Bitcoin Terminology and Definitions (Crypto Glossary) – Learn the Jargon
Whenever you learn about something, you first need to know the basic terminology for it. Bitcoin is no different. By learning the cryptocurrency glossary of terms, you will get a better understanding of Bitcoin, and other cryptocurrencies, regardless of your goals.
Bitcoin is one of the most desired cryptocurrencies today. Yet, there are people who don’t know it very well. Bitcoin has its own jargon, which would be useful for you to know, even if you don’t intend to become a trader. Beginners, as well as experts, need a common set of terms. Without knowing them, it would be difficult to understand the currency, or what the media is saying about it. This glossary will help you understand the bulk of Bitcoin terms.
A Bitcoin address is similar to a physical address or an email. It is the only information you need to provide for someone to pay you with Bitcoin. It’s the location from which you would receive, send or hold your currency. An important difference, however, is that each address should only be used for a single transaction. It looks like a string of letters and numbers
A wallet address is the public portion of the two encrypted keys necessary for a holder to accept or verify a transaction.
Altcoin is a name for cryptocurrencies that are alternatives to Bitcoin. Usually all altcoins have rules incompatible with Bitcoin and have their own genesis blocks. Most notable altcoins are Litecoin (uses faster block confirmation time and scrypt as a proof-of-work) and Namecoin (has a special key-value storage).
Stands for “application-specific integrated circuit” which is a chip meant to do one thing. In Bitcoin’s case – they are used to process hashing problems to mine Bitcoins. ASIC typically refers to specialized mining chips or the whole machines built on these chips. Some ASIC manufacturers: Avalon, ASICMiner, Butterfly Labs (BFL) and Cointerra.
A Chinese manufacturer that makes custom mining hardware, sells shares for bitcoins, pays dividends from on-site mining and also ships actual hardware to customers.
A 51% attack is a situation where more than half of the computing power on a network is operated by a single individual or concentrated group, which gives them complete and total control over a network. Things that an entity with 51% of the computing power can do include, but are not limited to:
- Halting all mining.
- Halting and manipulating all interpersonal transactions.
- Use singular coins over and over.
In computer security, an attack surface refers to the number of places where a malicious user may be able to gain access to a system. In general, a computer running more complex software has a higher attack surface than one running simpler software.
BCC is a ticker symbol for Bitcoin Cash; used mostly on Asian exchanges.
BCH is the most used abbreviation and exchange ticker symbol for the Bitcoin Cash digital currency.
Bitcoin Improvement Proposal (BIP) is a technical design document providing information to the bitcoin community, or describing a new feature for bitcoin or its processes or environment which affect the Bitcoin protocol. New features, suggestions, and design changes to the protocol should be submitted as a BIP. The BIP author is responsible for building consensus within the community and documenting dissenting opinions.
Bit is a sub-unit of one bitcoin. There are 1,000,000 bits in one bitcoin. This unit is usually more convenient for pricing tips, goods and services.
Bitcoin is the first global decentralized, peer-to-peer online currency with open source software.
As a network, Bitcoin is all the computers that follow the same rules and exchange transactions and blocks between each other.
As a unit, one Bitcoin (BTC, XBT) is defined as 100 million Satshis, the smallest units available in the current transaction format.
There are two main versions of Bitcoin: Bitcoin Cash (BCH) and Bitcoin Core (BTC).
Bitcoin ATMs provide people with Bitcoins after depositing regular currencies. Bitcoin kiosks are machines which are connected to the Internet, allowing the insertion of cash in exchange for bitcoins given as a paper receipt or by moving money to a public key on the blockchain.
Original implementation of Bitcoin with a command line interface. Currently a part of BitcoinQT project. “D” stands for “daemon” per UNIX tradition to name processes running in background.
A Java implementation of a full Bitcoin node by Mike Hearn. Also includes SPV implementation among other features.
Bitcoin implementation based on original code by Satoshi Nakamoto. Includes a graphical interface for Windows, OS X and Linux (using QT) and a command-line executable bitcoind that is typically used on servers.
It is considered a reference implementation as it’s the most used full node implementation, especially among miners. Other implementations must be bug-for-bug compatible with it to avoid being forked.
A Bitcoin utilities library in Ruby by Julian Langschaedel. Used in production on Coinbase.com.
Bitcoin Whitepaper describes the original plan and protocol for Bitcoin. It was written by Satoshi Nakamoto in 2008.
A collection of Bitcoin transactions that have occurred during a period of time (typically about 10 minutes). If the blockchain is thought of as a ledger book, a block is like one page from the book. One of the most popular terms in the blockchain terminology.
Block height is the number of blocks preceding the genesis block (first block) on the chain. A genesis block will always have a height of zero because nothing precedes it. It’s a metric used to create a bearing on time in the programming world as well as a few other functions such as maintaining counter-party and betting in the crypto world. Considering that a new Bitcoin block is made every 10 minutes, you can work out certain time related pieces of information if you have the total length of the chain.
Block reward is the reward allotted for hashing, or solving the mathematical equation related to a block. The reward for mining a Bitcoin block is 25 bitcoins per block mined, which will halve every 210,000 blocks!
Blockchain is a list of every block that has been mined since Bitcoin began. All Bitcoin transactions are displayed within the Blockchain in order to provide transparency for the currency. As blocks are verified by miners, they are added to the chain of previous blocks, hence the name.
A web service running a Bitcoin node and displaying statistics and raw data of all the transactions and blocks. It also provides a web wallet functionality with lightweight clients for Android, iOS and OS X.
Bitcoin Price Index (BPI) shows the price of Bitcoin against a number of other crypto and fiat currencies.
Brain wallet is a concept of storing private keys as a memorable phrase without any digital or paper trace. Either a single key is used for a single address, or a deterministic wallet derived from a single key. If done properly, a brain wallet greatly reduces the risk of theft because it is completely deniable: no one could say which or how much bitcoins you own as there are no actual wallet files to be found anywhere. However, it is the most error-prone method as one can simply forget the secret phrase, or make it too simple for anyone to brute force and steal all the funds. Additional risks are added by a complex wallet software.
Brainwallet.org utility is based on bitcoinjs to craft transactions by hand, convert private keys to addresses and work with a brain wallet.
BTC is the most popular informal currency code for 1 Bitcoin (defined as 100 000 000 Satoshis).
A form of organization whereby a single party, group, authority is in control. These systems have single points of failure. VISA, Paypal, ApplePay are examples of centralized payment systems. Centralized organizations are contrasted by decentralized systems.
The reversal of a bank payment or money transfer after it was authorized. Sometimes used to commit fraud.
Informal name for a portion of a transaction output that is returned to a sender as a “change” after spending that output. Since transaction outputs cannot be partially spent, one can spend 1 BTC out of 3 BTC output only by creating two new outputs: a “payment” output with 1 BTC sent to a payee address, and a “change” output with remaining 2 BTC (minus transaction fees) sent to the payer’s addresses. BitcoinQT always uses new address from a key pool for a better privacy. Blockchain.info sends to a default address in the wallet.
An informal term that means either 1 bitcoin, or an unspent transaction output that can be spent.
Coinbase is a unique type of Bitcoin transaction with no inputs that is created by miners after finding new blocks. This type of transaction is, in most cases, the first transaction within new a block. Coinbase transactions reward miners for their work.
Coinbase.com is a US-based Bitcoin/USD exchange and a web wallet service.
The storage of Bitcoin private keys in any fashion that is disconnected from the internet. Typical cold storage includes USB drives, offline computers, or paper wallets. Cold storage is the safest method of storing your cryptocurrency especially for wallet balances that you plan to keep untouched for a significant period of time.
A Bitcoin wallet that is in cold storage (not connected to the internet).
A bitcoin transaction is confirmed once it has been included in a block on the blockchain by a miner. Each subsequent block added to the blockchain is another confirmation for that transaction. 6+ confirmations are generally accepted for a transaction to be finalized; although 99.99% of the time Bitcoin Cash transactions can be considered final with 0 or 1 confirmation.
A confirmed transaction is the one that has been included in the blockchain. Probability of transaction being rejected is measured in a number of confirmations.
Confirmation number is a measure of probability that transaction could be rejected from the main chain. “Zero confirmations” means that transaction is unconfirmed (not in any block yet). One confirmation means that the transaction is included in the latest block in the main chain. Two confirmations mean the transaction is included in the block right before the latest one. And so on. Probability of transaction being reversed (“double spent”) is diminishing exponentially with more blocks added “on top” of it.
A person or entity that has a partial control over a multi-signature Bitcoin wallet. To complete a bitcoin transaction, a multi-sig wallet requires authorization from a certain amount of all cosigners on the wallet. The amount of authorizing cosigners required is known as ‘M of N’.
Short for cryptography, it means hidden or kept secret.
A digital currency that uses cryptography to provide security and verify transactions on its network. Bitcoin is the first cryptocurrency. Unlike traditional fiat currencies, a cryptocurrency does not require a central bank or any other centralized authority to ensure security or to maintain control of money supply.
The practice and study of techniques for secure communication in the presence of third parties. Bitcoin and other currencies are related to cryptography insofar as they use mathematics to secure information. Within Bitcoin, cryptography creates and secures wallets, signs all transactions, and verifies each and every transaction on the blockchain.
Darknet Market is an online black market that is frequently used to evade authorities’ review, often for illicit goods or activities. Transaction payments via digital currencies like Bitcoin are often utilized. Popular Darknet Markets that have since been shut down by law enforcement include Silk Road and Alphabay.
Without a central authority or controlling party. Bitcoin is a decentralized network since no company, government, or individual is in control of it.
Decentralized Exchange is an exchange market that does not rely on a third party service to hold the customer’s funds.
Denial of Service
Denial of Service (DoS) is a form of attack on the network. Bitcoin nodes punish certain behavior of other nodes by banning their IP addresses for 24 hours to avoid DoS. Also, some theoretical attacks like 51% attack may be used for network-wide DoS.
Digital currency is an asset represented in digital form and having some monetary characteristics. They represent electronic money (e-money).
A distributed network is designed so that there is no central server or entity that others must connect to. Instead, network participants connect directly to each other. Bitcoin is a distributed network.
A distributed ledger is an agreement of shared, replicable and synchronized data, in this case spread across multiple networks, across many CPU’s.
If a malicious user tries to spend his/her bitcoins to two different recipients at the same time, this is double spending. Bitcoin mining and the block chain are there to create a consensus on the network about which of the two transactions will be confirmed and considered valid.
A transaction output that is smaller than a typically fee required to spend it. This is not a strict part of the protocol, as any amount more than zero is valid. BitcoinQT refuses to mine or relay “dust” transactions to avoid uselessly increasing the size of unspent transaction outputs (UTXO) index.
Stands for Elliptic Curve Digital Signature Algorithm. Used to verify transaction ownership when making a transfer of bitcoins.
The use of cryptography to encode a message such that only the intended recipient(s) can decode it. Bitcoin uses encryption to protect wallets from unauthorized access.
Exchange is a resource for exchanging currencies. Bitcoin exchanges are used to convert fiat currencies into Bitcoin and vice versa, or to exchange Bitcoin with other cryptocurrencies.
Faucet is a resource that provides free Bitcoins, usually in the form of hourly or daily deposits of several Satoshis.
It is a “regular” currency such as Dollars or Pounds that are given value based on people giving them a value.
A fork is the permanent divergence of an alternative operating version of the current blockchain. Forks come into existence when a 51% attack occurs, a bug in the program, or more commonly a new set of consensus rules come into existence. These happen when a development team creates and inserts notably substantial changes into the system. The successful fork is decided by the height of their blocks.
Halving is the reduction of minable reward every so many blocks. For Bitcoin the reward is halved after the first 210,000 blocks are mined and then every 210,000 thereafter.
Some people use term hard fork to stress that changing Bitcoin protocol requires overwhelming majority to agree with it, or some noticeable part of the economy will continue with original blockchain following the old rules. See Fork and Soft Fork for further discussion.
1) A unique identifier of a Bitcoin transaction. 2) A mathematical function that Bitcoin miners perform on blocks to make the network secure.
The hash rate is the measuring unit of the processing power of the Bitcoin network. The Bitcoin network must make intensive mathematical operations for security purposes. When the network reached a hash rate of 10 Th/s, it meant it could make 10 trillion calculations per second.
A Bitcoin hot wallet resides on a device that is connected to the internet. A wallet installed on a desktop computer or smartphone is usually a hot wallet.
The input side of a given Bitcoin transaction is the side where the Bitcoin payment is coming from. Usually, this is expressed with a Bitcoin address.
Key could mean an ECDSA public or private key, or AES symmetric encryption key. AES is not used in the protocol itself (only to encrypt the ECDSA keys and other sensitive data), so usually the word key means an ECDSA key. When talking about keys, people usually mean private keys as public key can always be derived from a private one. See also Private Key and Public Key.
Some wallet applications that create new private keys randomly keep a pool of unused pre-generated keys (BitcoinQT keeps 100 keys by default). When a new key is needed for change address or a new payment request, the application provides the oldest key from the pool and replaces it with a fresh one. The purpose of the pool is to ensure that recently used keys are always already backed up on external storage. Without a key pool you could create a new key, receive a payment on its address and then have your hard disk died before backing up this key. A key pool guarantees that this key was already backed up several days before being used. Deterministic wallets do not use a key pool because they need to back up a single secret key.
Ledger is a physical or electronic log book containing a list of transactions and balances typically involving financial accounts. The Bitcoin blockchain is the first distributed, decentralized, public ledger.
Lock Time (locktime)
It is a 32-bit field in a transaction that means either a block height at which the transaction becomes valid, or a UNIX timestamp. Zero means transaction is valid in any block. A number less than 500000000 is interpreted as a block number (the limit will be hit after year 11000), otherwise a timestamp.
M of N
The number of cosigners that must provide signatures (M) out of the total number of cosigners (N) in order for a multi-signature bitcoin transaction to take place. A common M of N value is “2 of 3” meaning two of the three cosigners’ signatures are required.
Miner is a computer or group of computers that add new transactions to blocks and verify blocks created by other miners. Miners collect transaction fees and are rewarded with new bitcoins for their services.
Bitcoin mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money. There two types of mining: cloud mining and hardware mining.
A service that allows separate owners of mining hardware to split the reward proportionally to submitted work. Since probability of finding a valid block hash is proportional to miner’s hash rate, small individual miners may work for months before finding a big per-block reward. Mining pools allow more steady stream of smaller income. Pool owner determines the block contents and distributes ranges of nonce values between its workers. Normally, mining pools are centralized. P2Pool is a fully decentralized pool.
Mixing Service is an act of combining Bitcoins from different people by switching their addresses. This can help improve privacy and anonymity, but also can be used for money laundering.
Multi-Signature (multisig) is a bitcoin transaction that requires signatures from multiple parties before it can be executed. Coinbase multisig vaults use this type of technology.
A special participant on the Bitcoin network. Nodes hold a copy of the blockchain ledger and relay new transactions to other nodes. It supports the network through validation and relaying of transactions while receiving a copy of the full blockchain itself.
Open source software code is made publicly available to edit, use, and share and that is free to distribute. Bitcoin is an open source project and arguably the first open source money.
The output side of a given Bitcoin transaction is the side where the Bitcoin payment is being sent to. Usually, this is expressed with a Bitcoin address.
Paper Wallet is a type of cold storage wallet where private keys are printed on a piece of paper or other physical medium.
Peer to Peer
Peer to Peer (P2P) is a type of network where participants communicate directly with each other rather than through a centralized server. The Bitcoin network is peer to peer.
Mining of a cryptocurrency before it is actually public and live, generally performed by its creator.
It is a string of letters and numbers that can be used to spend bitcoins associated with a specific Bitcoin address.
Proof of Work
Proof of Work (PoW) is a piece of data that requires a significant amount of computation to generate but requires a minimal amount of computation to be verified as being correct. Bitcoin uses proof of work to generate new blocks.
Proof of work was a concept originally designed to sieve spam emails and prevent DDOS attacks.
The official rules that dictate how participants on a network must communicate. Bitcoin’s protocol specifies how each node connects with the others, how many bitcoins will exist at any point in time, and defines other aspects of the network.
Public Key is a string of letters and numbers that is mathematically derived from a private key. Public keys allow one to receive bitcoins from other users.
Reward is an amount of newly generated bitcoins that a miner may claim in a new block. The first transaction in the block allows miner to claim currently allowed reward as well as all transaction fees from all transactions in the block. Reward is halved every 210 000 blocks, approximately every 4 years. As of July 27, 2014 the reward is 25 BTC (the first halving occurred in December 2012). For security reasons, rewards cannot be spent before 100 blocks built on top of the current block.
A digital representation of a bitcoin public or private key that is easy to scan by digital cameras. QR codes are similar to barcodes found on physical products in that they are a machine-friendly way to embody a piece of data.
The smallest divisible unit of one bitcoin. There are 100 million Satoshis (8 decimal places) in one bitcoin. One Satoshi = 0.0000001 bitcoins.
He is an author of the Bitcoin Whitepaper, published in 2008. Nakamoto is considered to be a founder and a creator of Bitcoin.
The US Securities and Exchange Commission (SEC) is a government entity for protecting investors; maintaining fair, orderly, and efficient markets; as well as facilitating capital formation.
Secret key is either a Private Key or an encryption key used in encrypted wallets. Bitcoin protocol does not use encryption anywhere, so secret key typically means a private key used for signing transactions.
SegWit (Short for Segregated Witness) is the process when the block size limit on a blockchain is increased by removing signature data from Bitcoin transactions.
SegWit2x is one of the proposals for boosting Bitcoin’s transaction capacity, it seeks to upgrade Bitcoin by enacting SegWit and set a timeline for increasing the network’s block size to 2MB.
The specific hash function used in the process of mining to secure bitcoin transactions.
A cryptographic signature is a mathematical mechanism that allows someone to prove ownership.
A two-way smart contract is an unalterable agreement stored on the blockchain that has specific logic operations akin to a real world contract. Once signed, it can never be altered. A smart contract can be used to define certain computational benchmarks or barriers that have to be met in turn for money or data to be deposited or even be used to verify things such as land rights.
Sometimes the soft fork refers to an important change of software behavior that is not a hard fork (e.g. changing mining fee policy).
When a Bitcoin clock is successfully hashed, the act of hashing it becomes ‘stale’, which means that no other miner may attempt to hash it.
Testnet is a set of parameters used for testing a Bitcoin network. Testnet is like mainnet, but has a different genesis block (it was reset several times, the latest Testnet is testnet3). Testnet uses slightly different address format to avoid confusion with main Bitcoin addresses and all nodes are relaying and mining non-standard transactions.
A token is actually nothing more than a new term to make reference to a unit of value issued by a private entity. Although tokens bear many similarities with bitcoins (they have a value attached to them which is accepted by a community and are blockchain-based), they serve a much broader purpose. Tokens are more than a currency because they can be used in a broader range of applications. Also, virtually all tokens rely on Ethereum blockchain protocol, which, according to some experts, is more complete than bitcoin’s blockchain.
It is an entry in the blockchain that describes a transfer of bitcoins from one address to another. Bitcoin transactions may contain several inputs and outputs.
Transaction Fee or “miner’s” fee is an amount of bitcoin included in each transaction that is collected by miners. This is to encourage miners to add the transaction to a block. A typical bitcoin fee amount is 0.0001 BTC.
A part of a transaction that contains a reference to a previous transaction’s output and a script that can prove ownership of that output. The script usually contains a signature and thus called scriptSig. Inputs spend previous outputs completely. So if one needs to pay only a portion of some previous output, the transaction should include extra change output that sends the remaining portion back to its owner (on the same or different address). Coinbase transactions contain only one input with a zeroed reference to a previous transaction and an arbitrary data in place of script.
An output contains an amount to be sent and a script that allows further spending. The script typically contains a public key (or an address, a hash of a public key) and a signature verification opcode. Only an owner of a corresponding private key is able to create another transaction that sends that amount further to someone else. In every transaction, the sum of output amounts must be equal or less than a sum of all input amounts. See also Change.
Vanity Address is a Bitcoin address that is personalized, like a vanity license plate.
Vault is a type of Bitcoin wallet provided by Coinbase.com. Vault accounts add additional time-lock and security measures to protect your funds.
A Bitcoin wallet is loosely the equivalent of a physical wallet on the Bitcoin network. The wallet actually contains your private key(s) which allow you to spend the bitcoins allocated to it in the block chain. Each Bitcoin wallet can show you the total balance of all bitcoins it controls and lets you pay a specific amount to a specific person, just like a real wallet. This is different to credit cards where you are charged by the merchant.
A web service providing wallet functionality: ability to store, send and receive bitcoins. User has to trust counter-party to keep their bitcoins securely and ready to redeem at any time. It is very easy to build your own web wallet, so most of them were prone to hacks or outright fraud. The most secure and respected web wallet is Blockchain.info. Online exchanges also provide wallet functionality, so they can also be considered web wallets. It is not recommended to store large amounts of bitcoins in a web wallet.
XBC is a ticker symbol for Bitcoin Cash used to meet the International Standard for currency codes (ISO 4217).
XBT is a currency code is generally built from the two-digit ISO 3316 country code and a third letter for the currency. BTC is the preference of the native Bitcoin community while XBT is used in traditional finance settings.
During a Bitcoin transaction, the seller may choose to send the product before the transaction has received confirmations. This is generally a show of good faith but also runs the risk of using the Bitcoins twice.
Of course you do not have to learn by heart all those terms, but it can be helpful to have crypto terminology handy.