Understanding the Jargon of the Blockchain and Cryptocurrency World
At this point, especially after the growing hype we saw in late 2017, everyone has heard about bitcoin. It’s a very interesting concept at first, as most people develop an itch to understand more since it has become a very conversational trend. With this guide to all the jargon associated with bitcoin, hopefully you’ll be able to impress your friends, family, and co-workers with a conversation about the technology that will be more revolutionizing than the internet. The descriptions of the terms below are general, but I hope they leave you with enough comprehension to know the basic ins and outs of the blockchain and cryptocurrency world.
Cryptocurrencies Like Bitcoin (BTC): the simplest and most heard of explanation of what a cryptocurrency is, is that it’s electronic cash made to be used as a form of payment, or to transact value of some kind. Cryptocurrency, or crypto for short, is better than fiat currency because it can be sent/received quickly, cheaply, and safely thanks to blockchain technology. A common question arises, where does a cryptocurrency’s value come from? By taking a look at Bitcoin, we see that there is a cap on how many bitcoins will ever be in existence. One way cryptos can be valued is based off their scarcity: for example, there will only ever be 21 million bitcoins (many other cryptos also have a limited supply). Another way to derive value from cryptos is that it’s difficult to acquire them (through mining, talked about below). For example, every 4 years it gets harder (need more and more computational power) to mine bitcoin. Also, just like any other commodity, value is determined partly on speculation. That is, there are people who will buy at a price higher than you bought in for. Most importantly, value comes from user consensus and adoption. Bitcoin and other cryptocurrencies are constantly evolving and becoming better, and more individuals and entities are beginning to adopt and use them.
Coin vs Token: These two terms trick people up the most. All coins and tokens are considered cryptocurrencies but there is a difference between them so they shouldn’t be used synonymously. Coins (Bitcoin, Ethereum, Monero, NEO, etc.) have their own blockchain. Tokens (VeChain, OmiseGo, Augur, etc.) don’t have their own blockchain and are built on another, most likely the Ethereum blockchain. Coins are usually used as payment method while tokens vary on their use cases because the projects behind them are using blockchain technology for specific purposes. For a more in depth understand of the difference between coins and tokens I recommend checking out this article.
Blockchain: the technology behind bitcoin. It’s a decentralized digital ledger where data can be stored and transferred securely, quickly, and cheaply. No person or entity is in control of any individual blockchain (as there are quite a few). Most blockchains are considered to be public blockchains (aside from private blockchains which companies create as a way to experiment and do small scale real-world implementations) meaning they are global and opensource, so anyone anywhere can download and run the blockchain on their computer as well as build applications off of it. Individuals who want to make an impact in a certain industry will often start a project with aims of utilizing the blockchain, this project can then develop their own blockchain or use other blockchains already created and well established. The bitcoin blockchain is the first blockchain (developed by an unknown person or group of people only referred to by the name Satoshi Nakamoto), making bitcoin the first of its kind. For a great visualize explanation to blockchain I recommend giving this article a look.
Breaking down the block and the chain: By taking a look at the bitcoin blockchain (created solely for the purpose of transacting value, that is bitcoin), each block consists of a number of bitcoin transactions. To determine that number you take the maximum block size divided by the average transaction size, that then equals the average transactions per block. So, currently: 1,000,000 bytes (1MB)/500 bytes=2,000 transactions per block. There then arises a problem because the blocks have a maximum size, so if there is no more room on the block for your transaction, you will need to wait for a new block to be created. More people using bitcoin with a 1MB block size means more transaction delays. As for understanding “the chain aspect”: blocks can never be deleted or edited. Only new blocks can be added. Each block, once validated and processed, gets attached to the block that came before it. Giving the name “blockchain”. So, more users=more transactions=more blocks=longer chain=more safe and reliable the blockchain becomes.
Decentralized Applications (DApps): DApps are truly advancing the use cases for blockchain. It’s an ambiguous term to define, but essentially a dApp is an application that utilizes blockchain technology. Traditional, centralized applications are software programs like web browsers, games, utilities, etc. that run on your computer and each have different “applications” for use so they’re called such. Decentralized applications can be viewed the same way but they don’t run on your computer, rather they run on their own blockchain or on another (the crypto associated with such a dApp would be a token). A dApp takes a normal application and utilizes the blockchain to enhance it’s functions. For example, Brave is an enhanced web browser application built off the ethereum blockchain, and its token is called Basic Attention Token. There’s steemit.com which is essentially like reddit but it uses blockchain technology, and since it has its own blockchain, the coin Steem is used to pay users who produce content on the website. There are so many uses cases for blockchain and dApps aim to fulfill them. In the broadest terms, bitcoin is too considered a dApp. For simplicity, just think of decentralized applications as what the name implies: applications that are decentralized thanks to blockchain technology. DApps come in many varieties and it’s easy to get lost in researching all of them out there but it’s fun to know how the blockchain is being used in so many different and revolutionary ways.
Nodes: So what makes blockchain technology so exceptional and revolutionizing? One answer is that it is decentralized. No entity or individual has authority over a public blockchain. This is possible because of nodes. A node is a point of connection in a network. It’s a processing device (your computer) with a specific address (your IP address). A bitcoin node is known as a full client. This is an individual who owns/runs the full blockchain on their computer which helps validate transactions and blocks. In order for information to be updated on blockchain, all nodes must validate it (consensus). If 99.99% of all nodes were to be destroyed, a blockchain can still survive as long as one node is still online to keep the network running. As for a private blockchain, all the nodes (very few if not just one) are controlled by one entity, usually the company running the project.
Mining: How a bitcoin (or some other cryptocurrencies) is created. “Miner(s)” is the name given to those individuals doing the mining. Their computers solve very complex computational puzzles (which is essentially processing every single transaction occurring on the specific blockchain the miner is mining on and then making sure every transaction is valid). The mining process is how a block can be linked to the one before it. The first miner whose computer(s) solves the puzzle is the one who places the next block in the chain. In doing so, bitcoin is rewarded to miner.
More technical jargon:
Public/Private Keys and Wallets: You can think of a cryptocurrency wallet as your storage place for your public keys (used to receive crypto) and private keys (used to send crypto). These keys are a randomly generated long list of numbers and letters. For example, here is my public key address for my coinbase bitcoin wallet: 368iinsizSZZN3xM4JuURd1kBHhXVcxRXk When transferring crypto, it’s quite cumbersome to type in the entire address, so most wallets include QR codes that allow easy address input. The crypto wallet is a software program that enables you to have full control over your crypto depending on which type wallet you opt for. Check out blockgeeks’ post here for different versions of wallets where you can store public and private keys for each cryptocurrency you own.
Cryptography, which has been around for quite some time, is an essential component of cryptocurrencies as it keeps information safe using math. For example, “digital signatures use cryptography for wallet identification and secretly match the public and private key of a wallet” and “by attaching a digital signature to a transaction, no one can dispute that that transaction came from the wallet it purports to have come from, and that wallet can’t be impersonated by another wallet.” Researching further into how cryptography is used with the blockchain will bring you into the world of “hashing” and “encryption” and even more computer-like technical jargon.
Smart Contracts: Nick Szabo, a computer scientist and cryptographer who is considered a legend in the crypto world, was the first to propose smart contracts, and some people even speculate that he is Satoshi Nakamoto. Although proposed in the ’90s, smart contracts have taken to their truest form and function thanks to blockchain technology. Smart contracts, existing on the blockchain, allow for the transaction of more complex data like property titles, marriage licenses, ownership rights, etc. As the name itself implies, “it’s a contract, or an agreement between parties involved in a transaction that holds each party responsible (buyer vs. seller, for example) for their role.” Without the blockchain, smart contracts can’t operate in a decentralized, distributed, secure, and very trustworthy way. On the flip side, without smart contracts, blockchain use cases are minimized.
Consensus Algorithms: It is through consensus algorithms that allows nodes to come to a “consensus” or in other words, reach an agreement on the contents of the blockchain which they are a part of. Seeing as how blockchains are decentralized and run on a peer-to-peer network, problems like double spending may arise since there are so many nodes in the network that must validate the blocks. Consensus algorithms are “mechanisms that are used to achieve agreement on a single data value, and thus obtain reliability in a network that can involve unreliable participants.” Proof of Work (PoW) is the most common consensus algorithm as it is what’s used on the bitcoin blockchain. There are consensus rules and the “blocks that do not follow these consensus rules will be rejected by network nodes. The combination of the PoW consensus algorithm and the consensus rules produces a reliable network in which agreement as to the shared state of the blockchain can be achieved”. Consensus algorithms induce trust and reliability into the blockchain network and there are other ones besides PoW, including: proof-of-stake (PoS), proof-of-authority (PoA), delegated proof-of-stake (DPoS), etc. For a better look into the different types of consensus algorithms, check out this article.
Hard Forks and Soft Forks: If you’ve heard of Bitcoin Cash or Ethereum Classic you should know that these coins are the products of a process called “forking.” A fork is done to a blockchain when it needs to be upgraded. When a blockchain forks, the one chain turns into two. Imagine an actual fork utensil, it has the main stem and then breaks into tinier ones at the end. In a hard fork, both the original and the newer blockchain exist simultaneously. Ethereum Classic and Bitcoin Cash are both examples of a hard fork. When a fork like that happens, those holding Bitcoin at the time of the fork are then rewarded with the same amount of Bitcoin Cash as they have Bitcoin (depending on where they store their Bitcoin). Literally free money. In a hard fork, the nodes have a choice to either upgrade (following new rules of the newly diverged blockchain) or don’t upgrade (follow old rules from original blockchain). In the case of a soft fork, there is no choice to diverge or stay the same, nodes must upgrade. This then makes the newer version of the blockchain the permanent one, while the older version seizes to exist since there won’t be any nodes left running it. Look into this article for more info on these forks, as well as segregated witness (the act of increasing the block size by removing signature data from transactions in order to increase transaction time) and an on going dilemma of upgrading the bitcoin blockchain.
Hash Rate (at the bottom for a reason, might want to skip this one as it’ll probably lead to more confusion): The most technical term I’ve come across, so I’ll just refer to this explanation because it is the best I’ve come across so far, “a hash rate can be defined as the speed at which a given mining machine operates. Crypto mining involves finding blocks through complex computations. The blocks are like mathematical puzzles. The mining machine has to make thousands or even millions of guesses per second to find the right answers to solve the block. In other words, to effectively mine a block, the miner should hash the block’s header such that it’s below or equal to the “target.” The target changes with every change in difficulty. To arrive at a given hash (or target), the miner has to vary some of the block’s headers, which is known as a “nonce”. Each nonce begins with “0” and is increased every time to get the necessary hash (or target). Given that the varying of the nonce is a game of chances, the chances of getting a given hash (or target) is very low. The miner, therefore, has to make numerous tries by varying the nonce. The number of attempts that miner makes per second is known as the hash rate or hash power.”
