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.