The terms used in the digital currency world can be confusing. We have assembled many of them here for you. Hopefully these will help you get started in your new Bitcoin adventure!
A condition in which more than half the computing power on a cryptocurrency network is controlled by a single miner or group of miners. That amount of power theoretically makes them the authority on the network. This means that every client on the network believes the attacker’s hashed transaction block. This gives them control over the network, including the power to:
- Issue a transaction that conflicts with someone else's.
- Stop someone else's transaction from being confirmed.
- Spend the same coins multiple times.
- Prevent other miners from mining valid blocks.
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. An important difference, however, is that each address should only be used for a single transaction.
Bit is a common unit used to designate a sub-unit of a bitcoin - 1,000,000 bits is equal to 1 bitcoin (BTC or B⃦). This unit is usually more convenient for pricing tips, goods and services.
The name of a decentralized p2p crypto-currency network.
Digital currency units generated and used within the Bitcoin system. Common abbreviations include BTC, XBT or lowercase bitcoin when referring to units of the currency.
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.
The block chain is 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.
Each block includes the difficult-to-produce verification hash of the previous block. This allows each subsequent block to be linked to all previous blocks. These blocks which are linked together for the purpose of verifying transactions within blocks is called the block chain.
When a Bitcoin miner finds a block, it receives newly minted bitcoins known as the "Block Reward". The reward (aka subsidy) is halved every four years and is responsible for bitcoin's controlled supply.
The block at which the block chain diverges into multiple chain branches
The common decimal unit of a single bitcoin. Equal to 100,000,000 satoshis.
Every once in a while, an old block hash is hardcoded into Bitcoin software. Different implementations choose different checkpoint locations. Checkpoints prevent various DOS attacks from nodes flooding unusable chains and attacks involving isolating nodes and giving them fake chains. Satoshi announced the feature here and it was discussed to death here.
"Coinbase" is another name for a generation transaction. The input of such a transaction contains some arbitrary data where the scriptSig would go in normal transactions -- this data is sometimes called the "coinbase", as well.
To protect against double spending, a transaction should not be considered as "confirmed" until a certain number of blocks in the block chain confirm, or verify that the transaction. The classic bitcoin client will show a transaction as "n/unconfirmed" until 6 blocks confirm the transaction.
Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already uses cryptography. In the case of Bitcoin, cryptography is used to make it impossible for anybody to spend funds from another user's wallet or to corrupt the block chain. It can also be used to encrypt a wallet, so that it cannot be used without a password.
Every 2016 blocks, Bitcoin adjusts the difficulty of verifying blocks based on the time it took to verify the previous 2016 blocks. The difficulty is adjusted so that given the average estimated computing power of the whole bitcoin network, only one block will verified on average every ten minutes for the next 2016 blocks. The difficulty is usually expressed as a number, optionally accurate to many decimal places (eg. in block 100,000 it was 14,484.162361. The difficulty is inversely proportional to the hash target, which is expressed as a hex number with around 50 digits, and is the number under which a block's generated hash must be to qualify as an officially verified block. The hash target is equal to ((65535 << 208) / difficulty). Difficulty is also often called block difficulty, hash difficulty, verification difficulty or the difficulty of generating bitcoins.
Attempting to spend coins that have already been spent in another transaction.
A currency, conjured out of thin air, which only has value because people say it does. Constantly under close scrutiny by regulators due to its known application in money laundering and terrorist activities. Not to be confused with bitcoin.
The creation of an alternative ongoing version of the blockchain, typically because one set of miners begins hashing a different set of transaction blocks from another. It can be caused maliciously, by a group of miners gaining too much control over the network (see 51% attack), accidentally, thanks to a bug in the system, or intentionally, when a core development team decides to introduce substantial new features into a new version of a client. A fork is successful if it becomes the longest version of the blockchain, as defined by difficulty.
The process by which new bitcoins (aka the "Block Reward") are distributed via Mining.
The output of a cryptographic 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", that 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 which is being hashed.
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.
The longest Block Chain.
Generators store transactions waiting to get into a block in their memory pool after receiving them. Received transactions are stored even if they are invalid to prevent nodes from constantly requesting transactions that they've already seen. The memory pool is cleared when Bitcoin is shut down, causing the network to gradually forget about transactions that haven't been included in a block.
Every transaction has a hash associated with it. In a block, all of the transaction hashes in the block are themselves hashed (sometimes several times -- the exact process is complex), and the result is the Merkle root. In other words, the Merkle root is the hash of all the hashes of all the transactions in the block. The Merkle root is included in the block header. With this scheme, it is possible to securely verify that a transaction has been accepted by the network (and get the number of confirmations) by downloading just the tiny block headers and Merkle tree -- downloading the entire block chain is unnecessary. This feature is currently not used in Bitcoin, but it will be in the future.
Computer software which is designed to repeatedly calculate hashes with the intention to create a successful block and earn coins from transaction fees and new coins created with the block itself. The term references an analogy of gold miners who dig gold out of the ground and thus "discover" new gold that can be used to create new coins with a similar kind of discovery occurring with a successful hash to create new Bitcoins.
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.
Each Bitcoin client currently running within the network is referred to as a Node of the system.
A nonce is an otherwise meaningless number which is used to alter the outcome of a hash. Each time Bitcoin hashes a block, it increments a nonce within the block which it is trying verify. If the numeric value of the effectively random hash is below a certain amount determined by the block generation difficulty, then the block is accepted by other clients and gets added to the chain.
An orphan block is a block which has no known parent in the currently-longest block chain. Not to be confused with a Stale Block (which has a known parent, but is no longer part of the longest chain).
The root (first) block in an orphan block chain.
Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.
A collection of mining clients which collectively mine a block, and then split the reward between them. Mining pools are a useful way to increase your probability of successfully mining a block as the difficulty rises.
A scoring mechanism to help ensure that expensive data storage isn't consumed by lower quality and spam. Low priority transactions will not get included by a miner if the limited space is already filled by higher priority transactions. A transaction fee will affect priority.
A private key is a secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. 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 for their respective Bitcoin wallet.
Proof of work
A result that can only be obtained through the use of computational resources. Changing the data in the proof of work requires redoing the work.
A two-dimensional graphical block 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.
A block chain reorganize (or reorg) happens when one chain becomes longer than the one you are currently working on. All of the blocks in the old chain that are not in the new one become orphan blocks, and their generations are invalidated. Transactions that use the newly-invalid generated coins also become invalid, though this is only possible in large chain splits because generations can't be spent for 100 blocks. The number of confirmations for transactions may change after a reorg, and transactions that are not in the new chain will become "0/unconfirmed" again. If a transaction in the old chain conflicts with one in the new chain (as a result of double-spending), the old one becomes invalid.
The base unit of Bitcoin (0.00000001 BTC) is sometimes called a Satoshi, after Bitcoin's creator Satoshi Nakamoto.
Nodes whose IP addresses are included in the Bitcoin client for use during a new installation when the normal bootstrapping process through IRC wasn't possible.
A cryptographic signature is a mathematical mechanism that allows someone to prove ownership. In the case of Bitcoin, a Bitcoin wallet and its private key(s) are linked by some mathematical magic. 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. However, there is no way for the world to guess your private key to steal your hard-earned bitcoins.
A well-formed block which is no longer part of the difficultywise-longest and well-formed blockchain. Not to be confused with an Orphan Block (which has no known parent in the longest block chain).
See "Block Reward" above.
A participant in a p2p network which connects to as many other nodes as possible.
Adaptation of Bitcoin to the Tonal System. 1 TBC is defined as 1,0000 (65,536 decimal) base bitcoin units. Not widely used.
A voluntary fee which can be added to a transaction which is used as an incentive to add the bitcoin transaction to a block. The fee determines the likelihood of inclusion in any given block, where a high fee included with a transaction has a priority over transactions with a lower fee included or no fee at all.
The reward for generating a block that has not yet been spent, a state which might increase the ability to transact anonymously.
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.