Bitcoin Beginner’s Glossary
The maximum number of bitcoins that there will ever be. The number has been hard-set into the protocol and cannot be changed, ensuring that Bitcoin is a deflationary currency.
Each Bitcoin transaction is broadcast to all nodes, or computers using the Bitcoin client. When the miners confirm a block, a page in the Bitcoin ledger is published attesting that the transactions in that block are valid and that no effort has been made to spend those bitcoins on two things at the same time. This process is known as a confirmation and occurs every 1o minutes on average. One confirmation is considered secure, but having 6 confirmations is considered proof that there is statistically no chance that any cheating has occurred.
The Bitcoin network is essentially a democracy with every miner having one vote. As long as at least 51% of the participants are honest, then the network is secure. If some person or group were to get enough mining power to represent more than 51%, they could invalidate transactions, create false transactions, and change the Bitcoin protocol.
Because of the rise of mining pools (in which people with only a small amount of computing power join a pool and get paid on the percentage of their contribution), the risk of one group getting 51% or more control is real, but also not tremendously dangerous. The miners themselves are invested in the value of Bitcoin and the trustworthiness of the network. At the beginning of 2014, one mining pool got close to this number and themselves started discouraging people from joining to ensure the integrity of Bitcoin.
Some say the real danger of having too much centralized mining is that it would provide governments with a way to subpoena, threaten, or control the miners into redlisting addresses.
An address is a string of letters and numbers which can be used to send or receive bitcoins. Addresses are usually accessed through wallets like Bitcoin Qt, Blockchain, or others. These addresses are often shown as QR codes to make transactions easier and it is safe to share as long as the private key is kept secure.
Bitcoin is the first successful crypto coin experiment. Many others have used the Bitcoin protocol to come up with their own variations. Variations include Litecoin, which has a quicker confirm time and higher number of eventual coins and Primecoin which finds prime numbers at the same time as it confirms its blocks.
At the moment only Bitcoin has the network effect to make it a likely success as an crypto currency and store of value, but the other coins are experiments in attributes that might eventually be adopted to Bitcoin, services, or special purpose coins like SXC.
One of the main arguments made for the need of governments to regulate or pass laws against Bitcoin is its usefulness to pass money nearly instantly and nearly anonymously. Anti-Money Laundering legislation has been used along with KYC laws to prosecute some Bitcoin businesses. Additionally, banks have been known to close the accounts of Bitcoin related businesses and even individual users, supposedly due to the possibility of money laundering.
Application Specific Integrated Circuits. As the profitability of mining became apparent, miners naturally sought ways to mine faster and more efficiently to maximize profits. The use of ASIC miners have practically taken mining out of the hands of the amateurs and centralized it in the hands of a few mining pools.
One one-hundreth of a bitcoin (.01).
Bitcoin Investment Trust
An institution that purchases and stores Bitcoins on behalf of investors.
The heart of the Bitcoin system. Bitcoin is essentially an open-ledger accounting system. Bitcoin transactions are broadcast to the network when they are made, and then they are recorded in a block by the miner who solved the most recent Bitcoin math problem. One block is like one page from that ledger, showing recent transactions that the network agrees are valid.
The Bitcoin protocol is set so that each block will take, on average, every ten minutes.
If every block is a page from an accounting ledger, then then the bottom of each page of the ledger would have a calculation based on the contents of that page that must be solved before the next page can be created. Because of the linking of the blocks together in this way, the validity of every page in the ledger can be confirmed since it links with the page before and behind it. Linking the blocks together makes it impossible to spoof blocks and allows the system to be trusted.
To encourage miners to solve the problem of each block and confirm the next set of transactions, they are awarded a bounty of Bitcoins and transaction fees. The block reward for Bitcoin was originally 50 BTC, but is halved every four years.
A common abbreviation for Bitcoin.
An agreement that resulted in the creation of the stock market on Wall Street in 1792. More recently, it refers to attempts to create an open-air market for Bitcoin.
A software program that connects to the Bitcoin network like Bitcoin Qt. These may require hosting the full block chain.
When a transaction is successfully entered into a block, it is said to be confirmed. This means that more than 51% of the Bitcoin nodes recognize that the transaction is valid and that there has been no effort to double spend those bitcoins. Although one confirmation is considered secure, 6 confirmations are generally enough to make the validity of a transaction beyond question.
A project by BitcoinX to allow for the ‘marking’ of some bitcoins so that they can be used for specific purposes like stocks, contracts, and even physical property. The project is under development, but is one of many attempts to build more practical applications on top of the Bitcoin protocol, further increasing its value beyond currency or store of value.
The length of time since a coin has last been spent. Noting how long since a number of coins have been transacted is one indication of velocity in the Bitcoin economy. However, since transactions may not be between people, but merely individuals moving their holdings from one address to another, this can be overstated.
Any of a number of digital currencies, including Bitcoin, that are produced through solving mathematical equations. The security of these networks is ensured by the strength of the cryptography used.
Most currencies used today are inflationary. Governments produce more money to cover their debts and the increased money supply drives prices up. When the supply of a commodity or currency is set, then its value will adjust to demand, and in most cases that means it’s the price at which goods and services can be bought, will tend to go down.
There are many theories as to why a deflationary currency is not desirable, including the tendency of people to hoard rather than spend their money. On the other hand, a deflationary currency will mean that savings will be naturally rewarded, cause salaries to naturally increase in value, and make pension planning much easier. Deflationary currencies favor those furthest from the money supply, which explains why politicians and economists tend to oppose the idea.
On average, a block is produced every ten minutes. However, the number of people, and the amount of computing power, does not remain constant as Bitcoin gains in popularity. Greater computing power means a reduction in the amount of time it takes to produce a block; therefore, at regular periods, the difficulty of the problems miners must solve to produce a block is recalculated to keep the rate of blocks at about ten minutes.
A double spend is when someone tries to spend the same bitcoins at two places at the same time. If successful, one transaction would be recorded in a block and confirmed, and the other would be considered not-valid, depriving that recipient the bitcoins. As the transaction gains in confirmations, the risk of a double spend decreases. Although possible, double spends wouldn’t be worth the effort for small sums, and people conducting large transactions will be willing to wait for 1-6 confirmations.
A bitcoin can be divided into one-hundred million pieces, known as satoshis. Very small amounts of bitcoins are known as dust as they have no practical value. Some websites, like faucets, may attempt to make many dust transactions, which clutter up the block chain. Small transaction fees and limits on how many satoshis can be sent have been imposed to limit dust transactions.
The Elliptic Curve Digital Signature Algorithm is the lightweight cryptographic algorithm used to sign transactions in the Bitcoin protocol.
Escrow is the act of letting a third party hold the money during a transaction until both people agree that it has been successfully completed. With Bitcoin, transactions are irreversible, therefore, in some cases, requests that funds be put into escrow is expected.
Some have suggested that escrows could become automated with apps built on top of the Bitcoin protocol. Funds would be sent to a particular address and not be released until certain conditions, conditions that could be automatically checked, were met.
Exchanges are businesses that allow changing one type of currency for another at market rates. Crypto currency exchanges may swap between different crypto currencies and fiat currencies.
Bitcoin exchanges have had a number of difficulties gaining financial and legal footing, making getting fiat onto and off of them tricky. This situation is expected to improve over time.
Sites that give away small amounts of Bitcoin. Initially this was done to spread the currency and get people interested. More recently, faucets are a way to get people interested in online crypto gambling or to get advertising revenue.
Though the amounts given away are small, faucets remain a good way to teach people about Bitcoin and get them comfortable using wallets without putting up any of their own money.
A term frequently used in crypto currency circles. Fiat money is money by decree of the government that issues it. Although there are frequent attempts that fiat money has value because of legal requirements to accept it and its utility in dealing with the government, it is also usually inflationary and open to broad manipulation by the government.
One reason governments prefer fiat money is that governments are usually run with deep amounts of debt. By issuing more money, the government can cause inflation, which drives down the relative value of its debt. This benefits the government and the banks at the expense of everyone else.
The Financial Crimes Enforcement Network, an agency within the US Treasury Department. FinCEN was responsible for seizing two Mt. Gox bank accounts in 2013. Along with the Commodities Futures Trading Commission, it is expected to be the branch of government that will issue regulations on crypto currencies.
A fork occurs when two blocks dealing with the same transactions is produced. In this case, one set of miners will be working off of one block, and another set of the other. Eventually, only one set of blocks will be honored.
Forks can happen in the case of 51% attacks, because of bugs in the protocol, or because the core developers wish to introduce a new feature into the protocol.
There have been several successful forks due to developers introducing features, and one because of a bug. In that case, the bug was quickly recognized and the mining community rallied to accept the correct fork with a fix to the bug.
The first block mined by Satoshi Nakamoto that began it all. This block is still part of the block chain and can be viewed.
Graphical Processing Unit. In the early days, bitcoins were mined with regular computers. Soon after, someone discovered that the GPUs used for gaming were more efficient and most mining switched over to those before transitioning to ASICs.
A way to take a large amount of data and produce a short, fixed-length output. Hashes are useful to Bitcoin because it is nearly impossible to figure out the original data based on the result and even the smallest change to the original data will produce a completely different output. This helps Bitcoin remain a secure protocol.
The number of hashes that a miner can produce in a set amount of time, usually seconds. The hash rate necessary to successfully mine a block has been rising exponentially. We are now looking at gigahashes and petahashes.
A decrease in purchasing power due to a decrease in confidence in a currency or currency manipulation.
The address from which a transaction has originated.
The ability to switch between any two given currencies easily. In a market where there are lots of people, liquidity can usually be expected because there will always be people buying or selling. In a small market, few numbers means that there will be times where it is easier to buy or to sell, causing volatility.
A millibitcoin, or one thousandth of a bitcoin (.001). Often referred to as a milli.
An exchange of a very small amount of currency. In many places, especially in sales or exchanges on the internet, microtransactions are nearly impossible because of the cost of transmission. Bitcoin partly solves this problem, allowing artists and authors to be paid very small amounts for their work. More work needs to be done in this area as in the developing world many transactions might be seen as bit dust and be discouraged.
The production of bitcoins by solving mathematical problems using specialized equipment. The term ‘mining’ was coined for this because of the similarities that bitcoin mining has with gold mining. It is also mistaken since winning one block will not ‘put you on to’ the next block the way a gold miner might discover a gold vein. Rather, mining is a bit closer to a lottery in which each hash is a ticket to win. Increasing hashing power does not increase the supply of bitcoins, but merely increases the chance that the miner will win the next block.
Because increased hashing does not increase the bitcoin supply, there has been a lot of criticism of hashing as wasteful, particularly in terms of electricity. In fact, miners are also increasing the security of the Bitcoin network.
Bitcoin, despite broad claims to the contrary, is not exactly anonymous. All bitcoin transactions are public and viewable on the block chain. It is possible, therefore, to trace bitcoins and transaction histories. Mixing services are sites that will pool bitcoins together with a great many other bitcoins and then issue back bitcoins of an equal value. This randomizes the bitcoin histories and makes it much more difficult to track them.
Any computer connected to the internet running the bitcoin client software. These computers transmit transaction throughout the network.
A random number used in a hash in an attempt to find a block. Using a nonce ensures that the hash calculation is cryptographically secure (can’t be hacked) since it can’t be repeated without that random number.
In the event that the block chain is forked, an orphan block is on the chain that is abandoned for the valid chain.
A place or business in which buyers and sellers interact directly without the need for a middleman.
An address or addresses to which funds are sent in a transaction.
Peer-to-peer. Systems of sharing information between individuals on a network rather than going through a central authority. In music downloads, Napster was a central authority and bit torrent is a P2P network. Napster was brought down because it had a central node that could be attacked.
Bitcoin wallets need two strings of code, a public key identifying where the bitcoins will be stored, an a private key, which allows the owner to send those coins to a different address. A paper wallet is a printout of both of these numbers, either as strings of digits and letters, or as QR codes.
If created correctly, paper wallets are considered one of the more secure ways to store bitcoins.
As the amount of computing power needed to mine a block has risen, those who don’t have the resources or skills needed to compete can merge their computing power with others and get a proportional return on the blocks discovered.
The rise in pools has also given rise to concentrations of hashing power, making some people worry about the possibility of a 51% attack. In practice, thus far, miners have been careful not to come too close to this limit to protect the trust of the system and the value of their holdings.
This is when a coin founder mines a coin before allowing others to do so. With Bitcoin and most altcoins, it is necessary to pre-mine a bit in order to create faucets and otherwise drum up interest. Some scamcoins mine a significant portion of their coins before release.
A long string of numbers and letters used to unlock an address and allow its bitcoins to be moved. It is very important to keep this key private as proved by the TV reporter who flashed a QR code of his private key during a news segment and immediately lost his coins. The person who took the coins contacted the reporter, saying that he had taken them before someone with less noble intentions did and offered them back. Eventually, the coins were donated to charity.
Pump and dump
When a group of people heavily hype a new coin, driving the price up, and then quickly sell leaving other investors with a worthless asset. This is not new to crypto currencies, but the excitement surrounding them make pump-and-dump schemes common. Be careful when checking out altcoins.
Another type is when groups of traders buy bitcoin back and forth between themselves to drive the price up and then sell a larger amount, crashing the price, and buy back in cheap. The relative smallness of the Bitcoin economy makes these more of a possibility than in the larger market.
Proof of stake
Proof of work
Hashes are cryptographic problems that must be solved in order for a block to be won. Since it is hard to solve a hash, the solution is proof that a miner put in the effort to get that block.
A long string of numbers and letters which marks a location on the block chain where bitcoins can be stored. The public key, or its QR code, can be freely shared. An example of this is the college student who held a QR code of his public key up at a sporting event along with the note “Mom, send money!” He received over 20,000$ in value from unknown good Samaritans.
A type of barcode formatted to contain more complex information such as addresses, websites, promotions, etc. Since these are easily usable with most smartphones and computers, many Bitcoin applications will let you show or print both public and private keys as QR codes.
A competing/complimentary currency and network to Bitcoin. Ripple is based on a principle of multiple IOUs being exchanged as a way for value to be exchanged between unknown parties. The system is set up on trust.
Bitcoins can be divided 100 million times. The smallest unit is named in honor of the founder of Bitcoin, Satoshi Nakamoto. One satoshi is .00000001. At the moment, one satoshi is worth considerably less than one penny, but in the event that Bitcoin’s value rises, bitcoins can be made further disvisible.
The programmer or group of programmers who created Bitcoin. Satoshi apparently planned on being anonymous and dropping out of the project. He, she, or they, were initially heard from in late 2008 when the Bitcoin white paper was published on a cryptgraphic forum and disappeared in 2010 when he, she, or they stopped returning emails.
There are about 1,000,000 bitcoins in addresses that have not been touched since the first year of Bitcoin. As these addresses all have exactly 50 bitcoins, it is supposed that they were mined by Satoshi, who will re-emerge at some point as a Bitcoin billionaire.
An altcoin created with the sole purpose of enriching the creator. Usually a pump-and-dump scheme.
A proof-of-work process that is supposedly more efficient on CPUs than ASIC miners, and thus more democratic. Litecoin uses scrypt.
A sum that results from hashing a public and private key to prove that a transaction came from a particular address.
The early days of Bitcoin were driven by people who wanted a currency that could be used when fiat money was too dangerous. Silk Road was a website, operated on TOR, on which people could buy questionable goods like illegal drugs.
In 2013, the site was shut down by the FBI and the operator, Ross Ulbricht, was arrested. The FBI seized about 160,000 bitcoins from Ulbricht’s computers, making the FBI one of the largest owners of bitcoin in the world.
A wire transfer system for the Euro in the European Union.
The cryptographical process underlying Bitcoin’s proof of work.
Simplified Payment Verification. A process used by some Bitcoin wallets that lets them not download the whole block chain, but only headers, in order to verify the Bitcoins held in that wallet. This makes using these wallets substantially easier to use.
When a block is ‘discovered,’ any other miners who are working on solving that block stop, and move on to the next one. The block they were working on is now considered ‘stale.’
A way of linking addresses by tracking how a bitcoins move between addresses. Taint analysis can show where stolen bitcoins go and suggest that a set of addresses belong to a single individual. If any addresses are publicly associated with an individual (like the donation QR on this site), then that entire set of addresses might be identified.
An alternative bitcoin block chain, used purely for testing purposes.
A browser extension that allows people to visit sites not listed on Google, and to do so without risking their identities. It was originally created for the US Navy and has since come to be used by journalists, activists, and any number of other people who want to keep their activities and identities secret.
As part of the ‘dark web,’ TOR has naturally been used for illegal activities and became famous as the way to visit Silk Road. The TOR Project, though, says that it is dedicated to keeping both governments and corporations out of our lives if we don’t want them there.
A set of transactions that have been broadcast to the Bitcoin network which are then bundled together to create the next block.
A small fee imposed on many transactions on the block chain. This ensure that miners will continue to be rewarded for their efforts. Transactions sent without fees will generally be confirmed, but it may take more time as transactions with fees are prioritized.
A micro bitcoin, or micro, .000001.
It is possible to get addresses with names or other recognizable patterns in them. These are termed vanity addressed.
Bitcoins obtained as a reward for discovering a block that have not been spent.
How wildly the price of Bitcoin moves within a specific time frame. Bitcoin has had periods of truly wild swings, and will continue to do so until many more people adopt its use.
A wallet is where your bitcoins are. It’s a program, piece of paper, or online service that stores the public and private key of a Bitcoin address.
When bitcoins are sent to an address but the transaction is not yet included in a block, it is considered a zero-confirmation transaction. The on-average confirmation time of ten minutes is too long for many, everyday, purchases. Therefore, most merchants will take seeing that funds have arrived in their wallet as adequate proof that the transaction has taken place and conclude the sale.