A new phenomenon usually brings with it a whole set of new words, terms, phrases and definitions.
While Bitcoin is a relatively new invention, some of the terms used such as mining and wallet may have been around for a long time – they just carry their own definitions applicable in the world of cryptocurrencies.
If you’re new to bitcoin, blockchain and cryptocurrencies, it would be a good idea to give the list below a skim through. This is a quick way to understand and familiarise yourself with the terms and nomenclature unique to bitcoin, cryptocurrencies and their related technology.
Terminology of Bitcoin and Cryptocurrency
An abbreviated term for alternative coins or alternative cryptocurrencies, these are spin-offs based on the Bitcoin open-source software and later on, from some of the earlier cryptocurrencies which have proven to be successful. Most altcoins do not play quite the more mainstream role as bitcoin does, and some fail and disappear due to lack of adoption. They are usually created for specific purposes and can be treated like currency within their own industries. At time of writing, there are over 500 altcoins in existence, and these are all listed at www.worldcoinindex.com. Some altcoins such as Ethereum and Zcash have become quite popular, while a few others have been created as scam exploits and aptly named scamcoins.
An acronym for Application-Specific Integrated Circuit. These are purpose-built hardware designed to do only one thing and excel at it – bitcoin mining. Having replaced the CPU and GPU that were once used for mining, ASIC miners are now developed to provide the fastest hashrates at the lowest power consumption possible. This lowers overheads and maximise the ROI in bitcoin mining. See How to Mine Bitcoin for some examples of ASIC miners.
The second most popular bitcoin mining software after CGMiner.
The word Bitcoin has two definitions. Bitcoin with an uppercase B refers to the Bitcoin system, protocol, network and such, whereas bitcoin with a lowercase b refers to the unit value of bitcoin currency, which is denoted by the symbol ฿.
The primary implementation of the Bitcoin protocol and what wallets and bitcoin-related services are based on. Bitcoin-Qt is also known as Bitcoin Core.
An alternative implementation of the Bitcoin code initiated by Gavin Andresen and Mike Hearn which is compatible with the current main implementation of Bitcoin. It was introduced by Andresen and Hearn as a replacement for Bitcoin-Qt during a debate with the developers of Blockstream, but as Bitcoin relies on the consensus of the majority of miners, and with most miners favouring Bitcoin-Qt instead, Bitcoin XT was short-lived.
Transactions are grouped into blocks on the blockchain. Each block is validated by miners approximately every 10 minutes, and is appended to the previous blocks in a series like chain, hence the term blockchain.
A decentralised public ledger that records all the bitcoin transactions that ever took place. The transactions are stored in a series of blocks in a chain-like connection, hence the term blockchain. The blockchain is not limited to only bitcoin – the Bitcoin is a currency app the uses the blockchain for it to function, and just one app amongst other possible apps of digital assets like intellectual property, smart contracts, bonds, titles, votes and others that rely on the blockchain technology for their function.
As its name suggests, a block explorer is a website or software program that allows users to explore and wade through the blockchain to monitor and scrutinise bitcoin transactions. A separate block explorer is also available for altcoins.
The most popular bitcoin mining software.
Sometimes called a cold vault or cold storage, this is a wallet on a computer, storage drive or USB key that is not connected to the network and not susceptible to hacking or any unauthorised access using online methods. See also, hot wallet and paper wallet.
Central Processing Unit is the electronic circuitry within a computer that carries out the instructions of a computer program by performing basic arithmetic, logical, control and input/output operations specified by those instructions. See also, GPU.
A digital currency that utilises cryptography as a core of its function, which enables it to function securely on its network and keep transactions, and user identities and accounts secure. Bitcoin is the world’s first decentralised cryptocurrency that was created in 2009 and since then, thousands of other cryptocurrencies known as altcoins have been created from the open-source code of Bitcoin.
The part of the deep web built from specific services which are usually of illicit nature, such as illegal drug activities. The dark web is not necessarily limited to illegal activities, but also provide a secure place for people to meet for more legal activities such as information gathering, where anonymity is required. In Bitcoin world, the Silk Road was the most infamous reference to the dark web.
The structure where a network or service is distributed over a large group of people or operations, such as in a peer-to-peer network. The advantage of a decentralised network is the absence of a single point of failure. The Internet is a good example of a decentralised global network of computers. Terminology-wise however, a decentralised structure is slightly different from a distributed structure.
Also known as invisible web or hidden web, deep web is the part of the Internet where data is not indexed by search engines and hence not visible through common web browsers. This includes matters ranging from the legal such as banking and confidential data, to the illegal such as drug activities.
In Bitcoin terms, this is a measure of how difficult it is to mine a block of bitcoin, which is directly considered as how difficult it is for miners to generate a new block of transactions on the blockchain. The Bitcoin network adjusts this difficulty once every 2,016 blocks, a period which roughly spans about 2 weeks, in order to keep the rate of new blocks generated consistent at approximately 10 minutes. Difficulty is a function of how much hashing power has been deployed by the network of miners Hence, it is also adjusted as the number of miners go up and down. The formula for difficulty is given by difficulty = difficulty_1_target / current_target, where target is a 256-bit number. For the current difficulty rate in real time, see the Blockchain.info difficulty chart. See What is Bitcoin Mining.
A decentralised platform that runs smart contracts, which are in turn run on a custom-built blockchain which enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given way in the past such as a will, and many other things that may not have been invented yet, all without an intermediary or counterparty risk.
The process of converting data and information into a code to protect it from access by persons who do not have authorisation. While encryption is designed for data security and protection, unauthorised access may still occur through malicious intent if the level of encryption is low. The higher the level of encryption, the more difficult it is to hack and gain access to encrypted data. See also, SHA256.
Services on the Internet which will give registered users small quantities of bitcoin for completing specific online activities such as ad viewing and form filling. The value of bitcoin given out for free is usually in the fractions of a cent.
Under the authority of the United States Department of Treasury, the Financial Crimes Enforcement Network safeguards the financial system from illicit use and combats money laundering, promoting national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.
A fork happens when modifications are made to an existing open-source code. In the world of Bitcoin and cryptocurrencies, a fork may occur when a false blockchain is mined, either by accident or by malicious intent. This, though, doesn’t affect the integrity of the actual blockchain.
A local system on the network that stores the entire blockchain and helps validate confirmed bitcoin transactions performed by miners. Full nodes do not require special hardware and do not receive bitcoin as rewards like miners do.
A description of an item, usually money, goods or a commodity, whose individual or divided units, can replace or be replaced by another identical item. In summary, fungible items are mutually interchangeable. Money is considered a good example of fungibility, as a $100 note may be replaced by another $100 note, or may replace two $50 notes or ten $10 notes. A diamond is less fungible as not all diamonds are equal, and variations in their cut, colour and clarity makes it hard to determine if two sets of diamonds are of equal value for a direct exchange or replacement.
Also known as Block 0, the genesis block is the very first block that was created at the beginning of the blockchain, which took place on 3rd January 2009.
Founded by Tom Preston-Werner, Chris Wanstrath and PJ Hyett in 2008, GitHub is a worldwide web-based version-control repository of open-source code and software. GitHub is a development platform that provides a common space for collaborative work on open-source code and hosts such codes on its site at github.com. GitHub also runs an education program called GitHub Student Developer Pack to provide students free access to popular software development tools and services.
Graphics Processing Unit is a specialised electronic circuit designed to rapidly manipulate and alter memory to accelerate the creation of images in a frame buffer for output to a display device such as a computer monitor or mobile device screen. Also known as graphics card, or Visual Processing Unit (VPU). See also, CPU.
A popular bitcoin-mining software that features a graphical user interface (GUI).
An occurrence where a cryptocurrency’s network splits into two, when one group of users and miners start using a version of the software code and protocol that is modified, and another group of users and miners remain on the older software that continues to mine on the blockchain. This can happen if a majority of the participants do not upgrade to the newer protocol version, and the original blockchain which is longer and involves a higher hashrate continue to be supported. See also, soft fork.
A unit of measurement to quantitatively define the computational power being employed on a network, and in the case of bitcoin, to solve a complex algorithm. See also, hashrate.
The speed at which a computer is capable of processing calculations, and thus a measure of how powerful a bitcoin mining equipment hardware is. A hash rate of one terahash per second (TH/s) is equivalent to one trillion calculations per second. An AntMiner S9 rated at 13.5 TH/s is thus capable of 13.5 trillion calculations per second.
Unlike cold wallets, hot wallets are connected to the Internet, whether they are web-based or installed in the phone. Bitcoin stored in hot wallets are exposed to the risk of being stolen in the event the computer or wallet is hacked. Hot wallets are what makes bitcoin easy to use, as they can be transacted immediately when needed. However, large quantities of bitcoin not regularly used are best kept in the more secure cold wallet. See also, Mt. Gox.
Lightning Network is a proposed implementation of bi-directional payment channels which allows payments to be securely routed across multiple peer-to-peer payment channels. This allows the formation of a network where any peer on the network can pay any other peer even if they do not directly have a channel open between each other. Key features of the Lightning Network are: rapid payments, no third party trust required, multi-signature capable, securely cross blockchains including sidechains and altcoins’, and sub-satoshi payments. The Lightning Network was proposed to help resolve scalability problems associated with the increasing number of transactions that the Bitcoin network has to cope with. The white paper on Lightning Nerwork was put forward by developers Joseph Ppn and Tadge Dryja in 2015 as a way to expand Bitcoin to accommodate millions of transactions per second by building a top-layer to Bitcoin that doesn’t require any additional trust in intermediaries. See also, Segregated Witness.
Also known as bitcoin miner – a person or company that participates in the Bitcoin network with a connected mining hardware that performs mathematical computations in validating transaction blocks and confirming transactions, and in effect keeping the blockchain secure. Miners expend huge amount of resources in terms of equipment costs and electricity to keep the Bitcoin network and system running smoothly, and they are in turn rewarded with bitcoin with every block of transactions successfully validated. Anyone can get involved with mining, although these days it is more feasible when operating with special mining hardware known as ASIC miners, or joining a community that offers better returns due to economies of scale. See Who Are Bitcoin Miners and Join A Bitcoin Mining Pool.
The process of participating and connecting mining hardware to the Bitcoin network to confirm bitcoin transactions that are grouped into blocks. To validate each block, miners have to employ the computational power of their mining hardware to solve complex mathematical problems before sending the block of transactions to the rest of the network. The first miner to successfully solve the mathematical problem, upon successful verification by other miners on the network, is then rewarded a set of bitcoin for that block. For more detailed explanation, see What is Bitcoin Mining and How to Mine Bitcoin.
A bitcoin exchange based in Tokto, Japan which was launched in July 2010 and was handling over 70% of all bitcoin transactions around the world by 2013. In 2014, Mt. Gox announced that about 850,000 bitcoin belonging to the company (circa 100,000 bitcoin) and its customers (744,408 bitcoin) were missing and probably stolen – an amount to the total of approximately US$470 million at that time. Investigations later on indicated that most or all the missing bitcoin were stolen straight out of the Mt. Gox hot wallet over time beginning in late 2011. 200,000 bitcoin were later recovered in an old digital wallet from 2011, but the damage had been done. On 28 February 2014, Mt. Gox filed for bankruptcy protection in Tokyo, and in the US on 9 March 2014 to temporarily halt legal action by traders who alleged the operation was a fraud. On 16 April 2014, Mt. Gox relinquished its plan to rebuild under bankruptcy protection, and asked a Tokyo court to allow it to be liquidated.
The domain name mtgox.com was originally reserved by programmer Jed McCaleb in 2006 as a website for users of the Magic: The Gathering Online to trade cards. The word mtgox was short for Magic: The Gathering Online eXchange. The site was sold to Mark Karpeles in March 2011 who served as the company CEO, after which the bitcoin started to go missing slowly.
A participant who plays an important part in securing the Bitcoin network by double-checking the work done by the miners. Node runners do not compete in the mining activity and are not rewarded bitcoin for their effort in securing the Bitcoin network.
Software code which is open, non-proprietary and can be modified by the public.
The private key to an amount of bitcoin in a wallet, written or printed out on a piece of paper. This practice is considered a very secure way to keep your bitcoin as it is a form of cold wallet, and hence not connected to the Internet and subjected to threats of being stolen. However, it is still important to note that if your computer is infected with malware and connected online, the process of extracting your private key and viewing it to be copied or printed may still subject it to similar threats of being stolen. Precautionary measures will need to be taken, such as ensuring the computer is clean of any spyware and that it is not connected to the Internet. Paper wallet is still just a piece of paper document, and if not careful, may be misplaced or damaged. Once written or printed out, the paper wallet should be treated like cash or jewellery, and be safely stored in a bank vault or safe deposit box, especially if the private key grants access to a significant amount of bitcoin.
A practice with certain altcoins where the creator generates a number of altcoins before the network goes live for the first for proper mining by legitimate miners. Some scams involving altcoins start off with a pre-mined quantity of bitcoin by the creator, although it may be legitimate if the nature of the altcoin requires that it be pre-mined, or if the altcoin only serves a specific industry on a small scale. In any case, the creator should be expected to declare this upfront so that investors and users know what they are getting the altcoins for.
A private key is usually a 256-bit number (some newer wallets may use between 128 and 512 bits), which is a secret number that allows bitcoin to be spent. Every Bitcoin wallet contains one or more private keys, which are saved in the wallet file. The private keys are mathematically related to all Bitcoin addresses generated for the wallet. The private key is the code that allows someone to spend bitcoin, and hence it is important that these are kept secure. Private keys can be kept on computer files, but in some cases are also short enough that they can be printed on paper. See cold wallet and paper wallet.
A cryptographic key that can be obtained and used by anyone to encrypt messages intended for a particular recipient, such that the encrypted messages can be deciphered only by using a second key (i.e. the private key) that is known only to the recipient. Public keys may be disseminated widely, with the private keys known only to the owner. The public key is used to verify that a holder of the paired private key sent the message.
The work of proving that bitcoin or any cryptocurrency on the blockchain has been sent to an unspendable address, resulting in the said bitcoin or cryptocurrency to be removed from the system.
A method of obtaining more altcoins by using cryptographic proof that secures that altcoin’s blockchain based on votes by placing or staking the coin holdings, rather than by computational power used in proof-of-work applied in the case of Bitcoin. Like a fixed deposit account at the bank, an altcoin that has been staked remains locked and unspendable for a set period. A percentage of the amount of coins staked as well as the total coins initially staked are return to the owner at the end of that period. The alternative cryptocurrency known as Clubcoin is acquired by proof-of-stake method.
The cryptographic proof used by Bitcoin in securing its blockchain by using computational power of mining hardware to solve complex mathematical problems in validating transaction blocks and sending them out to the Bitcoin network. Bitcoin uses the hashcash proof-of-work function in its mining core. For more information, see What is Bitcoin Mining.
Pronounced es~kript, this is a password-based key derivation function and the proof-of-work algorithm used by a number of cryptocurrencies such as Litecoin and Dogecoin in securing their networks. A password-based key derivation function is designed to be computationally intensive, so that it takes a relatively long time (on the order of several hundred milliseconds) to compute. Mining of cryptocurrencies that use scrypt is often performed on GPUs since GPUs tend to have significantly more processing power compared to the CPU. This led to shortages of high-end GPUs due to the rising price of these cryptocurrencies in the months of November and December 2013.
Segregated Witness, or SegWit in short, is a soft fork solution that addresses the scalability issue as transactions on the Bitcoin network increases over time. SegWit allows the signature part of bitcoin transactions to be separate from the transfer, resulting in a smaller transaction size. This means that more transactions could be fitted into a block regardless of the block size. SegWit also introduces some security improvements, such as fixing the transaction malleability problem where transaction IDs could be modified. This would make it easier for wallet owners to track their spent bitcoin and prevent follow-up transactions from becoming invalid due to an earlier payment or transaction ID getting modified. With this malleability issue resolved, the Lightning Network will also be less complicated to implement as there will now be more efficient use of space on the blockchain. See also, Lightning Network.
Acronym for Secure Hash Algorithm 256-bit encryption, SHA256 is one of the current six hash functions of the SHA-2 family designed by the National Security Agency (NSA). It is the computer algorithm that is used by Bitcoin and some other cryptocurrencies to secure their networks and data.
One of the possible solutions to scaling Bitcoin as transactions increase over time. This involves keeping track of a large number of transactions on a separate blockchain-like ledger that will be added to the final blockchain in a compressed form.
Founded in February 2011, Silk Road was an online black market and the first modern dark web marketplace which allowed online users to browse and trade goods and services anonymously by utilising a Tor hidden service. Silk Road became known as a platform for selling illicit drugs and other items of illegal nature, such as fake driver’s licence. Nevertheless, certain items were prohibited from sale, such as stolen credit cards, weapons of any type, and child pornography. The FBI shut down the website in October 2013 with the arrest of Ross Ulbricht under the charges of being the site’s founder going by the pseudonym Dread Pirate Roberts.
Applications that run exactly as programmed without any possibility of downtime, censorship, fraud, or third party interference.
A change to the Bitcoin protocol that requires only a majority of miners to upgrade to, to put the new rules into effect. Unlike a hard fork, a soft fork is both forward- and backward-compatible, and will not run the risk of causing the network to split into two and the older protocol to start validating an alternative blockchain. Segregated Witness is an example of a soft fork. See also, hard fork.
Like fees charged for a transaction in banking, in Bitcoin world, transaction fees are small amount of bitcoin charged in the transaction ot bitcoin. Transaction fee is optional in Bitcoin, and usually amounts in the value of a few cents. It is independent of the amount sent, so the transaction fee charged for $1 or $1 million is the same. This is much lower compared to what banks, remittance companies, credit card and online payment processors charge, making it quite negligible as far as transaction fees go.
A software or app on the computer or smartphone that communicates with the Bitcoin network to sign transactions using your Bitcoin address. Local wallets are free to download and install, and are generally the method people use to keep and store their bitcoin. See Setting Up a Blockchain Wallet.
Unlike a local wallet, a web wallet is web-based and held and controlled on a website hosted by a company, usually an exchange. This means that your private keys are handed over and passed to that company to secure for you, based on trust. This method is not as secure as a local wallet as a company having the custody of many users’ private keys in one place is more susceptible to a hack – the more eggs in one basket analogy. However, newer web wallets now feature cold vaults, multisignature technology (multisig) and offline key generation that makes them much safer. Still, web wallets would be more suitable for the purposes of trading bitcoin, using them to spend online, and for the short- to medium-term storage.
A decentralised and open-source cryptocurrency that shields transactions to hide the sender, recipient and value on the blockchain, thereby upholding confidentiality and ensuring private information is protected whilst still operating on a public blockchain. Zcash is also the first permissionless financial system that employs zero-knowledge security, a cryptographic proof that allows fully-encrypted transactions to be confirmed as valid – thus enabling entire new classes of blockchain applications to be built.