Glossary of terms

Air-gapped is a term used in computer networking to imply a non-internet-connected computer. Air-gapped computing devices can increase the security of digital currency wallets, and are often employed by exchanges or institutions using “cold wallets.” Air-gapped devices may require removable media such as a USB stick to access and move digital assets or other data onto an internet-connected machine.

AML/CFT is a joint global initiative that aims to fight terrorism and money laundering, involving a set of decrees for businesses and organizations used to prevent serious economic consequences and violence against civilians globally. The AML/CFT initiative is supported by a large number of countries, as well as government organizations and agencies, including the UN, EU, FATF, IMF, and more.

Money laundering is the process of transferring criminally-acquired money, such as those taken from fraudulent transactions, corruption or bribery. The purpose of making such transfers is to cover up where the money came from and make the acquisition look legitimate. Terrorism financing is the process of funding terrorist networks and organizations. Today, efforts to combat terrorism financing are led by government financial intelligence units (FIU), which are specialized government agencies that share information with each other.

An attestation is a type of assurance an accounting firm provides to attest to the accuracy of a set of statements. It is different from an audit, which is an assurance engagement that verifies the accuracy of financial statements and is typically performed annually by a public accounting firm. See Circle’s monthly attestations.

An automated market maker (AMM) is a system used by decentralized exchanges (DEX) allowing users to become liquidity providers to facilitate automated trading. In traditional markets, buyers and sellers rely on order books and professional market makers to fill orders.
Automated market makers use algorithms to facilitate asset trades between liquidity pools generated with user deposits.

A blockchain is a decentralized immutable ledger composed of a series of blocks that store a set of data on transactions made in a particular network of computers, which are called nodes. Nodes can hold a copy of the blockchain and confirm the validity of the transactions, and some nodes help secure the blockchain through processes known as mining or staking.

Blockchains are notable for their open, immutable, transparent and decentralized attributes, theoretically enabling anyone with an internet connection to participate in the network or view transactions made on-chain.

Cryptocurrencies are a common use case for blockchain technology, but many businesses and industries could benefit from decentralized infrastructure. Blockchain can be used to facilitate decentralized voting, health records, education, file sharing, governance, provenance and loyalty rewards, and more.

A blockchain network refers to the whole system that supports a distributed ledger and its series of smart contracts. It is analogous to a bank’s ledger, only that it ensures its integrity by encryption, decentralized validation, and permanent record instead of simply being based on trust.

The role of smart contracts in a blockchain network is to facilitate the transactions made by the network’s participants and automate their recording on the ledger. This enables the creation of a platform where users can perform various types of transactions depending on the applications developed in it, as well as in other participating blockchains.

There are many instances when blockchain networks that offer various services collaborate with each other to create a bigger ecosystem. In these networks, smart contracts function as the bridge between different networks to enable cross-chain transactions.

A blockchain node refers to a computer or a server that stores data in a blockchain network, and is interconnected with other nodes. Each time a new version of a blockchain is confirmed, each node updates its copy with the latest version. Some nodes only store a portion of the blockchain in their storage, but there are also full nodes that keep the whole blockchain history.

Miners interact with blockchain nodes whenever a new transaction has to be added to a block. Transactions stored in blocks are broadcast to the network’s nodes, which miners verify based on the validity of the transaction signature and underlying transaction information.

Burning is the process of removing (i.e. burning) units of a particular digital asset from circulation, reducing the total supply. As an example, vetted businesses and financial institutions can burn or redeem USDC or EURC to receive a corresponding amount of fiat currency.

A Central Bank Digital Currency or CBDC refers to a type of centralized digital asset issued by governments, usually by central banks. CBDCs can be considered a hybrid of crypto and fiat as CBDCs typically use blockchain technology to create a digitized form of national currencies. CBDCs can be used for different purposes, including as a medium of exchange and store of value.

Cold storage refers to a way of storing digital assets and other sensitive data offline. Cold storage or ‘cold wallets’ may be used by cryptocurrency exchanges and financial institutions, individual holders, or other businesses to reduce the risk of theft from unauthorized access or cyber attacks.

Cross-chain bridges are software applications that use one or a variety of methods to move data or value between blockchains. Some cross-chain bridges require liquidity to be locked on the ‘sending’ network to back the value of assets on the ‘receiving’ network.

Cryptocurrency is digital currency that exists digitally on blockchain networks, in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.

A cryptocurrency exchange is a platform for the trading of digital assets. Other services might also be available through these platforms, including leverage trading or perpetual contracts.

Cryptocurrency exchanges can be either centralized (CEX) or decentralized (DEX). CEX typically utilize order books to facilitate trading, while most DEX are powered by Automated Market Makers (AMMs). When using a CEX, users are effectively handing over control of their funds to the exchange until they are withdrawn. With DEX, the user remains in control of their assets within their digital wallets.

Decentralized Autonomous Organizations (DAOs) are entities tasked with controlling a platform, network or product without a designated centralized hierarchy used to make decisions. DAOs can steward a variety of organizations and entities, including digital assets, DeFi protocols, charity organizations, and more.

The core feature of a DAO is ownership; it is collectively owned by all its members, in some cases in proportion to holdings of ‘governance tokens’. Many DAOs have their own treasuries that are used to advance or preserve a given organization or entity, and which can only be accessed through a vote by its members.

DAOs operate through smart contracts on a blockchain. The smart contracts set the rules governing the organization. The members of the community who have a stake in the organization can determine a major change in these rules through proposals and votes. One major advantage of these organizations is transparency. Most DAOs have an open code that can be viewed by the public, and their treasuries can be analyzed on-chain, increasing transparency.

A decentralized exchange (DEX) is a digital asset exchange platform that allows for trading directly between users or using liquidity pools without relying on a centralized third-party to facilitate transactions.

Decentralized Finance (DeFi) refers to blockchain-powered financial applications designed to increase financial inclusion and availability of financial tools around the world. DeFi has been used for decentralized lending and exchange platforms, perpetual contracts, decentralized derivatives and more. DeFi applications may also use smart contracts to automate financial transactions, aiming to increase capital efficiency and global liquidity.

Digital currency is a form of currency that exists only in digital or electronic form on blockchains and that can operate without relying on traditional financial infrastructure.

Digital wallets are applications that connect to blockchain networks or proprietary databases and are used to execute transactions (like sending a payment) or store digital assets like USDC or non-fungible tokens (NFTs). Digital wallets are typically found on connected devices and have varying levels of security and compatibility between one another and various applications, based on their configuration. Learn about Programmable Wallets.

An electronic stored-value instrument that is redeemable at par to the US dollar.

Fiat currency is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. Compared to currencies based on fixed resources like gold or silver, fiat currency gives the central banks greater control over the money supply and related economic variables like credit supply, money velocity and liquidity.

Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Fractional reserve banking is used to support lending and expansion of the economy. However, fractional reserve banks are susceptible to bank runs where depositors request to take out more money than is held in reserve, which can lead to bank failure.

Full reserve banking is a system in which all deposits made at a bank or financial institution are held in reserve, not lent out to generate returns as in fractional reserve banking.

Hot wallets are connected to the internet and used to make on-chain transactions like sending payouts to customers or rebalancing liquidity on exchanges. Hot wallets typically hold only funds that are needed to perform day-to-day operations, because they are considered less secure than “cold wallets” that remain offline and often hold a greater proportion of an organization’s funds than hot wallets.

Know-Your-Customer (KYC) is a regulatory guideline and procedure that obligates financial institutions as part of their customer due diligence (CDD) process to screen and verify the identities of all their customers periodically in order to ensure that they are true and accurate. Banks, centralized exchanges and other financial service providers implement KYC procedures to prevent cases of identity theft, money laundering, terrorism financing and other illicit transfers of funds.

Layer 2 solutions are protocols built on top of an existing blockchain mainnet Layer 1 in order to increase transaction speeds and throughput of the main blockchain. Layer 2 solutions are designed to help scale blockchain throughput by handling transactions off the Layer 1, while still taking advantage of security inherent in the mainnet blockchain. Layer 2 solutions are a secondary network, where transactions can take place independently of the mainnet.

A liquidity provider is a person or entity who deposits assets into a platform or protocol to facilitate DeFi activity. Liquidity providers can be considered market makers because they provide liquidity, sometimes within a specified price range, to AMM protocols.

Markets in Crypto-Assets (MiCA) is the EU regulation governing issuance and provision of services related to cryptoassets and stablecoins. MiCA covers issuers and service providers, with the aim of protecting consumers and investors while ensuring financial stability and supporting innovation.

Minting refers to the process of generating (i.e. issuing) new units of a particular digital asset and recording its presence on a blockchain. As an example, when vetted businesses and financial institutions deposit fiat currency in their Circle Mint account, a corresponding amount of USDC or EURC is minted.

The Monetary Authority Singapore (MAS) is the central bank and financial regulatory agency of Singapore. The MAS is in charge of currency, banking and insurance, and financial service regulation. In addition, the bank issues guidelines for the registration of other banks in the country.

Established in 1971, MAS regulates policy and misconduct in the financial market by setting up regulations guiding payments, capital markets and other regulatory agencies.

Multi-factor authentication (MFA) is a security function that utilizes two blockchain networks to prevent attackers from easily gaining control over a user’s digital assets. MFA systems provide authentication to a digital wallet or application using at least two independent log-in credentials.

Multiparty computation (MPC) is a cryptography technique that allows multiple parties to conduct a transaction without compromising privacy. Essentially, an entity in a group adds their data to the computation without revealing it to the other group members.

MPC cryptography helps solve the problem of having individuals maintain control over their private keys. MPC, also known as secure multiparty computation or privacy-preserving computation, enables users to collectively authorize transactions using a private key derived from hidden segments submitted by a group of entities.

Multiparty computation allows businesses and institutions to increase security by requiring blockchain transactions to be authorized by more than a single person or department.

Multisignature refers to a digital signature that can be formed only through the fusion of several other unique digital signatures. Cryptocurrency wallets utilize multisignature to provide a complex layer of security that requires two or more signatures before any transaction is authenticated.

Single-key wallets can often be compromised because they only have a single point of failure. An attacker only needs access to one private key in order to take control of a wallet in such cases.

On the other hand, multisignature wallets make sure that before any transaction is authorized, two independent signatures (but not necessarily all possible signatures) have to first be provided. This lowers the risks of successful wallet attacks since it requires multi-layered approval before each transaction goes through.

Non-fungible tokens (NFTs) are digital collectibles stored as data on the blockchain. A fungible asset is an asset that can be replaced for other like assets which are essentially the same thing. For example, one USDC can be swapped for another USDC. A non-fungible asset is unique and has no exactly alike counterparts with which it can be interchanged. NFTs can be art, music, videos, games, and more.

NFTs can help verify ownership using cryptographic signatures unique to the asset, and data about the original generator and a list of all previous owners are recorded on the blockchain.

A payment stablecoin is a digital bearer instrument entitling the holder to redemption at par for equivalent fiat currency, even in the event of the issuer's bankruptcy. Learn more.

Permissionless blockchains, also known as public blockchains, do not restrict who can join and participate in the network. The most well-known blockchains – such as Bitcoin, Ethereum, and Stellar – are public blockchains. Permissionless blockchains represent the foundational layer in the next evolution of how value and information is transmitted online.

A private key refers to a series of alphanumeric data that is assigned to a digital wallet as soon as it is generated. A private key is used to access the contents and control the actions of a wallet, and anyone with access to the private key can view its contents and sign transactions to spend tokens or transfer NFTs.

A public address is a cryptographic code that allows users to receive assets in a cryptocurrency wallet; it is the address other users input to send transactions to your wallet, like an email address. A public crypto address consists of a mixture of letters and numbers, but services exist to allow users to substitute difficult to remember strings of characters with more easily recognized titles, like ‘circle.eth’.

Unlike private keys, public keys and addresses can be safely shared with other users for peer-to-peer transactions, and can be used with blockchain analysis tools to understand the contents (but not interact with them) of a given digital wallet.

A recovery seed, also known as a seed phrase, refers to a randomized list of words provided to users during the initial setup of a digital wallet. A recovery seed allows users to regain access to an associated digital wallet in the event access to the device hosting the wallet is disrupted or lost.

A smart contract is a self-executing agreement that contains defined parameters that lead to automatic execution of specific functions. Smart contracts allow transactions to happen without the need for third-party execution or manual intervention.

Smart contracts are used in decentralized applications (dApps) since they can be coded to perform actions independently as long as the standards specified by developers are met. Today, smart contracts are already used in decentralized exchanges, lending services, non-fungible tokens, and more.

Stablecoins, such as USDC, are a form of cryptocurrency that are designed to remain pegged, or tied to an existing fiat currency, commodity or otherwise set price.

Tokenized cash represents a subset of stablecoins, meant to represent instruments that are fully-reserved with cash and cash equivalents, such as Treasury bills and other high-quality liquid assets. USDC and EURC are examples of tokenized cash. This category is often contrasted with tokenized deposits, which are on-chain representations of traditional fractional-reserve bank deposits.

Total value locked (TVL) is the total of all digital assets held in decentralized finance (DeFi) protocols. TVL may also be used in reference to the value of digital assets held within a specific protocol or blockchain ecosystem TVL can be used as a metric for measuring health and growth in the DeFi sector. It includes all the tokens deposited in DeFi protocols offering services that include staking, lending, liquidity pools and more. TVL changes when users deposit or withdraw in the DeFi pools.

A blockchain validator is an entity responsible for confirming and verifying transactions on the blockchain. A blockchain is a decentralized public ledger for the record of transactions. As a result of the decentralized nature of cryptocurrencies, there is no centralized authority responsible for verifying transactions.

Validators operate based on the underlying blockchain consensus model. For a blockchain that works on proof-of-work, the validators are miners and use high-end computational power to solve complex puzzles. For the proof-of-stake consensus model, validators stake assets and verify transactions to earn rewards, or risk having their staked tokens revoked based on inaccurate validation.

A virtual asset service provider refers to a broad category of entities engaged in the digital assets ecosystem. As broadly defined by the Financial Action Task Force (FATF), VASPs undertake or facilitate one or more of the following activities: exchange between virtual assets and fiat currencies; exchange of different forms of virtual assets; safekeeping, administration, or control of virtual assets; and participation in, or provision of, financial services related to an offer or sale of a virtual asset.