A Guide to Bitcoin Terms

By yBitcoin Magazine / October 15th, 2015

ASIC

Application Specific Integrated Circuit - ASICs are an integrated circuit customized for a specific use, in the BTC space they are now used for mining bitcoins.

Address

Similar to an email address and generated at no cost, this string of 27-34 characters represents the destination for a Bitcoin payment.

BTC

Most common unit representation of the Bitcoin currency, similar to USD with dollars.

Bitcoin

A payment network (“Bitcoin”), the currency unit used on that network (“bitcoins”). As digital/virtual currency, it uses peer-to-peer technology to facilitate instant payments. Bitcoin is an alternative currency known as a cryptocurrency, which uses cryptography for security, making it difficult to counterfeit. Bitcoin issuance and transactions are carried out collectively by the network, with no central authority. The total number of bitcoins that will be issued is capped at 21 million to ensure they are not devalued by limitless supply. Users store their bitcoins in a digital wallet, while transactions are verified by a digital signature.

Block

Data is permanently recorded in the Bitcoin network through files called blocks. A block is a record of some or all of the most recent Bitcoin transactions that have not yet been recorded in any prior blocks. Blocks are links in a chain of transaction verifications. Outstanding transactions get bundled into a block and are verified roughly every ten minutes on average. Each subsequent block strengthens the verification of previous blocks. Each block contains one or more transactions.

Blockchain

A public record of Bitcoin transactions in chronological order. The block chain is shared between all Bitcoin users. It is used to verify the permanence of Bitcoin transactions and to prevent double spending.

Cold Storage

Keeping bitcoins safely offline through a USB or other drive, paper wallets or a physical coin.

Cryptography

The branch of mathematics that creates mathematical proofs to provide high levels of security. Online commerce and banking already use cryptography. In Bitcoin, cryptography is used to make it impossible for someone to spend funds from another user’s wallet or to corrupt the blockchain. It can also be used to encrypt a wallet, so that it cannot be used without a password.

Deflation

Reduction of prices in an economy over time. It happens when the supply of a good or service increases faster than the supply of money, or when the supply of money is finite. This leads to more goods or services per unit of currency, meaning that less currency is needed to purchase them. This carries some downsides. When people expect prices to fall, it causes them to stop spending in the hope that their money will go further later.

Difficulty

Every 2,016 blocks, Bitcoin adjusts the difficulty of verifying blocks based on the time it took to verify the previous 2,016 blocks. The difficulty is adjusted so that given the average estimated computing power of the whole Bitcoin network, only one block will be verified on average every 10 minutes for the next 2,016 blocks.

Double Spending

When a malicious user tries to send his bitcoins to two different recipients at the same time. Bitcoin mining and the blockchain are there to create a consensus on the network about which of the two transactions will be confirmed and considered valid.

Escrow

Holding funds in a third-party account when two parties are engaged in a transaction. Advisable when making a transaction via a Bitcoin account with an unknown party, or when transacting high value items.

Exchange

A central resource for exchanging different forms of money and other assets. Bitcoin exchanges are typically used to exchange the cryptocurrency for other, typically fiat, currencies.

Fiat Currency

Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.

Halving

Refers to reducing reward every 210,000 blocks, approximately every four years. Due to reward halving, the total supply of bitcoins is limited.

Hash Function

A computer algorithm which takes an arbitrary amount of input data and deterministically produces fixed length output, known as the data’s “hash.” It can be used to easily verify that data has not been altered. If you change any single bit of the original data and run the hash algorithm, the hash will completely change. Because the hash is seemingly random, it is prohibitively difficult to try to produce a specific hash by changing the data that is being hashed.

Hash Rate

Measuring unit of the processing power of the Bitcoin network. The Bitcoin network must make intensive mathematical operations for security purposes.

Inflation

When the value of money drops over time, causing prices for goods to increase. The result is a drop in purchasing power.

KYC

Know Your Customer rules require financial institutions to vet the people they are doing business with, ensuring that they are acting in good faith and adhering to all applicable regulations.

Mining

Process of using computer hardware to 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.

Paper Wallet

Method of storing bitcoins offline on a physical piece of paper that holds both the private key and the public address.

Private Key

A secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. You can think of this as your PIN number. Your private key(s) are stored in your computer if you use a software wallet; they are stored on some remote servers if you use a web wallet. Private keys must never be revealed as they allow you to spend bitcoins from their respective Bitcoin wallets.

Public Key

An alphanumeric string which is publicly known, and which is hashed with another privately held string to sign a digital communication. You can think of this as your bank routing number. In the case of Bitcoin, the public key is a Bitcoin address.

QR Code

A two-dimensional graphical square containing a monochromatic pattern representing a sequence of data. QR codes are designed to be scanned by cameras, including those found in mobile phones, and are frequently used to encode Bitcoin addresses.

Reward

When a block is discovered, the discoverer is awarded a certain number of bitcoins agreed upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks.

Satoshi

Smallest unit of Bitcoin currency (1/100,000,000 BTC or 0.00000001 BTC). This unit has been named in collective homage to the founder of Bitcoin.

Satoshi Nakamoto

Anonymous creator and founder of the Bitcoin cryptocurrency.

Signature

A cryptographic signature is a mathematical mechanism allowing proof of ownership. In the case of Bitcoin, a Bitcoin wallet and its private key(s) are linked mathe- matically. When your Bitcoin software signs a transaction with the appropriate private key, the whole network can see that the signature matches the bitcoins being spent.

Transaction

A specific section of data that is broadcast to the network and then collected into Blocks.

Transaction Fee

Possible with any transaction of bitcoin, fees are processed and received by the Bitcoin miner. Transaction fees are voluntary but can help speed confirmation times.