Bitcoin Glossary š
š” Daily Reminder: Stay humble, stack sats
Bitcoiners,
Gaining familiarity with common terms used in Bitcoin helps you fully understand the protocol.
Here is a brief list of key terminologies used in Bitcoin. Many of these terms were taken directly from Bitcoin Magazine'sĀ Glossary. Please visit their site for a more in-depth list of terms.
A
Address (or Bitcoin Address):Ā A Bitcoin address is a string of 26 to 35 letters and numbers that represent a destination for bitcoin payments (addresses are often displayed as scannable QR codes). There are three bitcoin address formats currently in use: P2PKH, P2SH and Bech32.
B
Bitcoin Core: Currently the (de facto) reference implementation, or computing standard, for Bitcoin.
Bitcoin Network: The Bitcoin network is the network of computers through which Bitcoin transactions are broadcasted and which maintains the public blockchain.Ā
Block:Ā A block is an individual unit of a blockchain. Each block contains the hash of the previous block, confirmed transactions, and a number called a nonce. Someone creating a block must find a nonce such that the hash of the block is below a certain threshold (the target), which can only be done by trying out nonces one after the other until one that produces a desirable hash is found, and is harder the lower the target is. The reason why block creation is made deliberately difficult is to prevent someone from spending bitcoins and then creating and pushing his own blockchain that doesnāt contain the transaction that shows that the bitcoins are spent, effectively erasing that record and allowing him to spend them twice. When a valid block is created, it is distributed through the network and work on the next block starts.
Blockchain:Ā The blockchain is a public list of all blocks that have ever been mined, ensuring that everyone knows which bitcoins belong to whom. Many nodes on the network keep a copy of the blockchain.
BTC:Ā The ticker symbol representing the digital asset or cryptocurrency bitcoin. Also used as shorthand for Bitcoin Core.
C
Confirmation:Ā A bitcoin transaction being included in a block (and thus, the blockchain), in order to prevent double spending.
Cryptography:Ā Secure techniques based on mathematical concepts. In Bitcoin, cryptography is used to protect funds and blockchain data.
D
DCA (Dollar-Cost Averaging): An investment strategy using a fixed amount of dollars (or other currencies) to buy an asset at regular intervals. For bitcoin investing, this means buying BTC with a fixed amount of fiat currency at regular intervals, regardless of what the price is at any given interval.
Difficulty: The difficulty is how difficult it it to create a new block (for miners to find a hash below a given target). The difficulty is adjusted programmatically every 2,016 blocks so that Bitcoin blocks are validated as close to once every 10 minutes as possible.
Donāt Trust, Verify: An idiom used to emphasize that security, particularly over bitcoin funds, can only be guaranteed through independent verification.Ā
Double Spend:Ā A double spend is an attempt to send the same bitcoins twice. Miners generally prevent this, but such an attack is possible against users who accept unconfirmed transactions and in conjunction with a 51 percent attack.
E
Exchange: An exchange is a service which allows people to buy and sell bitcoins to each other.
Exchange Volume: The volume of an exchange is the number of bitcoins traded during a given time period.
F
Fiat: A fiat currency is a traditional currency like the U.S. dollar and the euro, which ultimately derives its value from its use being mandated by a government for payment of taxes and as legal tender.
G
Genesis Block: The genesis block is the first block of the blockchain released on January 3, 2009.
H
The Halving (Or āHalveningā):Ā A preprogrammed halving of the bitcoin block subsidy, which occurs every 210,000 blocks.
Hash: A hash is a function which transforms any data into a fixed size output which is impossible to do in reverse without trying all possible inputs. As an example of a simple hash function, consider the square root: the square root of 17202 is easy to calculate ā itās about 131.15639519291463, so a simple hash function might be the later digits of this, 9291463. However, given just 9291463 itās much harder to figure out what number it came from, and you basically have to go through all the possibilities. Modern cryptographic hashes like SHA-256 are a much more complex and secure version of this. The word is also used to refer to the output of such a function.
Hashing: Calculating a function that takes an arbitrary amount of input data and deterministically produces a fixed-length output, known as the dataās āhash.ā It can be used to easily verify that data has not been altered because if any part of the input data is changed and the hash algorithm is run again, the hash will change.
Hash Rate: A measurement of the processing power of the Bitcoin network. The higher the hash rate on the network is, assuming its coming from decentralized sources, the more difficult it would be to commit a 51 percent attack.
HODL: A term stemming from a 2013 post in the Bitcointalk.org Bitcoin forum titled āI AM HODLINGā (an apparent misspelling of āI AM HOLDINGā) that has come to define the philosophy of those bitcoin or other cryptocurrency investors who choose to keep their coins, rather than buy, sell and trade them for short-term profits or losses. Poseurs have later retrofitted HODL to be an abbreviation for āHold On for Dear Life,ā just ignore.
Hyperbitcoinization:Ā The inflection point at which bitcoin becomes the worldās preferred medium of exchange.
I
Inflation:Ā In economic terms, inflation is a general increase in prices and decline in the purchasing power of money. In the cryptocurrency space, it is often also used to simply refer to an increase in the supply of a cryptocurrency.
Intrinsic Value:Ā The measure of a given assetās worth based on the value it provides it in and of itself, independent of other factors.
J
K
KYC (Know Your Customer):Ā Financial services guidelines that require providers to make an effort to verify the identity of their customers and potential risks associated with facilitating their financial activity. Closely associated with AML (Anti-Money Laundering) regulations.
L
Layer 2:Ā In Bitcoin, Layer 2 refers to a secondary framework or protocol built upon the existing Bitcoin network, generally to improve scaling, transaction speed or add new functionality while leveraging some of the unique properties of Bitcoin.
Lightning Network:Ā The Lightning Network is a Layer 2 protocol for Bitcoin, specifically designed for cheap, fast and private payments. As an overlay network consisting of payment channels, Lightning payments are not recorded on Bitcoinās blockchain ā only channel-funding transactions and channel-closing transactions are. This effectively means that many Lightning transactions can be settled with much fewer on-chain Bitcoin transactions.
M
Miner: A miner is someone who tries to create blocks to add to the blockchain (the term also refers to a piece of software that does this). Miners are rewarded for their work by the Bitcoin protocol, which automatically assigns new bitcoins to the miner who creates a valid block. This is how all bitcoins come into existence.
Mining: The process by which transactions are verified and added to a proof-of-work blockchain. This process of solving cryptographic problems using high-powered, specialized computing hardware also triggers the generation of cryptocurrencies.
Multisignature:Ā A multisignature (multisig) address allows the address creator to require multiple parties using different cryptographic keys to authorize a transaction. The needed number of signatures is agreed upon at the creation of the address. Multisignature addresses are typically used for increased security and theft resistance.
N
Node: A data point or device within a larger network. Any computer that is connected to the Bitcoin network is referred to as a node, and those that fully enforce all of Bitcoinās rules (or protocols; see below) are referred to as āfull nodes.ā
Not Your Keys, Not Your Coins:Ā An idiom used to emphasize the importance of personally controlling private keys in bitcoin ownership. If a third party controls the private keys for BTC that you have bought, itās possible that the third party will lose or steal that BTC.
O
Off Chain:Ā Occurring off of the Bitcoin network and, therefore, not recorded on the blockchain or broadcasted to network nodes. Lightning Network transactions, for instance, occur off chain until final balances are settled on chain, thus reducing transaction times and fees.
On Chain:Ā Recorded on Bitcoinās blockchain and broadcasted to all network nodes.Ā
P
Peer-To-Peer (P2P):Ā As taking part directly between peers, with no central authority involved. P2P computing networks involve distributed application architecture that allows each computer to act as a server for others, making them equally privileged and granting shared access to data.
Private Key: A private key in the context of Bitcoin is a key connected to an address (technically, the address is the hash of the public key corresponding to the private key) that is stored behind the scenes and allows you to send bitcoins that have been previously sent to that address. Note that because of the way the encryption algorithm that Bitcoin uses (ECDSA) works it is possible to generate the public key and the address from just the private key.
Proof Of Work (PoW):Ā A cryptocurrency protocol, enforced by an algorithm, that seeks to achieve consensus among distributed users by choosing the creator of the blockchainās next block based on their ability to complete a difficult computation that can be verified by the network.
Public Key:Ā A string of alphanumeric characters used to receive bitcoin, which will only be spendable using a signature produced by the corresponding private key. Bitcoin addresses are usually hashes of public keys.
Q
QR Code:Ā A scannable code that in the context of Bitcoin often represents a bitcoin address or Lightning invoice, resembling a barcode.
R
Recovery Seed Phrase:Ā A list of unrelated words that can be used to recover a Bitcoin wallet. Typically generated by wallet software and written down on a piece of paper or otherwise documented by users.
S
Sat (BTC Denomination):Ā A satoshi, or sat, named after Bitcoin creator Satoshi Nakamoto, is one hundred-millionth of a bitcoin, or the smallest unit of the currency that can possibly be sent on the blockchain.
Satoshi Nakamoto:Ā The pseudonymous creator of Bitcoin whose real-world identity remains unknown. No longer publicly active.
Seed Phrase:Ā See āRecovery Seed Phrase.ā
Signature:Ā The segment of a bitcoin transaction that proves that it is approved by the owner of the private key connected to the bitcoin being transacted.
T
Transaction: A transaction is a message that informs the Bitcoin network that a transfer of ownership of bitcoins has taken place, allowing the recipient to spend them and preventing the sender from spending them again once the transaction becomes confirmed.
Transaction Fee:Ā The amount of BTC included in transactions as encouragement for miners to add the transactions to blocks and have them recorded on the blockchain.Ā
U
UTXO (Unspent Transaction Output):Ā The output of a blockchain transaction that has not been spent or used as an input in a new transaction. In Bitcoin, only unspent outputs can be used to initiate transactions.
UTXO Set:Ā The collection of all addresses with unspent transaction outputs (UTXOs), the sum of which represents every existing bitcoin. The set allows all nodes to verify the total supply of bitcoin at any time and to detect and prevent double spending.
V
W
Wallet: The term wallet can have two meanings: it can either be a synonym for a Bitcoin client (although the terms are in practice used slightly differently, āclientā referring more to fully fledged desktop clients and āwalletā more to lightweight browser-based and online managed services) or it can refer to a file which stores bitcoin addresses and the private keys needed to use them.
X
Y
Z
#
51 Percent Attack: A 51 percent attack is an attempt to gain the power to block and reverse Bitcoin transactions by obtaining and using a sufficiently strong pool of computing power to overpower the rest of the Bitcoin network combined (ie., controlling at least 51 percent of the network).
Happy Sunday,
-Pod
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