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 is a common unit used to designate a sub-unit of a bitcoin – 1,000,000 bits is equal to 1 bitcoin (BTC). This unit is usually more convenient for pricing tips, goods and services.
Bitcoin – with capitalization, is used when describing the concept of Bitcoin, or the entire network itself. e.g. “I was learning about the Bitcoin protocol today.”
bitcoin – without capitalization, is used to describe bitcoins as a unit of account. e.g. “I sent ten bitcoins today.”; it is also often abbreviated BTC or XBT.
A block is a record in the block chain that contains and confirms many waiting transactions. Roughly every 10 minutes, on average, a new block including transactions is appended to the block chain through mining.
The block chain is a public record of Bitcoin transactions in chronological order. The block chain is shared between all Bitcoin users. It is used to verify the permanence of Bitcoin transactions and to prevent double spending.
BTC is a common unit used to designate one bitcoin.
Confirmation means that a transaction has been processed by the network and is highly unlikely to be reversed. Transactions receive a confirmation when they are included in a block and for each subsequent block. Even a single confirmation can be considered secure for low value transactions, although for larger amounts like 1000 US$, it makes sense to wait for 6 confirmations or more. Each confirmation exponentially decreases the risk of a reversed transaction.
Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already uses 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 block chain. It can also be used to encrypt a wallet, so that it cannot be used without a password.
A digital signing algorithm is a process by which a user can produce a short string of data called a “signature” of a document using a private key such that anyone with the corresponding public key, the signature and the document can verify that (1) the document was “signed” by the owner of that particular private key, and (2) the document was not changed after it was signed. Note that this differs from traditional signatures where you can scribble extra text onto a document after you sign it and there’s no way to tell the difference; in a digital signature any change to the document will render the signature invalid.
A deliberate fork, where a user with a large amount of mining power sends a transaction to purchase some product, then after receiving the product creates another transaction sending the same coins to themselves. The attacker then creates a block, at the same level as the block containing the original transaction but containing the second transaction instead, and starts mining on the fork. If the attacker has more than 50% of all mining power, the double spend is guaranteed to succeed eventually at any block depth. Below 50%, there is some probability of success, but it is usually only substantial at a depth up to about 2-5; for this reason, most cryptocurrency exchanges, gambling sites and financial services wait until six blocks have been produced (“six confirmations”) before accepting a payment.
Encryption is a process by which a document (plaintext) is combined with a shorter string of data, called a key (eg.
c85ef7d79691fe79573b1a7064c19c1a9819ebdbd1faaab1a8ec92344438aaf4), to produce an output (ciphertext) which can be “decrypted” back into the original plaintext by someone else who has the key, but which is incomprehensible and computationally infeasible to decrypt for anyone who does not have the key.
A measurement roughly equivalent to computational steps. Every transaction is required to include a gas limit and a fee that it is willing to pay per gas; miners have the choice of including the transaction and collecting the fee or not. If the total number of gas used by the computation spawned by the transaction, including the original message and any sub-messages that may be triggered, is less than or equal to the gas limit, then the transaction processes. If the total gas exceeds the gas limit, then all changes are reverted, except that the transaction is still valid and the fee can still be collected by the miner. Every operation has a gas expenditure; for most operations it is ~3-10, although some expensive operations have expenditures up to 700 and a transaction itself has an expenditure of 21000.
A hash function (or hash algorithm) is a process by which a piece of data of arbitrary size (could be anything; a piece of text, a picture, or even a list of other hashes) is processed into a small piece of data (usually 32 bytes) which looks completely random, and from which no meaningful data can be recovered about the document, but which has the important property that the result of hashing one particular document is always the same. Additionally, it is crucially important that it is computationally infeasible to find two documents that have the same hash. Generally, changing even one letter in a document will completely randomize the hash; for example, the SHA3 hash of “Saturday” is
c38bbc8e93c09f6ed3fe39b5135da91ad1a99d397ef16948606cdcbd14929f9d, whereas the SHA3 hash of Caturday is
b4013c0eed56d5a0b448b02ec1d10dd18c1b3832068fbbdc65b98fa9b14b6dbf. Hashes are usually used as a way of creating a globally agreed-upon identifier for a particular document that cannot be forged.
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.
Bitcoin mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money.
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.
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.
Proof of Work
One important property of a block in Bitcoin, Ethereum and many other crypto-ledgers is that the hash of the block must be smaller than some target value. The reason this is necessary is that in a decentralized system anyone can produce blocks, so in order to prevent the network from being flooded with blocks, and to provide a way of measuring how much consensus there is behind a particular version of the blockchain, it must in some way be hard to produce a block. Because hashes are pseudorandom, finding a block whose hash is less than
0000000100000000000000000000000000000000000000000000000000000000 takes an average of 4.3 billion attempts. In all such systems, the target value self-adjusts so that on average one node in the network finds a block every N minutes (eg. N = 10 for Bitcoin and 1 for Ethereum).
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.
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 block chain. 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.