Important Bitcoin Vocab

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Bitcoin is difficult to understand. A lot of this difficulty can be attributed to the newness of the terminology being used to describe Bitcoin. Once one starts to understand the vocabulary being used, one can use Bitcoin with greater ease and follow its progression without being totally confused and overwhelmed.

Satoshi

The first name of the pseudonymous creator of Bitcoin, Satoshi Nakamoto. A “Satoshi” is the name of the smallest unit in Bitcoin: 0.00000001.

Sats 

A slang shortening of the unit “Satoshi”.

Seed or Mnemonic Backup

A set of random words that act as a backup for your Bitcoin wallet. In the event that you lose the device your bitcoin is secured by, if you have saved your mnemonic, you will be able to use it to recreate your bitcoin wallet by importing your mnemonic into your new device.

Private Key

Is a random number that creates a digital signature that is needed to move specific utxos or coins from one address to another. 

Address

A bitcoin address is an alphanumeric address that acts similar to an account number or email address. If you give someone your Bitcoin address they can send Bitcoin to that address.

HD Wallet

Hierarchical deterministic (HD) bitcoin wallets can create an almost infinite amount of private key/public key pairs from a single seed. Being able to create many public/private key pairs from one seed improves usability and privacy. 

Inputs/Outputs

Inputs and outputs are the bits that make up a single transaction. Transaction inputs are transaction outputs of a previous transaction. Inputs are used to create a new transaction. The transaction outputs are where the inputs go.

UTXO

Stands for “unspent transaction output”; wallets pull from the UTXOs in a wallet to create transactions.

Digital Signature

A digital signature is a unique identifier that mathematically proves possession of a private key. In the context of bitcoin, it proves you have possession of the public/private key pair associated with the UTXOs you’re attempting to transfer. Digital signatures are analogous to passwords on the bitcoin network.

Mempool

The lobby or the line of the bitcoin blockchain. This is where transactions wait to get into the Bitcoin Club, and there’s always a little cover; no one gets in for free

Transaction

A valid transfer of UTXOs to another bitcoin address.

Hash

A hash is a fundamental building block of crypto and the information age. A hash is a unique, fixed length alphanumeric identifier; it acts as a fingerprint for any arbitrary amount of data.

Transaction ID

A hash of a transaction’s information, which acts as a unique identifier for that transaction.

Block

A digital container of valid transactions that has valid Proof of Work and has been confirmed by the bitcoin network.

Block Reward

Each Bitcoin block comes with a bitcoin reward for the work completed in mining the block. The block reward is currently 6.25 BTC per block.

Block Height

Is the particular length, depth, or time of a block in the bitcoin blockchain. The height tells you which particular block in the chain you’re observing, with the first block having a block height of 0.

Block Weight

This measures the data load of the block. Every block abides by the same rules, but every block has a different data load and thus requires more or less of the network’s resources. The block weight tells you how much data is stuffed into the block.

Confirmations

Are acknowledgements from other independent Bitcoin nodes that a block of transaction is valid.

Double Spend

Someone or some group is able to overpower or outsmart the network and spend the same digital coins simultaneously. Satoshi was able to keep this attack at bay with the invention of Bitcoin, making it very improbable that any entity can double spend their bitcoin.

Proof of Work Mining

The idea is to have a decentralized group of computers expend energy (resources) trying to find a random number. The miner who finds the random number is rewarded with the right to publish their block of valid transactions to the Bitcoin blockchain. This entitles them to collect any transaction fees a part of that block and the right to mint new bitcoin at the agreed to production quota.  

Satoshi used it as (1) a way to protect the integrity of the transactions within each block, (2) a costly signal to create consensus around the order of transactions, (3) a way to distribute new supply and control over the protocol. By making it hard or costly to alter the integrity of past transactions, Satoshi made it very hard and costly to “double spend” a Bitcoin and to mint new Bitcoin. 

Mining Is the name give to the Proof of Work (PoW) process in Bitcoin that secures the network and is also a way of distributing the bitcoin token in a decentralized and open way. Miners are in a constant co-opetition in the sense that they are businesses in a ruthless competition, but they’re also fundamentally cooperating on a collective task: finding hard to find random numbers, securing the Bitcoin network.

ASIC 

Application Specific Integrated Circuits are computers designed to serve one specific purpose. In the context of Bitcoin, Bitcoin ASICs mine Bitcoin. 

Hashrate

Since mining involves a lot of hashing, we can measure how many hashes the network produces over any given amount of time, telling us how much computing power is on the network. ASICs have dominated the BTC hashrate since 2013.

Difficulty

This is a measure of how difficult it is to produce and add a valid block to the Bitcoin blockchain. The difficulty adjusts every 2016 blocks, or approximately two weeks.

Difficulty Adjustment

The difficulty adjusts changes in the amount of hash power on the network so that bitcoin may keep its intended production (inflation) schedule. Without difficulty adjustments it would be impossible to keep Bitcoin’s inflation on schedule and predictable.

Coinbase

The miner who wins the PoW race gets the privilege of minting new bitcoin. These new bitcoins are called the “coinbase”. They are pure, fresh bitcoin. 

Transaction fees (mining fees)

Every transaction on the bitcoin network must include a fee to pay for processing and secure settlement on the network. The winning miner collects all of the transaction fees included in their winning block along with the coinbase. 

Halving

About every 4 years the coinbase reward miners are allowed to mint for themselves is cut in half, thereby reducing the inflation rate by half. This will continue for about 100 years until the last satoshi has been mined.

Full node

A bitcoin full node is an independent computer that runs software which verifies bitcoin transactions, bitcoin blocks, and keeps a full history of the bitcoin blockchain.

Inflation

In the context of bitcoin, inflation is simply the creation of new bitcoin. When the bitcoin network creates no new supply in over one hundred years, its inflation rate will be 0.

Multisignature

Most bitcoin transactions only require one digital signature to move coins (UTXOs), but coins held in a multisignature wallet might require multiple digital signatures to move the funds and have at least two public keys associated with them.

Lightning Network

Is known as a layer two payment network. Lightning uses a network of multi signature wallets, smart contracts, and payment channels to move Bitcoin faster and cheaper than it could move on the layer one bitcoin blockchain, which is used primarily for security purposes.

HODL

Was a famous typo of HOLD on the subject line of a message board earlier in Bitcoin’s history when the price was tanking. The drunk poster, drunk-posted telling the community he was going to HODL through the pain and admits to being a terrible trader. He’s adamant about never losing to the better traders by never trading. It became a typo and ethos the community embraced fully, so to HODL is to hold on to Bitcoin with deep conviction no matter what the naysayers might be saying or what bearish traders in the markets might be doing. 

Coda

All monies and money networks are complex in their own ways. Bitcoin is no exception. But if you know some of the key terms and concepts surrounding this network you can start to form a solid base of understanding in which you can simplify the seemingly complex and be aware of what you’re doing. 

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