We know some of the terminology may be difficult to understand. Here is a glossary we put together with some of the most common terms related to cryptocurrencies.
An address is a "payment instruction" for a digital asset. When receiving payment, a payee communicates an address to the payor, and the payor sends funds to that address. A set of addresses used together comprises a “wallet.”
Bitcoin (with a capital B), which launched in 2009, established the world’s first decentralized digital asset. Bitcoin uses blockchain technology to create a digital asset that is entirely decentralized and managed across a wide network of computers rather than by a single entity. The virtual coins generated by the Bitcoin network are called bitcoin (lowercase b). In this sense, the word bitcoin is written in lowercase, much like the words “penny” and “nickel.” A bitcoin can be used to transfer or store value. While digital assets are speculative and present risks, the longevity and saturation of the Bitcoin and Ethereum networks, and their coins, have made them leading candidates for product support, such as custody and execution services.
A block is a set of updates to the blockchain ledger. Using Bitcoin as an example, a block is basically a virtual container of bitcoin transactions. A block can hold a limited amount of data, allowing for a certain number of transactions and the corresponding data to be stored in each block. A bitcoin node receives these blocks, validates all transactions in them, and then applies the updates to the global ledger. A bitcoin miner is tasked to validate all transactions in the block and then solve a complicated mathematical equation that cryptographically ties this block to previous blocks. Once broadcast to other nodes and miners, this block is added to the string of blocks that make up the chain. The whole blockchain is a publicly viewable record that keeps track of every transaction that has ever occurred within that digital asset.
This is a number that specifies how many blocks have been globally produced at the present time. The very first block created in a blockchain (known as the “genesis block”) has a height of zero, because it is the first block in the chain. The fifth block to be added will have a height of four, because four blocks came before it.
The first miner to solve the proof-of-work puzzle in a block receives a block reward of new coins as compensation for the miner’s expenditure in solving the puzzle. With bitcoin, the reward given is cut in half every four years in order to control the distribution of coins released.
Blockchain is the underlying technology that Bitcoin and most other digital assets use to record and validate transactions. It is a linked list of transaction updates to a virtual digital public ledger. A blockchain consists of a group of transactions in blocks. These blocks are cryptographically connected to one another as they are mined, creating a long chain.
Cold storage is a mechanism where private keys used to sign withdrawal transactions are kept in secure locations that are not connected to the internet.
Cryptocurrencies, also known as digital assets and digital currencies, are issued and transferred electronically. This is in contrast to U.S. dollars and government-issued currencies, which exist both in physical and electronic form. Bitcoin is a widely recognized cryptocurrency. Most of the other forms of cryptocurrency that have been issued are referred to as “altcoins.”
A service in which a financial institution or other entity holds property on behalf of a customer.
Our recommended description for this emerging asset class. Several other terms, such as “cryptocurrencies,” “crypto assets,” “virtual currencies,” and “crypto tokens,” are also used in this evolving market.
A digital signature is a mechanism that uses public-key cryptography to create un-forgeable proof that a transaction is authorized by the owner of the coins. The most common algorithm used by digital assets is the Elliptic Curve Digital Signature Algorithm (ECDSA), though there are many such algorithms, including Schnorr and BLS signatures, whose use is increasing.
Ether tokens are a cryptocurrency created within the Ethereum network and, like bitcoin, are tradeable digital assets. Unlike bitcoin, the focus of ether tokens is not as a store of value or payment system, but rather as a system for creating and paying for the execution of smart contract logic.
A decentralized, blockchain-based computing platform that allows developers to build and deploy decentralized applications, including smart contracts. In the Ethereum blockchain, mining computers work to earn ether, a digital asset that supports the Ethereum network.
An exchange is a platform that allows buyers and sellers to trade a range of digital assets using both fiat currencies and other digital assets. Some exchanges facilitate trading bitcoin for fiat currency, while others enable trading among different digital assets.
Fiat currencies are those issued by a government; typically used to refer to physical currencies such as U.S. dollar bills. Other examples include the Japanese yen and the eurozone euro.
The first block in a blockchain. As it is the first of the chain, the genesis block does not reference any prior block, as all subsequent blocks will.
Digital asset miners are compensated, or rewarded, for their work, which aids the process of validating and processing transactions. In Bitcoin, the reward amount for successfully mining a block is cut in half every four years. This is done to control the distribution of new digital assets in circulation. It is the technical mechanism by which the creator implemented the monetary policy of the system.
A hard fork is the splitting of a digital asset’s blockchain in a backward-incompatible way, resulting in two distinct digital assets. The code and data are replicated from the original digital asset to create the new one, adding backward-incompatible changes. Once the hard fork occurs, the two digital assets are non-fungible with each other, but share some transaction and ledger history. Hard forks occur for two key reasons. The first is when competing visions of a digital asset’s future development fail to reach agreement. The second is unforeseen bugs or intentional fixes to system-critical issues. When a hard fork occurs, developer and miner support are key components in determining whether the digital assets gain or lose value and relevancy. If poorly implemented, hard forks can also cause instability in the digital asset’s network, because of transactions that may be valid on both networks.
Hash or hash function
A hash is the function of mapping data of variable size to a new set of data at a fixed size in such a way that the reverse computation is effectively impossible. Cryptographic hash functions require specific properties to be considered secure, and different digital assets may use different hash functions. The SHA-256 hashing algorithm is used in Bitcoin, for example.
When miners run software to create blocks, the algorithm they run is called a “hash.” Miners compute a lot of hashes; the sum of how many hashes they compute in a given unit of time is called their hash rate. Hash rate is directly correlated with miner earnings. Increasing one’s hash rate by installing new mining devices increases the miner’s profits.
What began as a typing error on a Bitcoin forum in 2013 has become a beloved rally cry for long-time bitcoiners. It expresses the belief that long-term value is better obtained by holding a digital asset rather than actively trading it.
Examples include hedge funds, investment advisors, pensions and endowments, mutual funds and family offices.
The term “key pair” describes public and private keys used in public-key (or asymmetric) cryptography, where the key used to encrypt data is different from the key used to perform decryption. In Bitcoin, public keys are used as a transaction output in addresses, functioning similarly to an account number or payment instruction, while the private key is known only to the funds’ owner and can be used to sign transactions moving those funds.
Keys are long numeric codes that are involved in digital asset transactions, often encoded as hex or alphanumeric strings. Asymmetric key cryptography provides a strong security layer in which two different keys are created: a public key that is shared to encrypt a message, and a private key that is confidential to decrypt or sign a message. In Bitcoin these asymmetric keys are used to create digital signatures instead of encryption, which can be validated by everyone. There are two kinds of keys: public and private.
A light client is a wallet that does not download and validate the full blockchain. Generally, they are wallets (particularly on mobile devices) and rely on a server to supply them with transactions. In order to have full security for assets, a full node is generally required. A light-client mechanism was originally proposed by Satoshi Nakamoto called Simple Payment Verification (SPV).
Market capitalization or market cap
The term “market capitalization” comes from the world of equities and is determined by multiplying the total outstanding shares of an asset by the last available share price. The term has been adopted for use in the digital asset space and is computed by multiplying the total coin supply by the current market value of each coin. Some prefer the term “implied network value, as the coins are digital assets of decentralized networks rather than shares in a company.
A bitcoin can be split into very small parts. Each bitcoin is divisible to the eighth decimal place, so each bitcoin can be split into 100,000,000 units (satoshis). An mBTC is one thousandth of a bitcoin, or 0.001 BTC. It is also called a “millibitcoin.”
A Merkle tree is a binary tree data structure in which a set of data can be compactly committed to so that it cannot be modified. It works by hashing together pairs of data (leaf nodes), hashing the pairs of the pairs from that hashing and so on, in pairs, until there is a single hash remaining. This is known as the Merkle root and is a compact commitment to the entire set of data. Most digital assets use Merkle trees to ensure that the set of transactions in a block are unmodified. A Merkle tree also has a feature where by presenting a list of hashes which indicate a branch of the tree, a single element can be proven to be present in the tree. This is the fundamental tool used by Satoshi Nakamoto in his SPV proposal.
Due to the variance of whether a given miner will win a block or not, miners often band together into mining pools. In a mining pool, one node validates transactions and distributes a candidate block to multiple different miners. By agreeing to share winnings if one of the miners in the pool wins the block, pools help reduce variance for its members.
Nodes are software that run on internet-connected computers and function as transaction validators, as well as digital asset wallets for the network they serve. In Bitcoin, for example, full nodes download the entire blockchain and validate each transaction per the agreed-upon rules of the network, and relay transactions and blocks to others.
Off-chain transactions are valid bitcoin transactions that are not sent to the main Bitcoin network. New research using off-chain transactions is under development by several companies and enables a large increase in the effective transaction capacity of the network. They use multiple off-chain transactions to create a payment channel between counterparties. By keeping a valid signed transaction and not sending it to the blockchain, the parties in the payment channel can update their balances in real time, without having to wait for transactions to be mined. In the event of a dispute or one party going offline, the counterparties can send their transactions to the blockchain to settle. This technique is used by payment networks, such as the Lightning Network, and non-custodial trading. It is a major tool that allows blockchains to handle many more transactions than could ever be settled on the blockchain.
Peer-to-peer (P2P) network
A P2P network is created when two or more computer systems are connected to each other through the internet for file sharing and work distribution, all without a central server. Examples of P2P networks include file-sharing protocols like BitTorrent, the Invisible Internet Project (I2P) anonymity network and digital asset protocols like Bitcoin and Ethereum.
A private key in asymmetric cryptography is a piece of data held in secret by a single person or entity. It is used to compute digital signatures on data that can be verified using a public key.
Proof of work
Proof of work is the mechanism by which Bitcoin creates a cost of production for the unit of account and ensures immutability of the ledger in a trustless manner. Because each update to the ledger block contains a costly proof of work, this cost makes it expensive to rewrite the ledger.
A public key in asymmetric cryptography is a publicly shareable piece of data that is computed from a private key and shared with counterparties through addresses, which are hashes of public keys. Public keys are used along with digital signatures to validate that the holder of a coin authorizes the transfer of that coin to a new address or entity.
QR (quick response) codes are sometimes used in place of the long string of letters and numbers that make up a Bitcoin address like this: 16r61N8tB03FTQGwZCRXLLygNqVL8MEsrR. For convenience, wallets will provide the option of converting a Bitcoin address into a QR code for use in sending or receiving, or to transact a coin exchange directly between two smartphones, for example.
A ring signature is a type of cryptographic digital signature. In a peer-to-peer transaction, such as that used with cryptocurrencies, a ring signature enables an individual of a group to sign a transaction without revealing the identity of the actual signer.
A satoshi is currently the smallest denomination of a bitcoin. A bitcoin can be split into one hundred million units. Each of these units is called a satoshi. So, a satoshi = 0.00000001 BTC.
The idea for Bitcoin was presented to the public in a white paper, Bitcoin: Peer-to-Peer Electronic Cash System, written by Satoshi Nakamoto, a person or persons whose identity remains unknown. Nakamoto has communicated with developers under this pseudonym but has never publicly come forward to take credit for the invention of Bitcoin.
All cryptocurrencies contain an algorithmically enforced limit on the number of coins. This is different from traditional commodity and currency assets, in which either more commodities can be created (such as in gold mining) or more currency can be printed (fiat). Thus Bitcoin has a different – and stronger – form of scarcity than traditionally scarce assets.
Segregated Witness, or SegWit
Each transaction recorded on a blockchain has a signature that proves it is a valid transaction. How many can fit into each block depends on the maximum defined size of the block. Segregated Witness was one of many soft-fork upgrades to the Bitcoin network, and it altered the format of transactions. It moved some transaction data (witness data – signatures and scripts) outside of the main block, mainly in an effort to fix a technical deficiency called “transaction malleability.” By moving some data out of the main block, SegWit had the side benefit that it increased the effective block size of Bitcoin by up to 3.5 times, depending on uptake of the feature by users.
A soft fork can be viewed as a backward-compatible software update for a digital asset blockchain. Soft forks can refine the governance rules and functions of a digital asset blockchain but, unlike hard forks, are compatible with the previous blockchain. This means that a soft fork does not result in a split of the blockchain into two digital assets. For a soft fork to be implemented, a specific level of readiness to enforce the new rules must be signalled by miners. Soft forks are optional for all users in the system, and it is not necessary for users to immediately upgrade, unless they want to use the new features.
Store of value
Store of value is one of the core functions of money, alongside medium of exchange and unit of account. An asset is considered to be a good store of value if its purchasing power does not degrade over time.
Total circulating coin supply
This is the total number of coins that a particular digital asset has in circulation.
Total coin supply
This is the total number of coins that have been minted for a particular digital asset, although not all coins minted may be in circulation. It can also mean the total number of coins that will ever exist, as in 21 million bitcoin.
A transaction fee is an amount of cryptocurrency that is attached to a transaction and that incentivizes miners to process the user’s transaction. In Bitcoin, a transaction fee is not mandatory, nor is it prescribed by the code. Users can choose how much to pay for their transactions to be processed. That is why during times of network congestion, the average transaction fee goes up, as users are trying to incentivize miners to process their transactions rather than other users’ transactions. On the other hand, when network traffic slows down, average transaction fees also decline.
A bitcoin can be split into very small parts. A uBTC is one millionth of a bitcoin, or 0.000001 BTC. It is also called a “microbitcoin.”
Unspent transaction output
Bitcoin does not operate on the account model (like Ethereum) but on the unspent transaction output (UTXO) model. Every transaction has inputs and outputs. Outputs that have not been spent are the set of bitcoin in circulation (i.e., spendable bitcoin). Unspent outputs are used as inputs in new transactions.
A digital asset wallet is a piece of software that maintains keys and manages addresses. A wallet comprises a set of addresses. If the wallet has the private keys for these addresses, it is capable of sending transactions. If it does not have the private keys for these addresses, it is called a “watch-only” wallet, as might be used by an auditor.
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In the Bitcoin white paper, Satoshi Nakamoto computed the probability that transactions could be reversed. The ability to reverse transactions is only possible probabilistically as long as no entity has more than 51% of the mining hash rate and supports the rule of thumb to wait six confirmations before considering a transaction settled, as well as the concept of a 51% attack. If any entity controls 51% or more of the hashrate, it can arbitrarily censor transactions and/or prevent progress, although it cannot directly steal funds. Theft of funds is possible by such an entity only if a counterparty follows the six-confirmation rule, the attacker has 51% of the hash rate, and the attacker creates a double spend.