Blockchain: The foundational technology behind the blockchain and cryptocurrency sector. It is a virtual, immutable (unchangeable), distributed store of data stored on servers around the world. This is a new way of distributing both trust and data. It is an alternative to traditional systems where a central organization holds all the data.
Think of it as a chain of blocks of data, verified by consensus by any computer that chooses to participate. Each block of data containing anything from who has sent cryptocurrency to others to who owns what plot of land in a land registry.
Blockchain is a distributed ledger.
Block: A package of data containing multiple transactions over a given period of time.
Chain: The cryptographic link that keeps blocks together using a ‘hash’ function.
Distributed ledger: This is an analogy often made about blockchains. Instead of a centralized bank ledger, blockchains offer the promise of distributing balances throughout a network of computer servers.
You aren’t going to a single bank to store where you send your value — instead, you are going to a decentralized network of peers.
Distributed ledgers aren’t a new concept: the island of Yap used individual tables as early as 500 AD. They yelled at one another whenever they made a new transaction. Blockchains and cryptocurrencies offer the global, virtual network equivalent of that system.
Cryptocurrency: A token or currency built on top of blockchain technology. This token helps capture and distribute value from users of the blockchain. You can think of Bitcoin as the first application and cryptocurrency stemming from the blockchain. Cryptocurrencies are a subset of what are known as cryptoassets.
Tokens: The means of exchange to give value to a transaction; typically a native cryptocurrency. Some non-currency blockchain architectures can be tokenless.
Cryptocurrency Exchange: Cryptocurrency exchanges are websites or services that let you exchange digital cryptoassets and cryptocurrencies between one another or exchange fiat currencies such as the US dollar for cryptoassets. Two of the most prominent examples of these exchanges are Coinbase and Binance.
Public/Private Keys: Keys are your way to access crypto balances and to send and receive value or data in cryptocurrency. Your public key is like your email address. It’s what allows other people to send you funds. You can share your public key with the general public.
Services like Etherscan can scan account balances and transactions associated with a public key.
Private keys are the password to your email account. Anybody who holds the private key to a wallet can access and control it and spend any tokens within it. It’s a unique string of data that represents proof of identification within the blockchain, including the right to access and own that participant’s wallet within a cryptocurrency. It must be kept secret: it is effectively a personal password
A unique string of data that identifies a participant within the blockchain. It can be shared publicly.
If you lose your private key or forget it, you’ll lose control of all the crypto assets tied to that private key/public key combination.
Cryptocurrency Wallets: Cryptocurrency wallets are ways of storing your private and public keys to your cryptoassets. A wallet is a safe you can access to then get your keys.
Wallets allow for easier access and backups if you don’t remember your private key with techniques such as the mnemonic seed phrase, a series of 25 random words you have to input to get access to your private key.
There are software wallets and hardware wallets: software wallets store your keys online, while hardware wallets use a physical device such as the Trezor to protect your private key.
MultiSig: MultiSig is a permissions system for crypto wallets. The majority of cryptocurrency wallets are single-signature. This means you only need one person’s private key to control the balance within it.
MultiSig means you need more than one private key to spend funds. This allows you to set up an M-of-M scheme. As an example, you might need 5 out of 9 signers to approve of a transaction for it to go through. This is useful for corporate wallets, where many owners and employees have to approve before a transaction is sent.
Platforms like BitGo and Xapo provide MultiSig wallets for their users.
Proof-of-work: A system where blocks of transaction data on the blockchain are mined and validated by specialized computers who earn a reward for solving specific math equations. Repeatedly running a hash function, the mechanism by which data miners win the right to add blocks to a bitcoin-style blockchain.
Mining: A practice in proof-of-work systems where computers are dedicated to solving math problems in order to claim the right to mine a block of data and to get an amount of cryptocurrency.
How it works in some more detail: the cryptographic mining piece involves solving cryptographic puzzles. A computer needs to find a nonce to combine with unverified transactions to output a verified string.
Data Mining: The process of solving cryptographic problems using computer hardware to add newly hashed blocks to a public blockchain such as bitcoin. In fulfilling this function, successful data miners keep the blockchain actively recording transactions and, as an incentive, are awarded newly minted bitcoins for their trouble.
Mining pool: A mining pool aggregates computing resources dedicated to mining cryptocurrencies and allocates any of the mined blocks proportionally. In practice, mining cryptocurrencies has some randomness to it, so mining pools serve an essential purpose in keeping volatility down for individual miners.
Proof-of-stake: Proof-of-stake pushes people who own a selection of a blockchain’s tokens to make decisions on validating the chain. In practice, it’s a much less energy-intensive practice than mining.
Node: Any computing server around the world can run as a cryptocurrency node, which can store a copy of the blockchain and serve to verify transactions.
Hash The result of applying an algorithmic function to data in order to convert them into a random string of numbers and letters. This acts as a digital fingerprint of that data, allowing it to be locked in place within the blockchain.
Hash Rate: A measure of the computing power dedicated to any blockchain by the miners validating transactions and blocks. The higher the hash rate, the more active the chain is and the more appealing it is to miners. It then becomes harder to attack the chain, and infiltrate it with false transactions (known as a 51% attack).
Decentralization: A measure of how much authority is held by a central holder. You can argue that blockchains are naturally more decentralized than other methods of distributing data because there is (at least in public chains) no gatekeeper on who can join: as long as you have the computing power, you can participate in the blockchain.
Instead of all of your data residing in one central provider (ex: Equifax), it now sits and is processed and verified by a global network of computers.
Decentralization is an ideal of the blockchain community. However, it has not been perfectly achieved.
For example, the mining pools that mine most of Bitcoin are mostly based in China: a consortium of these mining pools might decide to do what is called a 51% attack. They would use their assembled computing power to change the rules of the blockchain and facilitate conditions such as “double spend”: the ability to infinitely spend the same block of cryptocurrencies, essentially creating wealth out of nothing. The control of mining resources is very centralized.
Public vs. Private Chains: There are blockchains open entirely to the public (anybody can participate) such as Bitcoin and Ethereum. There are also private blockchains that have gatekeepers who determine who can join.
Private blockchainA closely controlled network operated by consortia in which the data is confidential and is accessed only by trusted members. Private blockchains do not require a token.
Interoperability: Blockchains and cryptocurrencies are often isolated with one another, and need to be exchanged in order to be used.
Blockchains like Aion are looking to solve the interoperability piece by making different blockchains and cryptocurrencies interoperable, or compatible with one another: imagine, for example, a world where you can trade Bitcoin and Ethereum seamlessly (without exchanges) and use them interchangeably.
Atomic Swaps: Atomic swaps involve cryptocurrencies that are tradeable with one another without needing an exchange in the middle. Typically, they have to follow the same encryption standard and have a payment channel protocol such as Lightning Network. With what’s called a hash-time locked smart contract, two individuals can trustlessly trade cryptocurrency pairs with one another: solving the interoperability piece.
Hash functions/tables: A more technical and precise description of the underlying technical foundation of how data is shared and stored on a blockchain. Hash tables are a mainstay of computer science.
Bitcoin: Bitcoin was created by Satoshi Nakamoto in 2008 as the first application of the blockchain and as the first cryptocurrency. It is still the dominant cryptocurrency now.
Fork: There are soft forks, where a cryptocurrency maintains its value and its rules are simply rolled forward and changed in a reversible manner, usually with the assent of the majority of the community.
Hard forks are when a blockchain fails to reach consensus and has to do a hard reset and splits off into two chains. One chain adopts one set of rules and another continues the original set of rules. This is non-reversible. A hard fork is how Bitcoin and Bitcoin Cash split.
SegWit: Segmented Witness (or SegWit) is a soft fork that happened with the Bitcoin blockchain. It solved congestion on the network by increasing the blockchain’s block size limit and splitting blocks of data in two. It separated out the unlocking signature with the scripts that send and receive data with the transactional data.
This allows the network to process more transactions per second. Users don’t have to wait as long for bitcoin transactions.
Lightning Network: Lightning Network is an off-chain solution that can settle transactions without having to use the underlying blockchain. It opens up bidirectional payment channels between different individuals, allowing Bitcoin to process many more transactions per second.
Payment channels have pre-deposited amounts of crypto placed into them. They allow individuals with channels open between them to transact seamlessly without using the blockchain. Once you get a final balance, it is validated into the blockchain.
This allows for many more payments to be done per second. It also means there is some centralization between large payers.
Schnorr: A large Bitcoin update brewing as of the time of drafting for this article, Schnorr proposes to give users a new way to generate the private and public keys critical to cryptocurrencies. It replaces the Elliptic Curve technique currently used to generate keys with the Schnorr technique.
This update increases both privacy and security by grouping together MultiSig and regular transactions in the same category, allowing the blockchain process to more transactions and hiding whether or not a transaction is MultiSig or not.
Ethereum: The blockchain behind the second largest cryptocurrency. Ethereum differentiates itself from Bitcoin by allowing programmers to build on top of the blockchain with a Turing-complete programming language. This allows programmers to build distributed applications.
While Bitcoin can be seen as one application (transfer of value) on the distributed web just like email, Ethereum is a network that allows for many different applications to come to the fore.
The cryptocurrency associated with the Ethereum blockchain is known as Ether.
Decentralized Apps (DApps): A decentralized application is a specific type of app that serves a specific purpose within a blockchain network. It must be open-source, autonomous, and it must make changes to the underlying software via consensus from its users. It must store all its data on a public blockchain, which is auditable by the public, and it must generate tokens and be accessible via those same tokens.
DApps seem like regular web applications. Client-side, the same mechanism is in play, but server-side (or the back-end), data and control are distributed among a network of P2P (peer-to-peer) nodes and smart contracts rather than a centralized set of servers and server code.
Smart Contracts: Smart contracts refer to code that is placed on a blockchain and is then executed on it. The code can be audited by the public. Smart contracts are often regarded as a compliment or a replacement to traditional legal contracts.
A smart contract might algorithmically implement escrow payments without having the need to create a binding legal contract to hold parties accountable.
However, the term is often seen as overly broad as it can mean any block of code placed on the blockchain.
Gas: Gas is used as a transactional cost in the Ethereum blockchain. When you use Ether to access distributed applications, you have to spend a portion of gas associated with it. Gas is correlated with how much computational work your request takes. This ensures that transactional costs are rightly set for the amount of work the system needs to do.
Gas is a way to ensure that nobody tries to attack the Ethereum network by filling it with invalid requests.
DAO: DAOs or decentralized autonomous organizations are a collective grouping in which smart contracts make choices. The entire organization is run on the blockchain. Shareholders buy tokens that give them the right to vote on future decisions.
Casper: Casper is an implementation of the Ethereum blockchain that promises to process more transactions per second. Ethereum used to be able to process 20 transactions a second. Bitcoin could only process 4. Visa and Mastercard can process about 20000 transactions a second. Casper is an in-between step for the Ethereum blockchain to change over from proof-of-work to proof-of-stake. It implements sharding (dividing the main Ethereum chain into smaller subcomponent chains) to provide parallel processing and increased throughput.
ERC20: A set of standards based on the Ethereum blockchain. ERC20 allows anybody to create a token built on top of Ethereum’s blockchain. It is the basis of the initial coin offering craze and the advent of new “altcoins”.
Altcoins: Altcoins are tokens, cryptocurrencies and cryptoassets outside of Bitcoin and Ethereum. Coinmarketcap gives you a good view of how many there are!
Stablecoins: Stablecoins are cryptoassets pegged to a certain value or asset — for example, you have stablecoins that trade 1:1 with the US dollar. These are collateralized or not with other cryptoassets.
Initial Coin Offering: Another way to originate tokens for a blockchain. An ICO involves a marketing process, private sale, then a public sale of a newly-listed token, which then aims to be listed on as many cryptocurrency exchanges as possible. Note that there is no standard way of conducting initial coin offerings.
Hyperledger An umbrella project set up by the Linux Foundation comprising various tools and systems for building open-source blockchains.
Oracle: A bridge from a blockchain to an external data source that allows a smart contract to complete its business by referencing timely real-world information. An oracle might allow a smart contract to access consumer energy usage, live train timetables, election results, and so on.
Peer-to-peer (P2P)The direct sharing of data between nodes on a network, as opposed to via a central server.
Permissioned ledgerA large, distributed network using a native token, with access restricted to those with specific roles.
Proof of stake The mechanism by which participants earn the right to add new blocks and so earn new tokens, based on how much of that currency they already hold.
Public blockchainA large distributed network using a native token (such as bitcoin), open to everyone to participate and maintain.