Cryptocurrencies are trending, but many of us need help understanding exactly how they work. This bitcoin glossary explains the terminology you need to know before investing in a cryptocurrency yourself.
It is a symbolic number. There can only be a maximum of 21 million bitcoins. It is not known why Satoshi Nakamoto chose this exact number.
Refers to either the expected growth of a coin or the amount of leverage used in a margin trade. Either a sign of a highly bullish trend in a currency or a willingness to take risks when investing.
Most bitcoin miners could band together in proof-of-work blockchains to attack the blockchain. While such an attack would not allow miners to steal funds, they could reverse all recently confirmed transactions and block specific or general transactions, for example, by freezing funds. A successful 51% attack can bring the system to a halt.
If you want to send someone bitcoins, you need their bitcoin address. If you want to send someone Ethereum, you need their Ethereum address. Technically, an address is the SHA-256 hash of a public key or script. The address can be encoded with base58 or bech32.
The process of distributing a newly created altcoin to existing cryptocurrency holders or blockchain users.
Any cryptocurrency or token that is not a bitcoin. Often used pejoratively or as a synonym for shitcoin, although altcoins are now widely established.
Application-specific integrated circuit. Specialized chips optimized to run the SHA-256 hash function used in bitcoin mining.
Swapping a bitcoin for an altcoin in a way that doesn’t require escrow is called an atomic swap. It is a transaction performed under the condition of another transaction and using cryptography, making fraud impossible for either party. An atomic swap can be a good example of a smart contract.
Every transaction has at least one input and one output. If an output is also the input for another transaction, it is considered spent. To calculate your bitcoin balance, add up the value of the unspent outputs for which you have the private key.
A pending transaction is a transaction that has been sent to the network but has yet to be included in a block.
A person who is pessimistic about bitcoin. Bearwhale is a prominent trader who is bearish or sells large amounts of coins.
Used to parse large numbers shorter and lighter than binary numbers or the commonly used Base10 (which is the well-known number system 0-9). Base58 is the encoding scheme used for P2SH and P2PKH bitcoin addresses, starting with 1 or 3. It includes the numbers 1-9, all uppercase except I & O, and all lowercase except l (since it confuses with similar characters could become).
Typically, a bitcoin transaction contains a target output and a change output. However, for services that carry out multiple transactions, it makes sense to process transactions “batch by batch”. Performing a single transaction with multiple outputs instead of multiple transactions saves block space and fees.
Bech32 is a new encoding scheme that increases the security of addresses, especially in the context of multi-signature systems. These addresses start with “bc1” and are usually longer than Base58 addresses.
When a miner includes a transaction in a block, it is confirmed once. Each subsequent block found adds another confirmation. Only sufficiently confirmed transactions are considered “final”. If there is a risk of attack, a transaction with only one or two confirmations can be rolled back. However, after six confirmations, a transaction is generally considered irreversible, although depending on the size of the transaction, it may be unprofitable to double it much sooner. Unconfirmed transactions are generally considered insecure, although attacks are rare.
A Bitcoin ATM sells Bitcoin in exchange for banknotes. Some machines can also dispense fiat money and altcoins.
In August 2017, a group of Bitcoin fans changed Bitcoin’s consensus rules, specifically those determining block size. Since only a few miners and participants joined them, the network split permanently. Everyone who owned bitcoin before this fork received the same amount of bitcoin cash (this is called an airdrop), which can be traded on exchanges.
Bitcoin-qt (pronounced cute) is the graphical interface of Bitcoin Code, the most popular bitcoin client. It is named after the QT widget toolkit on which it is built.
A person using Bitcoin. Transactions, verification, storage, and mining are all uses of bitcoin.
A block contains transactions. Each block refers to its predecessor, forming a long chain back to the genesis block. The first transaction in a block currently creates 6.25 bitcoin out of thin air – the block subsidy. On average, a block is found by a miner every ten minutes. The block is then propagated on the network and accepted by the nodes if it conforms to the consensus rules.
Blocks always refer to the previous block, creating a chain of data. This chain is called the blockchain or ledger.
The allowed size of a block in the bitcoin blockchain. Since 2010 the limit is 1 MB. The SegWit soft fork allows signature data to be stored outside of a block, making block size measurement obsolete. Instead, the block weight is used. The effective maximum block size is almost double or even quadruple 1 MB.
For every block a miner finds, they can “create” bitcoins out of thin air. The bitcoin consensus rules determine how many bitcoins he is allowed to create. The bitcoins they are allowed to create are called the block subsidy.
The first 210,000 blocks of bitcoin contained a reward of 50 BTC, the following 210,000 blocks 25 BTC, currently 12.5 BTC, and since May 2020, it is only 6.25 BTC per block. The next halving is expected in 2024. At current rates, 99 percent of all coins will be mined by 2037, all but 100 bitcoins by 2081, and all but one bitcoin by 2109. This will continue until the block subsidy halves to 34 times around the year 2145. Then, transaction fees will be the only incentive to mine Bitcoin.
A platform where fiat money or other tokens can be bought or sold in exchange for bitcoin and other cryptocurrencies. As a rule, the exchanges specialize in OTC, fiat money, or tokens.
A bitcoin client is a software that interacts with the network. It can be a full node, an SPV node, or special software.
Bitcoins are stored on a medium that is not connected to the Internet (e.g., a computer, a USB stick, or a piece of paper).
An experimental bitcoin wallet that uses stealth payments to allow for increased transaction anonymity.
Double spend attack
The fundamental problem was solved by the Nakamoto Consensus. On the bitcoin blockchain, no one can spend a bitcoin twice after a certain amount of time has elapsed and the transaction has been confirmed.
In the case of a double-spend attack, a user would attempt to scam a participant by sending a coin and, after receiving a confirmation or two, attack the blockchain by sending a conflicting block of the same height as the block with the transaction mines. This becomes easier the more hashing power an attacker has (51% attack), and the more complex the block has more confirmations. After six confirmations, a transaction is generally considered irreversible, even if millions of dollars are spent on the attack.
The Elliptic Curve Digital Signature Algorithm is the algorithm used by Bitcoin to generate private and public key pairs and verify their signatures. It is unclear why Satoshi Nakamoto chose this algorithm as it was relatively unknown when Bitcoin was released.
A disposable machine is a vending machine where you can buy bitcoin and other cryptocurrencies with cash or, in rare cases, with a credit card. Unlike a two-way machine, such a machine cannot dispense cash.
A contract between two trading partners and a third-party intermediary who is expected to intervene only when requested to do so by one of the parties, e.g., if something goes wrong with the agreement.
Escrow of traditional funds is relatively expensive compared to bitcoin, where escrow can be inexpensively set up with a 2-of-3 multi-signature wallet. When the contract is fulfilled, the two parties can use the funds without the trust company having to intervene, unlike traditional arrangements where the intermediary has to intervene. Another advantage of Bitcoin is that the intermediary never completely controls the funds. He can only steal funds if he coordinates with at least one of the transaction partners.
Fiat money is government-issued currency.
Like a DDoS attack, a flood attack floods the mempool with transactions. In a functioning fee market, this increases transaction fees and limits network capacity. Flood attacks can be expensive for the attacker – either they have to pay transaction fees to the miners or, if they are miners themselves, bear the opportunity costs of not taking other paying transactions into account.
When members no longer agree on the state of the network, there is a split. This can be caused by a bug, an error, or an intentional act. For example, expanding the rules (such as increasing the block size or the number of bitcoins in existence) inevitably leads to network splitting. See also: hard fork and soft fork.
Due to the limited block space, a transaction must pay a fee to be included in a block. Ideally, the optimal fee is determined on a functioning fee market. In the long term, fees will be the main incentive for miners to keep mining as the block subsidy slowly approaches zero.
All blockchains have a genesis block, which is the first block in the blockchain. On the Bitcoin blockchain, the Genesis block is known to contain the message “The Times | 1/3/2009 | Chancellor on the brink of Secon
Any change that extends the existing set of rules (i.e., allows something that was NOT previously allowed) is called a hard fork. Unless all participants update their software, such a rule change will result in a chain split, commonly referred to as a fork.
A special chip that contains a secure enclave where your private key is stored. It is a hardware wallet only if the private keys cannot be extracted.
A hash is the output of a -> hash function. A Bitcoin address is a result of twice applying the SHA-256 function to your public key. Bitcoin mining uses the same hash function to allow computers to prove that you’ve expended some amount of power on Bitcoin’s proof-of-work algorithm.
A hash function is a “one-way” cryptographic function that compresses arbitrary data into a number, called a hash. This number can be used as a fingerprint for any data. A hash function is considered secure when its output cannot be predicted and when no two known strings compute the same hash value.
The number of hashes a bitcoin miner can perform.
Each block has an 80-bit header. This contains the version number, the previous block’s hash, the Merkle root of all transactions, the target difficulty, and the nonce.
Each block has a height that numerates its sequence in the blockchain beginning with block 0 of January 3, 2009.
A misspelling of the English word “hold.” It represents the ethos of saving and long-term planning instead of simply spending or selling the coins. Many crypto enthusiasts are often criticized for this “hoarding” mentality, favoring a culture of savings and long-term planning. HODL is often seen as an acronym for Hold On for Dear Life in the crypto scene on Twitter and other social media.
A wallet that runs on your computer or smartphone connected to the internet.
The capacity of crypto networks, usually measured in transactions per second or TPS, varies depending on the type of transaction. The Bitcoin network typically manages up to 5 TPS, depending on the transaction types used (see SegWit and batching). In contrast, the Ethereum network reaches up to 15 TPS, Binance smart chain up to 100 TPS and Solana up to 50,000 TPS, allowing transactions to be executed much faster.
A computer running a bitcoin client that verifies the integrity of the blockchain and new transactions and forwards new transactions and blocks to its peers. By default, your bitcoin node connects to 8 other nodes, and you can configure it to allow more incoming connections. Since the network does not depend on specific nodes, it is tough for all parties to impede communication between peers.
Cryptography or cryptology is the technique of hiding information, and securing and authenticating communications.
Money is secured by cryptography on a public blockchain.
Another name for the Bitcoin blockchain. More generally, a ledger is a record of transactions and assets, similar to a balance sheet.
The name of the Bitcoin network in operation. It is the opposite of the testnet.
A flaw in standard bitcoin transactions allows anyone to change the transaction ID before the transaction has been mined. This bug makes it difficult to chain unconfirmed transactions together. It was fixed by introducing a new transaction standard called SegWit.
Bitcoin’s Merkelized Abstract Syntax Trees aims to enable more complicated smart contracts in Bitcoin. They make it possible to specify a set of conditions under which bitcoin can be issued without disclosing all those conditions at once. Instead, they are individually hashed into a Merkle tree.
All transaction IDs are contained in a block at the top (or bottom) of the Merkle tree. At each level, the IDs are hashed together in the subsequent layer until only one hash remains: the -> root. No value in the Merkle tree can be changed without also changing that root. This root is contained in the header of the block.
Any unusually small payment is called a micropayment. Paying for a coffee or a bus ticket could be considered a micropayment.
A crypto miner is a machine connected to a cryptocurrency network that performs endless hashes; one speaks here of a proof of work. Miner also often refers to the person operating the machine.
Bitcoin’s most significant innovation lies in its use of Proof of Work. This is named after the Bitcoin inventor Satoshi Nakamoto.
The only other cryptocurrency invented by Satoshi Nakamoto. Namecoin’s goal was to create a blockchain that stores name registrations, like URLs or usernames.
The Bitcoin network consists of nodes that can mine or just verify. SPV or light clients are only used to conduct transactions.
Non-Fungible Tokens (NFTs) are unique digital assets representing real-world things like artwork, music or videos, and even in-game items in video games. The purchase and sale of NFTs is recorded on a blockchain. The NFT in your wallet is proof that the file is the original.
The nonce is part of the block header. The miner freely selects the nonce to find a block with a hash value with many leading zeros. How many zeros that is depends on the desired level of difficulty.
If two blocks are found at the same time, only one of them can be valid. The invalid block is orphaned because subsequent blocks are not built on top of it. In rare cases, the chain can temporarily split, e.g., due to a mistake or malicious action. In this case, there are two permanent chains or one orphan chain.
P2Pool is a decentralized mining pool where miners are paid proportionally to their work. This lowers the barrier to entry for miners compared to solo mining by spreading the chance of finding a block across a large number of users and guaranteeing a stable flow of income.
Pay to script hash. Instead of sending bitcoin to a public key, it can also be sent to a script. To redeem this coin, the owner must disclose the script, and the script must run successfully. With this technique, it is possible to create smart contracts in Bitcoin. P2SH addresses start with the number 3, while P2PKH addresses start with 1.
A paper wallet is a piece of paper that contains either a private key or the seed for a wallet. It either serves as a backup for a wallet or is a form of cold storage.
Peer to peer
“Bitcoin: A Peer-to-Peer Electronic Cash System” is the title of the Bitcoin white paper. Peer-to-peer means there is no centralized architecture and anyone can join the network and talk directly to other participants.
On May 22, 2010, developer Laszlo Hanyecz bought two pizzas for a grand total of 10,000 BTC. This was the first known transaction using Bitcoin to purchase a physical good. Satoshi’s favorite pizza seems to be pineapple and ham. At least, that’s what he said in a comment, though many hope he was just kidding.
Point of sale
The device or counter where something is sold. In the case of Bitcoin, this is usually a plugin, web app, smartphone app, or an integration with a traditional PoS device.
A mining pool allows small miners to work together and find the solution for a valid block together. Solutions are “pooled,” and all are paid out in proportion to the pool’s winnings, although the exact payout varies.
Pay Per Share is a common way for mining pools to set how much each miner gets paid. PPS means that the miner gets a fixed amount per hash, regardless of whether the pool finds a block or not. If the pool is lucky, it keeps the winnings, but it can also be unlucky and go bankrupt.
With Bitcoin, a private key is a random number with a length of 256 bits. The public key is derived from the private key using the ECDSA algorithm. This public key is then hashed twice with SHA-256, base58 encoded and prepended with a 1 to get its address. Other address formats like bech32 and P2SH have private and public keys, but the addresses are encoded differently.
Proof of Stake
Bitcoin’s proof of work is known to be intentionally very energy intensive. In the alternative proof-of-stake model, miners create valid blocks by voting against the coins they own on the valid blockchain. The PoS idea predates Bitcoin’s Proof of Work but has since been adopted by various cryptocurrencies.
Proof of work
PoW, also called Nakamoto consensus, is Bitcoin’s consensus algorithm. Miners expend electricity hashing the block header with various nonces until they find a valid block corresponding to the target difficulty. The more electricity someone uses, the more likely they will find a new block that will reward their efforts with newly minted bitcoin, known as the Coinbase transaction.
The Bitcoin protocol is a set of rules defining what constitutes a valid block of transactions and how nodes communicate. Some parts of the protocol are easy to change, while others require consensus across the network, making changes unlikely without a blockchain fork. Apart from its code, there are no formal specifications for the Bitcoin protocol.
A public key is derived from a private key. A public key is a point on an ECDSA curve. Its x and y coordinates are each 256 bits long, so the public key is 512 bits long.
In honor of its creator, Satoshi Nakamoto, the smallest unit of a bitcoin is called a satoshi. One Satoshi equals 1/100 million or 10^-8 bitcoin. Second layers like the Lightning Network allow such units to be further broken down into milli-satoshis or 10^-11 bitcoin, enabling micropayments.
The Bitcoin creator or creators used the pseudonym Satoshi Nakamoto to publish the Bitcoin white paper and to communicate with collaborators. Satoshi was last heard of in December 2010.
The Schnorr signatures are a proposed new method of signing transactions. Compared to ECDSA signatures, Schnorr signatures can combine multiple signatures into one, improving data protection and making multisig and smart contracts more manageable and less expensive.
Blocks should be found by miners every 10 minutes on average. As new miners join, the blocks are found faster and faster. The difficulty level is adjusted every 2016 block (roughly two weeks) to slow down the creation of new bitcoins. Eventually, when miners turn off their devices, the difficulty level drops.
The Bitcoin scripting language Script allows the creation of complex rules for the redemption of input, such as Multisignature and Smart Contracts. It is also possible to send bitcoin to a script hash instead of a public key. However, for security reasons, the number of opcodes is limited, there are no loops, and the language is not Turing-complete.
Instead of storing every private key in a bitcoin wallet, a seed phrase (or mnemonic phrase) can be used to generate an infinite number of random addresses. Only the phrase is required for backup, and this action must only be performed once.
A new transaction type that fixes the problem of older Bitcoin transactions being falsifiable. It was initially implemented as a soft fork, but combined with the lack of block size increase, it became a controversial issue contributing to bitcoin cash sharing.
A term denoting falling or failed cryptocurrencies. Shitcoins have little or no value or purpose.
A cryptographic signature allows the owner of a private key to prove ownership of that key without revealing it. With Bitcoin, it is primarily used as proof of the coins in your possession.
Signet is a centrally managed variant of testnet. It can be used to test whether new transaction types or changed blocks are accepted by the network without risking a loss of funds. You can join others’ signets or run your own. While Signet is still very new, it is expected to gain popularity over testnet as the times between new blocks vary less.
Between 2011 and 2013, the Silk Road was a popular dark web marketplace for trading drugs and contraband. It arguably helped Bitcoin become popular and demonstrated the usefulness and resilience of the network. Many of the circumstances surrounding establishing the Silk Road and its eventual dismantling by the authorities are still unknown. Ross Ulbricht is currently serving a life sentence on drug trafficking and money laundering charges for his alleged involvement in the Silk Road marketplace.
Simnet is a locally hosted simulation of the Bitcoin network, similar to Signet and Testnet. Unlike other simulations, it can be quickly built on-the-fly, accelerated, and used to simulate the network in fast-forward rather than real-time.
A smart contract is a computer program, or transaction protocol, run by a decentralized system, such as the Bitcoin network. Its rules are transparent, and it cannot be outwitted. Therefore it is considered incorruptible. Smart contracts are programmed to automatically perform or log actions as specified in the contract terms.
Solo mining means that a company is not part of a pool but instead attempts to mine entire blocks themselves. Due to Bitcoin’s tremendous hash power and the fact that it takes a bit of luck to find valid blocks, solo mining is becoming increasingly complex and rare.
The network can be spammed by generating large numbers of transactions for oneself and filling up blocks. This increases fees and generally makes Bitcoin more expensive to use while reducing network capacity. The purpose of block size limitation is to reduce the cost of such an attack to the nodes and to ensure that the network remains operational during such an attack. However, since miners make money from the transaction fees, it could be quite advantageous for them to carry out such an attack.
English abbreviation for Simplified Payment Verification. In the Bitcoin whitepaper, Satoshi discusses the possibility of an SPV. It would allow nodes to notify each other of invalid blocks without verifying the entire block. SPV still needs to be successfully implemented and may not be possible because a negative result (an invalid block) cannot be proven. Not to be confused with SPV wallets.
Some wallets refer to themselves as SPV wallets. They don’t validate the entire bitcoin blockchain, instead relying on nodes to calculate account balances. Be careful as such nodes could theoretically send false information to the SPV wallet regarding account balances and the validity of transactions. This is why SPV wallets offer less security.
Stealth payments allow two parties to make payments to each other without directly sending each other a bitcoin address that could be intercepted. Instead, they trade on a key.
The Bitcoin testnet is a replication of Bitcoin’s code and network. Testnet coins have no value and are used to test applications. In connection with the testnet, Bitcoin is often referred to as the mainnet.
Ticker symbols are used in the stock market to identify companies and currencies. Bitcoin commonly uses the symbol BTC, but XBT is also popular.
A token is an object that represents a right. By this definition, bitcoin can be considered a token (the right to trade on the bitcoin blockchain). Typically, tokens are used to represent deeds, contracts, or physical objects. See also: colored coins.
Transactions per second.
Each transaction has an identifier. While legacy transactions have a bug that makes this ID spoofable, SegWit transactions have a deterministic transaction ID. This allows second-layer networks, such as the Lightning network, to be deployed.
In common parlance, a computer is Turing-complete if it can simulate another computer. This term is named after Alan Turing and generally means that the machine can calculate any computable function. Bitcoin is not Turing-complete because the scripting language has limited functionality. This limitation was intentionally made because securing a machine with limited functionality is a far more achievable task.
A measure similar to weight. A Vbyte corresponds to 4 weight units.
Software, hardware, or paper that stores your cryptocurrency. The wallet either contains the private key directly or a seed phrase from which several private keys can be derived. A watch-only wallet only contains public keys but can be used to create unsigned transactions or check account balances.
A document that describes the functionality and vision of a cryptocurrency. “Bitcoin: A Peer-to-Peer Electronic Cash System” is the eight-page white paper published by Satoshi Nakamoto on October 31, 2008, that describes the core functions of Bitcoin.
An alternative ticker for Bitcoin instead of the commonly used BTC. With XBT one wants to comply with ISO 4217, which stipulates that non-sovereign currencies must begin with an X.
A document can be timestamped by embedding its hash on the Bitcoin blockchain using OP_Return. See also: Notarial services.
A type of cryptographic scheme that proves the solution to a puzzle without revealing any information about that puzzle. Zero-knowledge proofs come in many forms, e.g. B. to prove that the sum of inputs and outputs is equal without actually revealing the sum.
A number that describes the current difficulty level. For a block to be valid, the hash of its header must be less than the target value.
Unlike a one-way ATM, a two-way ATM can dispense cash in exchange for bitcoin and other cryptocurrencies.