In the Bitcoin Whitepaper, Satoshi Nakamoto computed the probability that transactions could be reversed. The ability to reverse transactions is only possible probabilistically as long as no entity has more than 51% of the mining hash rate and supports the rule of thumb to wait 6 confirmations before considering a transaction settled, as well as the concept of a 51% attack. If any entity controls 51% or more of the hashrate, they can arbitrarily censor transactions and/or prevent progress, though they cannot directly steal funds. Theft of funds is possible by such an entity only if a counterparty follows the 6 confirmation rule, the attacker has 51% of the hash rate, and the attacker creates a double spend.
An address is a "payment instruction" for a digital asset. When receiving payment, a payee communicates an address to the payor, and the payor sends funds to that address. A set of addresses used together comprises a wallet.
BTC is the original shorthand for bitcoin. This designation is often used on digital asset exchanges to denominate a bitcoin's current value. However, there has been an increase in the use of XBT as an alternate designation. The reason for this is that the International Organization for Standardization (ISO), which keeps a listing of all currencies, uses X to symbolize a currency that is not attached to a specific country (which is the case for all digital assets, because they are decentralized).
Bitcoin (with a capital B), which launched in 2009, established the world's first decentralized digital asset. Bitcoin uses blockchain technology to create a digital asset that is entirely decentralized and managed across a wide network of computers rather than by a single entity. The virtual coins generated by the Bitcoin network are called bitcoins (lowercase b). In this sense, the word bitcoin is written in lowercase, much like the words penny and nickel. A bitcoin can be used to transfer or store value. While digital assets are speculative and present risks, the longevity and saturation of the Bitcoin and Ethereum networks, and their coins, have made them leading candidates for product support, such as custody and execution services.
A block is a set of updates to the blockchain ledger. Using Bitcoin as an example, a block is basically a virtual container of bitcoin transactions. A block can hold a limited amount of data, allowing for a certain number of transactions and the corresponding data to be stored in each block. A bitcoin node receives these blocks, validates all transactions in them, and then applies the updates to the global ledger. A bitcoin miner is tasked to validate all transactions in the block and then solve a complicated mathematical equation that cryptographically ties this block to previous blocks. Once broadcast to other nodes and miners, this block is added to the string of blocks that make up the chain. The whole blockchain is a publicly viewable record that keeps track of every transaction that has ever occurred within that digital asset.
This is a number that specifies how many blocks have been globally produced at the present time. The very first block created in a blockchain (known as the genesis block) has a height of zero because it is the first block in the chain. The fifth block to be added will have a height of four because four blocks came before it. As of October 2018, the Bitcoin block height is almost 550,000 and the Ethereum block height is almost 6,500,000.
The first miner to solve the proof-of-work puzzle in a block receives a block reward of new coins as compensation for the miner's expenditure in solving the puzzle. With bitcoin, the reward given is cut in half every four years in order to control the distribution of coins released.
Blockchain is the underlying technology that Bitcoin and most other digital assets use to record and validate transactions. It is a linked list of transaction updates to a virtual digital public ledger. A blockchain consists of a group of transactions in blocks. These blocks are cryptographically connected to one another as they are mined, creating a long chain. The nature of the cryptographic tie from one block to previous blocks means that previous blocks cannot be altered by anyone.
Cold storage is a mechanism where private keys used to sign withdrawal transactions are kept in secure locations that are not connected to the internet.
Cryptocurrencies, also known as digital assets and digital currencies, are issued and transferred electronically. This is in contrast to USD and government-issued currencies, which exist both in physical and electronic form. Bitcoin is a widely-recognized cryptocurrency. Most of the other forms of cryptocurrency that have been issued are referred to as altcoins.
A service in which a financial institution or other entity holds property on behalf of a customer.
Our recommended description for this emerging asset class. Several other terms, such as cryptocurrencies, crypto assets, virtual currencies, and crypto tokens, are also used in this evolving market.
A digital signature is a mechanism that uses public-key cryptography to create un-forgeable proof that a transaction is authorized by the owner of the coins. The most common algorithm used by digital assets is the Elliptic Curve Digital Signature Algorithm (ECDSA), though there are many such algorithms, including Schnorr and BLS signatures, whose use is increasing. The signature itself is a 65-byte number, which in combination with a message and a public key can be validated by the signature algorithm.
A double spend is creating two conflicting transactions, one which sends funds to a counterparty, and the other sending those same funds back to yourself. This is prevented by the Bitcoin network and double-spends are not allowed. This is arguably the primary innovation of the Bitcoin blockchain— an algorithm for preventing double-spends. However, in combination with a 51% Attack, an attacker can cause one conflicting transaction to be replaced with another if he or she controls 51% or more of the hashrate.
The preferred public-key cryptography approach for cryptocurrencies to authorize asset transfer. It is favored over older mechanisms based on prime numbers because of the relatively small size of keys and digital signatures and is based on solving equations using an elliptic curve with values in a finite field. The most common elliptic curves used for digital assets are called secp256k1 (e.g., Bitcoin, Ethereum) and ed25519. They are accompanied by an algorithm to create digital signatures that can be publicly validated.
Ether tokens are a cryptocurrency created within the Ethereum network and, like bitcoins, are tradeable digital assets. Unlike bitcoins, the focus of ether tokens is not as a store of value or payment system but rather as a system for creating and paying for the execution of smart contract logic.
A decentralized, blockchain-based computing platform that allows developers to build and deploy decentralized applications, including smart contracts. In the Ethereum blockchain, mining computers work to earn ether, a digital asset that supports the Ethereum network.
An exchange is a platform that allows buyers and sellers to trade a range of digital assets using both fiat currencies and other digital assets. Some exchanges facilitate trading bitcoins for fiat currency, while others enable trading among different digital assets.
Fiat currencies are those issued by a government; typically used to refer to physical currencies such as US dollar bills. Other examples include the Japanese yen and the eurozone euro.
A fork occurs when the rules of a blockchain are changed, possibly creating two (or more) distinct digital assets. This may result from an upgrade to the features of the blockchain, a bug in the consensus algorithm, or changes to the node software. The term hard fork refers to a rules change that forces the creation of a new digital asset (if there is contentious disagreement among the network participants, or some nodes don’t upgrade in time). Alternatively, a hard fork may result in a continuation of the network structure if all the participants agree to the changes, install new node software, and update dependent software-like wallets. Soft forks are backward-compatible software updates to a digital asset blockchain. Soft forks do not result in a physical split of the blockchain into two digital assets.
The term market capitalization comes from the world of equities and is determined by multiplying the total outstanding shares of an asset by the last available share price. The term has been adopted for use in the digital asset space and is computed by multiplying the total coin supply by the current market value of each coin. Some prefer the term implied network value, as the coins are digital assets of decentralized networks rather than shares in a company.
This is the total number of coins that can be minted for a particular digital asset. Most digital assets have been designed with caps on the total supply that can be created by the network in an attempt to drive value by creating digital scarcity. A digital asset's maximum coin supply is a fundamental feature of its design, and some have no fixed maximum supply at all. Bitcoin's maximum coin supply is set at 21 million.
Mining is the method by which digital assets such as Bitcoin and Ethereum are minted and released into circulation. Mining is also the method by which transactions are incorporated into the blockchain. Finally, mining provides a mechanism to cause the unit of account to acquire a cost of production, which causes the blockchain to become a financial asset and not just a database entry. Miners perform all the same duties as nodes, and additionally attempt to solve a proof-of-work puzzle that, given a successful solution, gives them the right to publish a block of new transactions and allocate new coins to themselves. They do this by computing a hash repeatedly with different inputs, creating a proof-of-work algorithm. Mining is competitive and requires powerful dedicated hardware, energy consumption, and time.
Due to the variance of whether a given miner will win a block or not, miners often band together into mining pools. In a mining pool, one node validates transactions and distributes a candidate block to multiple different miners. By agreeing to share winnings if one of the miners in the pool wins the block, pools help reduce variance for its members.
Multi-signature, or multi-sig, is a feature of bitcoin and other digital assets that requires that multiple private keys be used to sign a transaction and move funds. Practically speaking, multi-sig can be used to add an extra layer of security to digital asset transactions by requiring an additional approval from a third party before a transaction is approved. Digital asset custodians typically use multi-sig wallets and processes to help secure client funds.
Nodes are software that run on internet-connected computers and function as non-mining transaction validators as well as digital asset wallets for the network they serve. In Bitcoin, for example, full nodes download the entire blockchain and validate each transaction per the agreed-upon rules of the network and relay transactions and blocks to others.
A nonce is a random number that is used to vary the input to a cryptographic hash function, modifying the output in an unpredictable way. In the context of proof of work, the nonce is what miners repeatedly modify to find an output hash numerically smaller than the target, thereby winning the block.
Off-chain transactions are valid bitcoin transactions that are not sent to the main Bitcoin network. New research using off-chain transactions is under development by several companies and enables a large increase in the effective transaction capacity of the network. They use multiple off-chain transactions to create a payment channel between counterparties. By keeping a valid signed transaction and not sending it to the blockchain, the parties in the payment channel can update their balances in real time, without having to wait for transactions to be mined. In the event of a dispute or one party going offline, the counterparties can send their transactions to the blockchain to settle. This technique is used by payment networks, such as the Lightning Network, and non-custodial trading. It is a major tool that allows blockchains to handle many more transactions than could ever be settled on the blockchain.
A P2P network is created when two or more computer systems are connected to each other through the internet for file sharing and work distribution, all without a central server. Examples of P2P networks include file-sharing protocols like BitTorrent, the Invisible Internet Project (I2P) anonymity network, and digital asset protocols like Bitcoin and Ethereum.
A private key in asymmetric cryptography is a piece of data held in secret by a single person or entity. It is used to compute digital signatures on data that can be verified using a Public Key.
Proof of Work (PoW) is the mechanism by which Bitcoin creates a cost of production for the unit of account and ensures immutability of the ledger in a trustless manner. Because each update to the ledger block contains a costly proof of work, this cost makes it expensive to rewrite the ledger.
A public key in asymmetric cryptography is a publicly shareable piece of data that is computed from a Private Key and shared with counterparties through addresses, which are hashes of public key(s). Public keys are used along with digital signatures to validate that the holder of a coin authorizes the transfer of that coin to a new address or entity.
Quick response (QR) codes are sometimes used in place of the long string of letters and numbers that make up a Bitcoin address like this: 16r61N8tB03FTQGwZCRXLLygNqVL8MEsrR. For convenience, wallets will provide the option of converting a Bitcoin address into a QR Code for use in sending or receiving, or to transact a coin exchange directly between two smartphones, for example.
A ring signature is a type of cryptographic digital signature. In a peer-to-peer transaction, such as that used with cryptocurrencies, a ring signature enables an individual of a group to sign a transaction without revealing the identity of the actual signer.
A bitcoin can be split into very small parts. Each bitcoin is divisible to the eighth decimal place, so each bitcoin can be split into 100,000,000 units (satoshis). An mBTC is one thousandth of a bitcoin, or 0.001 BTC. It is also called a millibitcoin.
A satoshi is currently the smallest denomination of a bitcoin. A bitcoin can be split into one hundred million units. Each of these units is called a satoshi. So, a satoshi = 0.00000001 BTC.
The idea for Bitcoin was presented to the public in a white paper, Bitcoin: Peer-to-Peer Electronic Cash System, written by Satoshi Nakamoto, a person or persons whose identity remains unknown. Nakamoto has communicated with developers under this pseudonym but has never publicly come forward to take credit for the invention of Bitcoin.
All cryptocurrencies contain an algorithmically enforced limit on the number of coins. This is different from traditional commodity and currency assets, in which either more commodities can be created (such as in gold mining) or more currency can be printed (fiat). Thus Bitcoin has a different (and stronger) form of scarcity than traditionally scarce assets.
Each transaction recorded on a blockchain has a signature that proves it is a valid transaction. How many can fit into each block depends on the maximum defined size of the block. Segregated Witness was one of many soft-fork upgrades to the Bitcoin network, and it altered the format of transactions. It moved some transaction data (witness data—signatures and scripts) outside of the main block, mainly in an effort to fix a technical deficiency called transaction malleability. By moving some data out of the main block, SegWit had the side benefit that it increased the effective block size of Bitcoin by up to 3.5 times, depending on uptake of the feature by users. As of October 2018, approximately 50% of the transactions on Bitcoin are using the SegWit transaction format.
A soft fork can be viewed as a backward-compatible software update for a digital asset blockchain. Soft forks can refine the governance rules and functions of a digital asset blockchain but, unlike hard forks, are compatible with the previous blockchain. This means that a soft fork does not result in a split of the blockchain into two digital assets. For a soft fork to be implemented, a specific level of readiness to enforce the new rules must be signaled by miners. Soft forks are optional for all users in the system, and it is not necessary for users to immediately upgrade, unless they want to use the new features.
Store of Value is one of the core functions of money, alongside Medium of Exchange and Unit of Account. An asset is considered to be a good Store of Value if the purchasing power does not degrade over time.
This is the total number of coins that a particular digital asset has in circulation.
A transaction fee is an amount of cryptocurrency that is attached to a transaction and that incentivizes miners to process the user's transaction. In Bitcoin, a transaction fee is not mandatory, nor is it prescribed by the code. Users can choose how much to pay for their transactions to be processed. That is why during times of network congestion, the average transaction fee goes up, as users are trying to incentivize miners to process their transactions over other users' transactions. On the other hand, when network traffic slows down, average transaction fees also decline.
Bitcoin does not operate on the account model (like Ethereum) but on the unspent transaction output (UTXO) model. Every transaction has inputs and outputs. Outputs that have not been spent are the set of bitcoins in circulation (i.e., spendable bitcoins). Unspent outputs are used as inputs in new transactions.
A digital asset wallet is a piece of software that maintains keys and manages addresses. A wallet is comprised of a set of addresses. If the wallet has the private keys for these addresses, it is capable of sending transactions. If it does not have the private keys for these addresses, it is called a watch-only wallet, as might be used by an auditor.
While BTC was and often still is the original shorthand for bitcoin, there has been an increase in the use of the term XBT. The reason for this is that the International Organization for Standardization (ISO), which keeps a listing of all currencies, uses X to symbolize a currency that is not attached to a specific country (which is the case for all digital assets, because they are decentralized).
Zero Knowledge Proofs (ZKPs) are an experimental technology that allows one to cryptographically prove a statement, without revealing the input data. For instance, one could prove that a transaction was included in the blockchain without telling you which transaction it is. One could also prove the ability to decrypt encrypted data, or the ability to spend from a certain address, or prove the amount of funds in your wallet without revealing any addresses (for instance, to satisfy an audit). ZKPs are being actively explored by a number of blockchain and cryptocurrency projects and are a fundamental piece of engineering infrastructure in the space.
A bitcoin can be split into very small parts. A uBTC is one millionth of a bitcoin, or 0.000001 BTC. It is also called a microbitcoin.
