Terminologies Used in Bitcoin
This blog is a continuation of my previous blog Bitcoins (An introduction for beginners)
- Block – Blocks are found in the Bitcoin blockchain. Blocks connect all transactions together. Transactions are combined into single blocks and are verified every ten minutes through mining. Each subsequent block strengthens the verification of the previous blocks, making it impossible to double spend bitcoin transactions
- Blockchain – The Bitcoin blockchain is a public record of all Bitcoin transactions. You might also hear the term used as a “public ledger.” The blockchain shows every single record of bitcoin transactions in order, dating back to the very first one. The entire blockchain can be downloaded and openly reviewed by anyone, or you can use a block explorer to review the blockchain online.
- Mining – Bitcoin mining is the process of using computer hardware to do mathematical calculations for the Bitcoin network in order to confirm transactions. Miners collect transaction fees for the transactions they confirm and are awarded bitcoins for each block they verify.
- Double spending – If someone tries to send a bitcoin transaction to two different recipients at the same time, this is double spending. Once a bitcoin transaction is confirmed, it makes it nearly impossible to double spend it. The more confirmations that a transaction has, the harder it is to double spend the bitcoins.
- Wallet – 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 blockchain. 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.
- Private key – 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.
- Signature – 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.
- Hash rate – 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.
- Cryptography – Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already use 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 blockchain. It can also be used to encrypt a wallet so that it cannot be used without a password.
- Address – 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 – a Bit is a common unit used to designate a sub-unit of a bitcoin – 1,000,000 bits is equal to 1 bitcoin (BTC).
- BTC – BTC is a common unit used to designate one bitcoin.
- Block height – The block height is just the number of blocks connected together in the blockchain. Height 0, for example, refers to the very first block, called the “genesis block.”
- Halving – Bitcoins have a finite supply, which makes them scarce. The total amount that will ever be issued is 21 million. The number of Bitcoins generated per block is decreased by 50% every four years. This is called “halving.” The final halving will take place in the year 2140.
- P2P – 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.
The above-given terminologies are the most important and basic terminologies used in bitcoin. The information has been collected for you from various sources and put into one blog.
By Ria Vaghela (Market Analyst intern at Qrius and FYBMS student at Narsee Monjee College of Commerce and Economics)