A Guide to Understanding Bitcoin Terminology
Let's be honest, bitcoin can be difficult to understand. Lolli wants to make bitcoin easy, so we put together a glossary of key terms and phrases used in the bitcoin + crypto industry.
Altcoin: An alternative coin. A cryptocurrency other than bitcoin. They have tradeoffs from differences in technical features. Some benefits, mostly negative consequences.
Asymmetric Cryptography: uses one-way functions to secure transactions and communications. Anyone can send bitcoin to a person’s public address but to send bitcoin from that address you must have the private key.
Bitcoin: A peer-to-peer electronic cash system, the first of its kind, in which digital currency is generated and transferred via a ledger maintained by a network of computers competing to complete mathematical problems.
Block: a subset of collected transactions from one address to another. New blocks are mined about every ten minutes, generating 6.25 coins.
Block Fee: The block fee is a small fee miners charge transactors to move bitcoin through the network. The fee amount is set by the market.
Block Reward: newly distributed coins given to the first miner who successfully adds a new block of transactions to the blockchain. Currently 6.25 bitcoin is rewarded per block of transactions.
Blockchain: the open-source ledger containing the string of blocks that record every transaction in bitcoin's history.
Cantillon Effect: also called injection effects, this occurs when new money is added to the economy top-down (non-proportionally). It tends to hurt savers and creditors while helping debtors and those who receive the new money first. It also skews incentives and keeps zombie companies alive.
Centralized: one party disproportionately controls the outcome for the entire system and the failure of that party causes system-wide failure.
Confirmation: block confirmation or final settlement occurs when a certain number of blocks (anywhere from one to five) have been stacked on top of the block the transaction in question was in. The transaction is theoretically irreversible and hence confirmed when the cost of reversing later transactions exceeds the benefit from doing so.
Cryptocurrency: a digital internet currency. Bitcoin is a cryptocurrency.
Cryptography: communications technology that allows the content of the message, along with the identity of the sender and recipient, to be anonymous.
Cypherpunk: group pursuing social and political change through cryptographic and privacy technology, namely cryptocurrencies like bitcoin.
Decentralized: a system with no single failure point. The system course is not centrally determined by one party. Pathways are driven by consensus between parties.
Decrypt: a process of revealing hidden, encrypted messages. Uses computationally difficult math.
Encrypt: a process of hiding messages by changing format and lettering. Uses arbitrarily easy math.
Fork: a fork is an update to the Bitcoin core code. Hard forks require all nodes to upgrade or risk becoming a secondary (and valueless) chain to the network. Soft forks are updates that allow older versions of the code to continue working on the main blockchain.
Halving: every 210,00 blocks the reward for mining a block of bitcoin transactions is halved. This has happened three times so far and it will continue until all 21 million coins are issued.
ICO: an Initial Coin Offering is a cryptocurrency distribution mechanism. They are different types and different tradeoffs with each type. It can and has been used as a scam to pump and dump on early investors. An ICO is similar to an Initial Public Offering (IPO) in stocks.
Mempool: the mempool or memory pool is the limbo or purgatory for bitcoin transactions; transactions wait in the mempool to be collected by a miner. When they are added to a block they are considered mined.
Mining: computer nodes run bitcoin’s code, verifying transactions and ensuring people have the currency they try to spend. Miners are incentivized by fees and new coin issuance.
Node: computer run by miners that confirms transactions unto the blockchain by communicating with other nodes.
Open Source: access to project or system is open and free for any party. In other words, any party is able to suggest or enter edits. Consensus between parties determines which changes are implemented or rejected.
Private Key: secret key belonging solely to the recipient or holder. Used to decrypt messages. Party A must enter their private key to send Party B bitcoin. Akin to a password.
Proof of Stake: an algorithm used by other cryptocurrencies to determine issuance. Having more currency on the network gives a higher chance of getting the newly created coins. Less costly in some ways than PoW but also some drawbacks such as less even distribution.
Proof of Work: PoW is an algorithm that determines bitcoin's issuance scheme and protects the network. Requires computers mining bitcoin to use processing power.
Public Key: key address viewable by the public. Must be decrypted by the recipient using the private key to get a message. Party A sends bitcoin to Party B’s public key.
Quantitative Easing: a process where central banks create money ‘ex nihilo’ or 'out of nothing'. Considered debt monetization by some, QE involves the Federal Reserve buying bonds from the treasury to create new money.
Quantitative Hardening: refers to when the rate of issuance of new money is decreasing. Bitcoin becomes quantitatively harder over its life cycle since it has a decreasing rate of issuance.
Satoshi: the smallest fraction of a bitcoin, a satoshi is 1/100,000,000 of a bitcoin. Divisibility allows smaller transactions to occur.
Satoshi Nakamoto: bitcoin’s pseudonymous creator(s). He/She/They wrote and released the bitcoin code in 2008-2009 and disappeared shortly after.
Supply Cap: the supply cap is the hard limit on the number of coins that will ever be issued. Bitcoin's scarcity is enforced by the network protocol and economic incentives, making its total supply cap just under 21 million coins.
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The Lolli Team🍭