, Liquidity®, was so named to emphasize its solution to this notorious drawback in crypto assets.


LND is the stablecoin that aims to maintain a fixed value to the US Dollar, issued and managed by Liquidity.


The Ecosystem is the network through which LNX Credits, LND Credits and tokens can be used, held, traded, transferred, or spent. 


Liquidity Exchange is the crypto-asset exchange where Members can buy, sell and trade their crypto assets. 


Using this trading application, Members can access Liquidity Exchange platform on phones or tablets to purchase and trade cryptocurrencies on the move. 


LNX is the official coin issued and managed by Liquidity. This digital asset was developed on the Ethereum platform specifically for dedicated use in Liquidity Ecosystem.


This is the payment solution app that fuels Liquidity Ecosystem, connecting Merchants and Members. Members of the ecosystem can exchange their LND and LNX for goods and services. 


Liquidity Support is the ability of the Reserve to use its funds to provide liquidity if needed.


This refers to the maximum amount of Liquidity Coin Credits that invited Members are entitled to purchase. 


Credits in a Member's account on Liquidity Exchange correspond to a crypto asset, which entitles the Member to trade on Liquidity Exchange platform.




This is a type of cyberattack where the attacker secretly relays, and possibly alters, the communications between two parties who believe that they are directly communicating with each other.


This term refers to a person or entity who registers and creates an account with Liquidity Exchange.


A Merchant is any retailer approved by Liquidity Pay who accepts LND Credits or LNX Credits as a means of payment for goods or services.


This is the new name of Facebook, changed in October 2021.


The metaverse is an environment for virtual reality, augmented reality, and video. In the metaverse, users "live" within a digital universe. Metaverse tokens are a virtual currency used to make digital transactions within the metaverse.


Mining is process by which new crypto coins enter into circulation, and the blockchain ledger is maintained. Mining is an energy-intensive process using sophisticated computers that solve complex computational math problems. Solving these computations is called Proof of Work. Miners are compensated for their work with cryptocurrency or tokens. In other words, miners receive value in digital form for completing blocks of verified transactions added to the blockchain.  Basically, miners work as impartial auditors by verifying the legitimacy of crypto transactions, and issuing new coins.


Minting is another way to create new coins as an alternative to mining. The difference is that mining is a Proof of Work activity which is extremely complicated and energy-intensive.  Minting is a passive activity based on Proof of Stake.  A staker can earn more coins based on how many they hold. 




A node is simply the name for a computer operated by a crypto miner.  Collectively, nodes are the administrative body of the blockchain which verifies the legitimacy of transactions in each block. Ethereum is known as a decentralized system because, instead of a central authority, it has thousands of nodes that communicate in the same system but are unknown and unrelated to each other.  As puts it, “Nodes communicate with each other to propagate information about the Ethereum Virtual Machine (EVM) state and new state changes. Any user can also request the execution of code by broadcasting a code execution request from a node. The Ethereum network itself is the aggregate of all Ethereum nodes and their communications.” 


Fungible, of course, means that units are all the same and are interchangeable, like US Dollars or Bitcoin. Non-fungible tokens are the opposite; each one is unique. NFTs are used like Certificates of Authenticity for particular assets. NFTs are stored on an open blockchain and use smart contracts. NFTs can be tracked as they are created, sold, and resold. 




Padding is a centuries-old technique of cryptography which involves adding extraneous information to a coded message. The simplest example is the children’s game of “Pig Latin” in which they add the extraneous syllable “ay” to each word. In Pig Latin, “Let’s jump rope” becomes “Et’s-lay ump-jay ope-ray.” More sophisticated versions of padding are still used in all kinds of cryptography today.


In cryptography, a padding oracle attack uses the padding validation of a cryptographic message to decrypt the ciphertext. To oversimplify somewhat, the oracle (usually a server) leaks data about the padding of an encryption such that an attacker can remove the padding, and uncover plain text. 


PCI DSS is a set of requirements which explain how to protect organizations and customers when taking payments.


Crypto operations are decentralized because they do not rely on a third-party authority, such as Federal Reserve, a bank or a credit card company. Peers are equals, and transactions on a blockchain are verified by groups of peers who are unknown to each other. 


Peg is a policy which sets a specific fixed exchange rate for a currency.  In conventional finance, countries control their fiat currency rate by pegging it — attaching it — to a standard currency, such as US dollars, which is a common practice in many nations. A pegged cryptocurrency is an encryption-secured digital medium of exchange whose value is tied to that of some other medium of exchange, such as gold or the currency of a given nation. Pegging is a mechanism to counteract volatility and secure a more stable currency. 


A penetration test is a simulated attack on a computer system to evaluate its security. Penetration testers use the same tools, techniques, and processes as malicious attackers to find weaknesses in a cyber system.


Plumbing is a common metaphor for infrastructure of the financial system that enables flows of credit, capital, and financial risk.


POS refers to the physical or virtual location of a customer's purchase of an item, or the actual physical point-of-sale device.


Liquidity Coin is offered in a private sale to certain Members of Liquidity Exchange on an invitation-only basis.


These are individuals formally invited by Liquidity Exchange to participate in the initial sale of Liquidity Coin by purchasing Liquidity Coin Credits, up to a maximum amount.


Proof of State is an alternative consensus system to Proof of Work (PoW). In PoS, cryptocurrency holders can mint new coins or validate block transactions based on the value of coins or tokens they hold in the system.  Instead of using excessive energy and computing power to answer PoW algorithm puzzles and mine coins, a Proof of Stake (PoS) minter is limited to minting a percentage of transactions related to the ownership stake they hold.  (The largest cryptocurrency, Bitcoin, uses only Proof of Work and not Proof of Stake.)


Proof of Work is a decentralized security mechanism based on the consensus of miners. Members of a network must invest effort and energy (usually massive amounts of electricity) solving a complex, arbitrary mathematical puzzle.  In other words, Proof of Work is the original consensus algorithm in Blockchain technology, used to confirm transactions and add new blocks to the chain.


Purchase Orders are submitted by Members to buy LND Credits on Liquidity Exchange.




This is when a government central bank buys large amounts of financial assets to try to stimulate the economy. QE involves buying huge amounts of different financial assets to put more money into the economy and also aid sectors that are on the verge of collapse by buying them out. US Federal Reserve announced March 15, 2020 that they would purchase $700 billion in government debt bonds and mortgage-backed securities from domestic financial institutions. QE is fairly new and somewhat experimental.


Quantum is a private encrypted blockchain protocol specially designed for use in Liquidity’s private blockchain network or consortium blockchain network. This is the backbone of the Ecosystem.


QR code is a square bar code which allows Members to instantly access information on a product or service.




RAFT is an acronym for an algorithm with the listed qualities. It is a consensus algorithm that is designed to be easy to understand.


This is an injection attack through which an attacker can execute malicious commands on the host operating system via the application.


Rent taking (or rent seeking) is an economic concept meaning that an entity gains wealth without contributing any value or productivity. It often involves government-funded programs. Examples of rent seeking are companies lobbying for government grants, subsidies, tax deductions, or tariff protection. In the context of this paper, rent taking could extend to private persons or entities controlling internet resources and charging user fees without adding any value.


A reserve is a pool of assets managed by Liquidity as Issuer of the digital assets (LNX, LND, etc.) that are collateral-backed to maintain the value of the digital assets.


This means any country where investments in crypto or other crypto transactions are restricted in any way.


A restricted period is one in which transactions outside Liquidity Exchange and Ecosystem are limited.




Slippage occurs when currency buy price is much higher than expected, due to market volatility. For example, the bid-ask spread of Ether (ETH) is 308.15 by 308.20. An investor places an order and expects it to fill at 308.20. But the market is so volatile and fluctuating so rapidly that in just the few moments in which the trade is being executed, the buy price goes up to 308.30. The 0.10 difference between expected price of 308.20 and actual price of 308.30 is called slippage.


A smart contract is a computer program or a transaction protocol, based on an actual contract, that automatically self-executes. The smart contract is an innovation of Ethereum. According to, “A smart contract is simply a program [a collection of code] that runs on the Ethereum blockchain. Smart contracts can define rules, like a regular contract, and automatically enforce them via the code.”


A stablecoin is a class of cryptocurrencies that attempt to offer price stability because they are backed by a reserve asset. Liquidity Network Dollar is a stablecoin, structured with the aim to maintain its value 1-to-1 relative to the United States Dollar.


Staking is a passive investment which is an alternative to mining.  Investors set aside tokens to serve as a validating node for the network. Staking means buying, and setting aside, a certain number of tokens to become an active validating node for the network. By simply holding coins or tokens, the buyer is compensated for acting as part of the network's security infrastructure. 


As the name conveys, subsequent is any issuance that occurs after the initial offering.




Please see Crypto Coin.


Thematic investing means buying investment vehicles oriented to a particular trend. Because thematic exchange traded funds – called thematics for short – are usually concentrated in one segment of the economy, they may carry more risk.


TLS is the latest version of the internet's most popular security protocol, which encrypts data to provide a secure communication channel between two endpoints. Nearly all users have encountered TLS, often without being aware, as it is deployed for email, instant messaging, voiceover IP, and secure HTTPS.



The blockchain supports two types of digital assets: cryptocurrency and crypto tokens.  The main difference is that currency is a native asset of a blockchain, like Bitcoin, and tokens are part of a platform built on an existing blockchain.  For instance, the Ethereum blockchain’s native token is ether (ETH), but many other tokens also utilize the Ethereum blockchain. Tokens serve many functions, including participating in decentralized finance mechanisms, accessing platform-specific services and, on some platforms, playing games. 


Traditional finance (TradFi) includes standard retail, commercial, and investment banks, as well as credit card and financial tech companies. Institutions in this sector are household names, like Chase, Bank of America, PayPal, American Express, Visa, etc.




Because unicorns, the imaginary animals, are so rare, they have become a humorous symbol for those rare, privately-held startup companies with value over $1 billion. Examples of unicorns are Airbnb, Facebook, and Google.


A user is anyone who accesses or uses Liquidity Exchange App or Liquidity Pay App.


This is the commercial value proposition of Liquidity Dollar.



WEB 1.0 & WEB 2.0

Web 1.0 was the first incarnation of the internet. Users would dial up to get information from static desktop webpages. In the next version, around the turn of the millennium, Web 2.0 became an interactive experience with user-generated content. And as smart phones developed, the internet became mobile and always connected. Users stored their data in the cloud, and lived their social lives online. 

WEB 3.0

Web 3.0 denotes the internet’s next generation, envisioned as a decentralized version of the virtual world, where users can interact and collaborate independently of central, data-specific repositories. The Internet of Value is seen to replace the current Internet of Information. In this web evolution, value will move and be exchanged as information is exchanged today.


This refers to Ethereum-type addresses or other blockchain addresses which have been verified and registered with Liquidity Exchange or the Issuer.


World Economic Forum is an NGO (non-governmental organization) formed in 1971 and based in Switzerland. Its membership is primarily political and business leaders who study political, economic, social, and environmental concerns.



Appendix- Intro to Ethereum

Since our proprietary Liquidity LNX Blockchain is a hybrid and has Ethereum components, the following article was posted on the website to explain the basics of the Ethereum system. The original may be found at  An excellent reference to delve deeper into cryptocurrency operations is the Ethereum Whitepaper at


What is a Blockchain?

A blockchain is a public database that is updated and shared across many computers in a network. "Block" refers to the fact that data and state are stored in sequential batches or "blocks". If you send Ether [crypto-currency] (ETH) to someone else, the transaction data needs to be added to a block for it to be successful. "Chain" refers to the fact that each block cryptographically references its parent. A block's data cannot be changed without changing all subsequent blocks, which would require the consensus of the entire network. Each new block and the chain as a whole must be agreed upon by every computer in the network. These computers are known as "nodes". This is so everyone has the same data. To accomplish this distributed agreement, blockchains need a consensus mechanism.


Ethereum currently uses a proof-of-work consensus mechanism. This means that anyone who wants to add new blocks to the chain must solve a difficult puzzle that requires a lot of computing power. Solving the puzzle "proves" that you have spent the computational resources. Doing this is known as mining. Mining is typically brute force trial and error but adding a block successfully is rewarded in ETH. New blocks are broadcasted to the nodes in the network, checked and verified, thus updating the state of the blockchain for everyone.


So to summarize, when you send ETH to someone, the transaction must be mined and included in a new block. The updated state is then shared with the entire network. More on the details below.


What is Ethereum?

In the Ethereum universe, there is a single, canonical computer (called the Ethereum Virtual Machine, or EVM) whose state everyone on the Ethereum network agrees on. Everyone who participates in the Ethereum network (every Ethereum node) keeps a copy of the state of this computer. Additionally, any participant can broadcast a request for this computer to perform arbitrary computation. Whenever such a request is broadcast, other participants on the network verify, validate, and carry out (“execute”) the computation. This causes a state change in the EVM, which is committed and propagated throughout the entire network.


Requests for computation are called transaction requests; the record of all transactions as well as the EVM’s present state is stored in the blockchain, which in turn is stored and agreed upon by all nodes.


Cryptographic mechanisms ensure that once transactions are verified as valid and added to the blockchain, they can’t be tampered with later; the same mechanisms also ensure that all transactions are signed and executed with appropriate “permissions” (no one should be able to send digital assets from Alice’s account, except for Alice herself).


What is Ether?

The purpose of Ether, the cryptocurrency of the Ethereum network, is to allow for the existence of a market for computation. Such a market provides an economic incentive for participants to verify/execute transaction requests and to provide computational resources to the network.


Any participant who broadcasts a transaction request must also offer some amount of ether to the network, as a bounty to be awarded to whoever eventually does the work of verifying the transaction, executing it, committing it to the blockchain, and broadcasting it to the network.


The amount of ether paid is a function of the length of the computation. This also prevents malicious participants from intentionally clogging the network by requesting the execution of infinite loops or resource-intensive scripts, as these actors will be continually charged.


What are Smart Contracts?

In practice, participants don’t write new code every time they want to request a computation on the EVM. Rather, application developers upload programs (reusable snippets of code) into EVM storage, and then users make requests for the execution of these code snippets with varying parameters. We call the programs uploaded to and executed by the network smart contracts.


At a very basic level, you can think of a smart contract like a sort of vending machine: a script that, when called with certain parameters, performs some actions or computation if certain conditions are satisfied. For example, a simple vendor smart contract could create and assign ownership of a digital asset if the caller sends ether to a specific recipient.


Any developer can create a smart contract and make it public to the network, using the blockchain as its data layer, for a fee paid to the network. Any user can then call the smart contract to execute its code, again for a fee paid to the network.


Thus, with smart contracts, developers can build and deploy arbitrarily complex user-facing apps and services: marketplaces, financial instruments, games, etc.

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