Blockchain Glossary

When the world’s first cryptocurrency, Bitcoin, was launched back in 2009, it didn’t take long before other digital currencies followed suit. The new cryptocurrencies became known under the umbrella term “altcoin.” So, altcoin means any cryptocurrency that is considered an “alternative to the Bitcoin.”

Most altcoins adhere to the same fundamental principles established by Bitcoin. Still, they offer new options for people who are into cryptocurrency, the same way that alternative music, alternative film, or alternative cuisine promise something slightly different for their fans.

Bitcoin is a digital currency. Unlike traditional money, it is decentralized, has no physical form, and exists only as encrypted transactions in ledgers copied across thousands of computers on the Internet.

Money, as we know it, is controlled by a central authority. This makes our existing financial systems vulnerable to manipulation by unscrupulous persons. Bitcoin is an initiative to make financial transactions truly transparent. Since it is free from direct government interference and decentralized, its users are not bothered by exchange rates, interest rates, and hidden charges.

Automated teller machines (ATMs) made banking convenient. Bitcoin ATMs have similar functionality. These are kiosks where people can buy or sell Bitcoin using real money. They work just like regular ATMs but have more security features such as fingerprint scanning and validation codes.

A Bitcoin ATM is not linked to a bank account but connects users to a bitcoin exchange through the Internet. Some machines, though, may require you to have a bank account before they let you transact.

Blockchain is the technology that makes cryptocurrency possible. It is a network of distributed ledgers, called "blocks." Transactions are logged into these ledgers. The entries in their turn are immutable — they cannot be changed or erased once they have been entered.

It helps to think of a blockchain as a spreadsheet that is copied on thousands of computers on a network. Then imagine the network updating this spreadsheet regularly on each of the computers. That's what a blockchain is, in essence.

A blockchain address is a unique sequence of numbers and letters and functions very much like an email address. It refers to a specific destination on the network where cryptocurrency can be sent to, and it can be used only once. The idea is to give a person a unique address every time he or she is to receive crypto.

Let’s say you owe your friend Bob some money and he’d like you to repay him with Bitcoin using the wallet app installed on his mobile phone. Bob generates a new and unique bitcoin address using his wallet app, which allows you to send Bitcoin for only this occasion.

Cryptocurrency is money. But it's not conventional money, so you won't be handling paper bills or metal coins. This is a currency that exists only in digital space, carefully recorded on digital ledgers that are distributed across thousands of computers on the Internet.

There is no central banking authority or government financial institution that controls this currency. Monitoring is done solely through the system of distributed ledgers called a blockchain. Cryptocurrency is not backed by gold or other valuable commodities. Its value comes solely from the consensus of autonomous members of its blockchain network.

Cryptocurrency mining is an important process of the cryptocurrency system. It means that transactions involving cryptocurrencies are validated and recorded into the blockchain ledger. Once a miner confirms a transaction, the data is disseminated in the network and becomes an unchangeable part of the digital filing ledger called the blockchain.

It's like being a member of a community who volunteers to be part of the neighborhood watch and keeps their eye out for any signs of criminal activity. For their contribution, the volunteer is paid a token fee.

Here's an interesting detail. Maintaining the ledgers in a blockchain takes a lot of computing power. So those who help maintain the ledgers get paid in the form of cryptocurrency tokens for their efforts.

A cryptocurrency portfolio is a means to manage your inventory of online currency investments. It can be hosted on a cryptocurrency management software that helps you track each coin’s performance and provides you with analytical tools.

Many portfolio management apps provide live feeds and pricing updates from cryptocurrency exchanges. They may even alert you to significant market activities.

Think of a cryptocurrency portfolio as a business’s profit and loss statement. Cryptocurrency investors can use their portfolios to take stock of their assets, ensuring they grow over time. As such, a cryptocurrency portfolio enables investors to keep an eye out on their inventory, so to speak, so nothing gets wasted. If an investment is causing a significant loss, the constant monitoring would warn the investor about it. If, on the other hand, a coin is making tons of money, the investor can invest more in it.

Cryptocurrency trading involves buying and selling cryptocurrencies for profit. If conventional currencies have a foreign exchange (forex), cryptocurrencies have their own digital currency exchange where people can engage in trading coin. Unlike the traditional stock exchange that closes at the end of the day, cryptocurrency trading is a 24-hour market.

To start trading, people need to choose a cryptocurrency wallet and a cryptocurrency exchange to trade on. There are about 1,500 cryptocurrencies in existence, but beginners are advised to start trading in prominent coins such as Bitcoin or ether to minimize losses in the extremely volatile cryptocurrency market. There are also various wallets available from where you could easily buy bitcoin and start your cryptocurrency journey.

Decentralization means a process where decision-making and accountability are taken away from a central authority. In a Blockchain, there is no central governing body. Independent nodes on the network validate transactions using a system that has been agreed on by everyone.

Think of a field of grass. All the grass plants do the exact same thing they were created for. There is no single grass plant that controls everyone else. And when one or more plants are pulled out, it does not affect the field. The grasses just continue on. That's the idea behind decentralization.

A decentralized app (DApp) is software that runs on a decentralized network. We are familiar with standard apps controlled by providers such as Google, Amazon, and eBay. Dapps are different because no such control exists. Users deal directly with each other, and the blockchain records it. This serves as proof that the transaction took place.

Dapps are best suited to trading, gambling, gaming, and other situations that require transactions to be recorded. Because of its blockchain foundation, a dapp cannot ever break down or go offline. If one or more nodes become unavailable, the dapp continues to work because all the other nodes remain functional.

A digital signature is a mathematical scheme that undeniably identifies the sender of the electronic document and attests to the non-alterability of the information it contains. It can be compared to a human’s fingerprint, which is unique and can help verify the true identity of a person.

In order to create a digital signature and make sure that information is absolutely safe from hackers, blockchain uses advanced encryption algorithms, so-called asymmetric cryptography.

This process implies using a pair of large numbers called a public key and a private key to encrypt and decrypt data. The public key converts a message into a code that can only be decrypted using a private key that’s known only to its owner.

A coupon can entitle you to a free drink. A casino chip could be worth one hundred dollars. A digital token works in the same way. It represents a specific amount of digital resources you can own, assign to another, or redeem later.

Digital tokens are either intrinsic or created by software and assigned a certain utility. Examples of intrinsic digital tokens are Bitcoin and Ether. The other type of digital token is asset-backed, which is issued to represent a claim on a redeemable asset, such as legal tender or precious metals.

A distributed ledger is a network of autonomous computers spread around the world that record, share, and synchronize a database of transactions. Each user of the distributed ledger becomes a witness to, for example, a bitcoin transaction made over the blockchain, making it impossible for people with malicious intentions to make any alterations to the data.

You can compare how a distributed ledger works to posters of wanted criminals in the old days of the Wild West. These posters were sent out to all sheriffs’ offices across the U.S., so lawmen knew who to watch out for. If a criminal gets caught, the updated information is resent to all sheriffs so they would no longer look for someone who is no longer on the list. Well, that’s pretty much how distributed ledgers work.

Double spending is the risk that a virtual currency or cryptocurrency can be spent twice.

When using physical money, you hand over the metal coin or paper money as proof of payment when you buy something. Since the money is given physically, you are not able to use that same banknote for another purchase afterward.

The same can’t always be said for cryptocurrencies which, due to their digital nature, can be very easy to reproduce — leading to a problem where the same digital coins are spent more than once.

Fiat money is any paper, coin or cryptocurrency that gets its value from a government decree. Or, as in the case of bitcoin, from the network of bitcoin operators agreed to consider it legal tender. Fiat money is not backed by valuable commodities like gold or silver.

The value of fiat money is subject to the fluctuations of supply and demand. It can, therefore, become worthless in the event of hyperinflation, or in the case of bitcoin, when supply imbalances make its value decline drastically.

United States dollar, EU’s Euro are some examples of fiat money.

Remember the proverbial road that splits at a certain point of the journey forcing travelers to choose which path to take? The same happens during a fork.

A fork is a technical event when the blockchain diverges into two different directions and requires users to choose which way to go. It results from a change in the software or algorithms being followed by the blockchain. This usually occurs when the blockchain software is updated, but it can also be triggered by an attack. Most forks are resolved without causing rifts, but some do cause a split resulting in two cryptocurrencies.

The genesis block, also known as Block 0, is basically the very first block in a blockchain.

Each block within the blockchain always has a link to a previous block. After reaching the very beginning of a block which has nothing linked behind it, you arrive at the genesis block.

Satoshi Nakamoto was the person who mined this very first block, containing 50 bitcoins. It took him 6 days to accomplish this feat back in 2009.

A hash is a mathematical function that hides a long string of characters within a shorter one. So you may be staring at what looks like a series of randomly typed characters without ever knowing that hidden in it is the entire U.S. Declaration of Independence.

Hashing is an important foundation of modern cryptography and is one of the building blocks of blockchain's security features. The hash function also makes it easy to locate data by retrieving the hash value or key associated with it on the index.

An Initial Coin Offering (ICO), is the means by which cryptocurrencies acquire funding. It's the counterpart of an Initial Public Offering (IPO), used in traditional financial circles. But where an IPO offers shares of stock to investors, an ICO sells a certain quantity of cryptocurrency in the form of tokens.

A token is like a digital document acknowledging a debt. In itself, it has no value but points back to where the value is located. Speculators buy these tokens that will offer them benefits in the future and do so using regular money or other cryptocurrencies like bitcoin. Proceeds from an ICO are used to launch a new digital currency or other products in the Web.

One of the limitations of bitcoin is that it allows only 7 transactions per second (compare that to Visa's 24,000 transactions per second!) so you can imagine how congested the system has become. The Lightning Network is a payment protocol or an additional layer in bitcoin that lets it conduct faster transactions. By taking some of the work away from the primary blockchain, the Lightning Network can help speed up bitcoin and lower transaction fees.

You can think of the Lightning Network as a bar tab. Instead of having to reach into your wallet to pay up for every drink you buy, you get to buy drinks and add them up to your tab as you progress through the night. Once you’re ready to leave, you get to pay for all of the drinks you bought all at once.

Multisig or multisignature is the requirement for a transaction which implies that more than a single key is needed before a transaction can be accepted. It is often used as a sort of secondary security protocol in case of a mishap, while also dividing the responsibility between more than one person when transacting with bitcoins.

You can think of multisig as a deposit box that has three keys. You hold the first key, the second key is held by your partner, and the last key is kept by your best friend. To open the box, you will need all three of these keys present.

In a distributed network, a node is any computing device that contributes its resources to the network. In blockchain, a node is any computing device that hosts a copy of the blockchain. It runs the electronic ledger that documents the transactions involving cryptocurrency exchange.

You can think of a node as another branch office of the company. It is equipped with the exact same tools and provides the same services as all the other branches.

A Bitcoin paper wallet is simply a printout of encrypted Bitcoin account information. It allows a user to generate and manage keys and addresses which it stores securely, ready to be used for any transaction. It's secure because it's totally offline, out of reach of hackers. It's also convenient because you can pull it out anytime and use it for your transactions.

You can think of paper wallets as the suitcases you see from various individuals in the airport. Each suitcase is owned by a specific person and can only be opened by the one who holds the key.

A smart contract, also called a cryptocontract, is a computer program that relies on the immutable nature of blockchain's distributed ledger to bind two parties to an agreement. Once details of the contract are entered into the blockchain ledger, they cannot be erased, edited, or reversed. It directly controls the transfer of digital currencies or assets between parties under certain conditions.

Smart contracts are no less binding than their lawyer-initiated counterparts since they are irreversible and can be tracked on the Internet anytime for easy verification.