Bitcoin Dictionary

AML

Anti-Money Laundering techniques are used to stop people converting illegally obtained funds, to appear as though they have been earned legally. AML mechanisms can be legal or technical in nature. Regulators frequently apply AML techniques to bitcoin exchanges.

ASIC

Stands for ‘Application Specific iIntegrated Circuit’.

This is a chip designed to perform a narrow set of tasks (compared to CPU or GPU that perform a wide range of functions).

ASIC typically refers to specialised mining chips or the whole machines built on these chips. Some ASIC manufacturers are: – Avalon – ASICMiner – Butterfly Labs (BFL) – Cointerra.

ASIC Miner

A Chinese manufacturer that makes custom mining hardware, sells shares for bitcoins, pays dividends from on-site mining and also ships actual hardware to customers.

ASICMiner is a virtual identity totally held by investors of the Bitfountain company. The Bitfountain company’s business includes mining with self-built ASIC devices, as well as the sales of them.

Address

A Bitcoin address is a Base58Check representation of a Hash160 of a public key with a version byte 0x00 which maps to a prefix “1”. Typically represented as text (e.g. 1CBtcGivXmHQ8ZqdPgeMfcpQNJrqTrSAcG) or as a QR code.

A more recent variant of an address is a P2SH address: a hash of a spending script with a version byte 0x05 which maps to a prefix “3” (e.g. 3NukJ6fYZJ5Kk8bPjycAnruZkE5Q7UW7i8).

Another variant of an address is not a hash, but a raw link../p/Private_Key.asciidoc[private key] representation (e.g. 5KQntKuhYWSRXNqp2yhdXzjekYAR7US3MT1715Mbv5CyUKV6hVe). It is rarely used, only for importing/exporting private keys or printing them on paper wallets.

Altcoin

A clone of the Bitcoin Protocol with some modifications. Usually all altcoins have rules incompatible with the Bitcoin Protocol and have their own genesis blocks.

The most notable altcoins are litecoin (uses faster block confirmation time and scrypt as a proof-of-work) and namecoin (has a special key-value storage).

In theory, an altcoin can be started from an existing Bitcoin Blockchain if someone wants to support a different set of rules (although, there is no such example to date).

Appcoin

A digital token built to be the exclusive or preferred means of accessing a specific applications features.

BIP

Bitcoin Improvement Proposals. These are RFC-like documents modelled after PEPs (Python Enhancement Proposals) discussing different aspects of the protocol and software. Most interesting BIPs describe hard fork changes in the core protocol that require supermajority of Bitcoin users (or, in some cases, only miners) to agree on the change and accept it in an organised manner.

Bitcoin Market Potential Index (BMPI)

The Bitcoin Market Potential Index (BMPI) uses a data set to rank the potential utility of bitcoin across 177 countries. It attempts to show which markets have the greatest potential for bitcoin adoption.

Base58

A compact human-readable encoding for binary data invented by Satoshi Nakamoto to make more user-friendly addresses. It consists of alphanumeric characters, but does not allow “0”, “O”, “I”, “l” characters that look the same in some fonts and could be used to create visually identical looking addresses. Lowercase “o” and “1” are allowed.

Base58Check

A variant of link../b/Base58.asciidoc[Base58] encoding that appends first 4 bytes of Hash256 of the encoded data to that data before converting to link../b/Base58.asciidoc[Base58]. It is used in addresses to detect typing errors.

Bitcoin-Ruby

A full Bitcoin implementation in Ruby by Julian Langschaedel.

It’s used in production on Coinbase.

Bitcoin (BTC)

Bitcoin (BTC) is a consensus network that enables a new payment system and a completely digital currency. Powered by its users, it is a peer to peer payment network that requires no central authority to operate. On October 31st, 2008, an individual or group of individuals operating under the pseudonym “Satoshi Nakamoto” published the Bitcoin Whitepaper and described it as: “a purely peer-to-peer version of electronic cash, which would allow online payments to be sent directly from one party to another without going through a financial institution.”

Bitcoin

Refers to a protocol, network or a unit of currency.

As a protocol, Bitcoin is a set of rules that every client must follow to accept transactions and have its own transactions accepted by other clients. Also includes a message protocol that allows nodes to connect to each other and exchange transactions and blocks.

As a network, Bitcoin is all the computers that follow the same rules and exchange transactions and blocks between each other.

As a unit, one Bitcoin (BTC, XBT) is defined as 100 million satoshis, the smallest units available in the current transaction format.

Bitcoin is written in lower case when speaking about the amount: “I received 0.4 bitcoins.”

BitcoinD

This was the original implementation of Bitcoin with a command line interface. Currently a part of BitcoinQt project. “D” stands for “daemon” per UNIX tradition to name processes running in background.

BitcoinQt

Bitcoin implementation based on original code by Satoshi Nakamoto. Includes a graphical interface for Windows, OS X and Linux (using QT) and a command-line executable BitcoinD that is typically used on servers.

It is considered a reference implementation as it’s the most used full node implementation, especially among miners. Other implementations must be bug-for-bug compatible with it to avoid being forked. BitcoinQT uses OpenSSL for its ECDSA operations which has its own quirks that became a part of the standard (e.g. non-canonically encoded public keys are accepted by OpenSSL without an error, so other implementations must do the same).

Bitcoin ATM

A bitcoin ATM is a physical machine that allows a customer to buy bitcoin with cash. There are many manufacturers, some of which enable users to sell bitcoin for cash. They are also sometimes called ‘BTMs’ or ‘Bitcoin AVMS’. CoinDesk maintains a worldwide map of operational bitcoin atm machines and a list of manufacturers. == Bitcoin Investment Trust

This private, open-ended trust invests exclusively in bitcoins and uses a state-of-the-art protocol to store them safely on behalf of its shareholders. It provides a way for people to invest in bitcoin without having to purchase and safely store the digital currency themselves. Read more here.

Bitcoin Whitepaper

The bitcoin whitepaper was written by ‘Satoshi Nakamoto’ and posted to a Cryptography Mailing list in 2008. The paper describes the bitcoin protocol in detail, and is well worth a read. Satoshi Nakamoto followed this by releasing the bitcoin code in 2009.

Bitcoinj

A Java implementation of a full node by Mike Hearn. It also includes SPV implementation among other features.

Bitcoinjs

An incomplete JavaScript implementation of a Bitcoin client. Allows signing transactions and performing several elliptic curve operations. It’s used on brainwallet.org.

Block

A data structure that consists of a block header and a merkle tree of transactions. Each block (except for the genesis block) references one previous block thus forming a tree called the Blockchain.

Block can be thought of as a group of transactions with a timestamp and a proof-of-work attached.== Block Header

A data structure containing a previous block hash, a hash of a merkle tree of transactions, a timestamp, a difficulty and a nonce.

Block Height

A sequence number of a block in the Blockchain.

Height 0 refers to the genesis block. Several blocks may share the same height, but only one of them belongs to the main chain.

Block height is used in lock time.

Block Reward

The reward given to a miner which has successfully hashed a transaction block. This can be a mixture of coins and transaction fees, depending on the policy used by the cryptocurrency in question, and whether all of the coins have already been successfully mined. Bitcoin currently awards 25 bitcoins for each block. The block reward halves when a certain number of blocks have been mined. In bitcoin’s case, the threshold is every 210,000 blocks.

Blockchain

A public ledger of all confirmed transactions in a form of a tree of all valid blocks (including orphans). Most of the time, “blockchain” means the main chain, a single most difficult chain of blocks.

The Blockchain is updated by mining blocks with new transactions. Unconfirmed transactions are not part of the blockchain. If some clients disagree on which chain is main or which blocks are valid, a fork happens.

Brain Wallet

Brain wallet is a concept of storing private keys as a memorable phrase without any digital or paper trace. Either a single key is used for a single address, or a deterministic wallet derived from a single key.

If done properly, a brain wallet greatly reduces the risk of theft because it is completely deniable: no one could say which or how much bitcoins you own as there are no actual wallet files to be found anywhere. However, it is the most error-prone method as one can simply forget the secret phrase, or make it too simple for anyone to brute force and steal all the funds. Additional risks are added by a complex wallet software. E.g. BitcoinQT always sends change amount to a new address. If a private key is imported temporarily to spend 1% of the funds and then the wallet is deleted, the remaining 99% will be lost forever as they are moved as a change to a completely new address. This already happened to a number of people.

Buttonwood

A project founded by bitcoin enthusiast Josh Rossi, to form a public outcry bitcoin exchange in New York’s Union Square. Named after the Buttonwood agreement, which formed the basis for the New York Stock Exchange in 1792

Casascius Coins

Physical collectible coins produced by Mike Caldwell. Each coin contains a private key under a tamper-evident hologram. The name “Casascius” is formed from a phrase “call a spade a spade”, as a response to a name of Bitcoin itself.

Change

Informal name for a portion of a transaction output that is returned to a sender as a “change” after spending that output. Since transaction outputs cannot be partially spent, one can spend 1 BTC out of 3 BTC outputs only be creating two new outputs: a “payment” output with 1 BTC sent to a payee address, and a “change” output with remaining 2 BTC (minus transaction fees) sent to the payer’s addresses.

BitcoinQt always uses new address from a key pool for a better privacy.

A common mistake when working with a paper wallet or a brain wallet is to make a change transaction to a different address and then accidentally delete it. E.g. when importing a private key in a temporary BitcoinQt wallet, making a transaction and then deleting the temporary wallet.

Checkpoint

A hash of a block before which the BitcoinQt client downloads blocks without verifying digital signatures for performance reasons.

A checkpoint usually refers to a very deep block (at least several days old) when it’s clear to everyone that that block is accepted by the overwhelming majority of users and reorganisation will not happen past that point.

It also helps protecting most of the history from a 51% attack. Since checkpoints affect how the main chain is determined, they are part of the protocol and must be recognised by alternative clients (although, the risk of reorganisation past the checkpoint would be incredibly low).

Circle

Circle is an exchange and wallet service, offering users worldwide the chance to store, send, receive and exchange bitcoins.

Coin

An informal term that means either 1 bitcoin, or an unspent transaction output that can be spent.

Coin Age

The age of a coin, defined as the currency amount multiplied by the holding period.

Coinbase

An input script of a transaction that generates new bitcoins. Or a name of that transaction itself (“coinbase transaction”).

A Coinbase transaction does not spend any existing transactions, but contains exactly one input which may contain any data in its script.

The genesis block transaction contains a reference to a Times article from January 3rd 2009 to prove that more blocks were not created before that date. Some mining pools put their names in the coinbase transactions (so everyone can estimate how much hash rate each pool produces).

Coinbase is also used to vote on a protocol change (e.g. P2SH). Miners vote by putting some agreed-upon marker in the coinbase to see how many support the change. If a majority of miners support it and expect non-mining users to accept it, then they simply start enforcing new rule. Minority then should either continue with a forked blockchain (thus producing an altcoin) or accept new rule.

Cold Storage

A collective term for various security measures to reduce the risk of remote access to the private keys. It could be a normal computer disconnected from the internet, or a dedicated hardware wallet, or a USB stick with a wallet file, or a paper wallet.

Colored Coin

A concept of adding a special meaning to certain transaction outputs. This could be used to create a tradable commodity on top of the Bitcoin protocol. For instance, a company may create 1 million shares and declare a single transaction outputs containing 10 BTC (1 billion satoshis) as a source of these shares. Then, some or all of these bitcoins can be moved to other addresses, sold or exchanged for anything. During a voting process or a dividend distribution, share owners can prove ownership by simply singing a particular message by the private keys associated with addresses holding bitcoins derived from the initial source.

CompactSize

Original name of a variable-length integer format used in transaction and block serialisation. Also known as “Satoshi’s encoding”.

It uses 1, 3, 5 or 9 bytes to represent any 64-bit unsigned integer. Values lower than 253 are represented with 1 byte. Bytes 253, 254 and 255 indicate 16-, 32- or 64-bit integer that follows. Smaller numbers can be presented differently.

In Bitcoin-Ruby it is called “var_int”, in Bitcoinj it is VarInt. BitcoinQt also has even more compact representation called VarInt which is not compatible with CompactSize and used in block storage.

Confirmation Number

Confirmation number is a measure of probability that transaction could be rejected from the main chain.

“Zero confirmations” means that transaction is unconfirmed (not in any block yet). One confirmation means that the transaction is included in the latest block in the main chain. Two confirmations means the transaction is included in the block right before the latest one. And so on.

Confirmed Transaction

Transaction that has been included in the blockchain. Probability of transaction being rejected is measured in a number of confirmations.

Cryptocurrency

A form of currency based on mathematics alone. Instead of fiat currency, which is printed, cryptocurrency is produced by solving mathematical problems based on cryptography.

Cryptography

The use of mathematics to create codes and ciphers that can be used to conceal information. Used as the basis for the mathematical problems used to verify and secure bitcoin transactions.

Denial Of Service

This is a form of attack on the network.

Bitcoin nodes punish certain behaviour of other node by banning their IP addresses for 24 hours to avoid DoS.

Also, some theoretical attacks like 51% attack may be used for network-wide DoS.

Depth

Depth refers to a place in the blockchain. A transaction with 6 confirmations can also be called “6 blocks deep”.

Deterministic Wallet

A deterministic wallet is a system of deriving keys from a single starting point known as a seed. The seed allows a user to easily back up and restore a wallet without needing any other information and can in some cases allow the creation of public addresses without the knowledge of the private key.

Difficulty

Difficulty is a measure of how difficult it is to find a new block compared to the easiest it can ever be. By definition, it is a maximum target divided by the current target.

Difficulty is used in two Bitcoin rules:

Every block must be meet difficulty target to ensure 10 minute interval between blocks and – Transactions are considered confirmed only when belonging to a main chain which is the one with the biggest cumulative difficulty of all blocks.

As of September 5, 2013 the difficulty is 86 933 018 and grows by 20-30% every two weeks.

Double Spend

A fraudulent attempt to spend the same transaction output twice. There are two major ways to perform a double spend: – reverting an unconfirmed transaction by making another one which has a higher chance of being included in a block (only works with merchants accepting zero-confirmation transactions) or – by mining a parallel blockchain with a second transaction to overtake the chain where the first transaction was included.

Bitcoin proof-of-work scheme makes a probabilistic guarantee of difficulty to double spend transactions included in the blockchain. The deeper transaction is recorded in the blockchain, the more expensive it is to “reverse” it.

Dust

A transaction output that is smaller than a typical fee required to spend it. This is not a strict part of the protocol, as any amount more than zero is valid.

BitcoinQt refuses to mine or relay “dust” transactions to avoid uselessly increasing the size of unspent transaction outputs (UTXO) index.

ECDSA

Stands for Elliptic Curve Digital Signature Algorithm. It’s used to verify transaction ownership when making a transfer of bitcoins.

Elliptic Curve Arithmetic

A set of mathematical operations defined on a group of points on a 2D elliptic curve. The Bitcoin protocol uses predefined curve secp256k1.

Here’s the simplest possible explanation of the operations: you can add and subtract points and multiply them by an integer. Dividing by an integer is computationally infeasible (otherwise cryptographic signatures won’t work). The private key is a 256-bit integer and the public key is a product of a predefined point G (“generator”) by that integer: A = G * a.

Associativity law allows implementing interesting cryptographic schemes like Diffie-Hellman key exchange (ECDH): two parties with private keys A and B may exchange their public key A and B to compute a shared secret point C: C = A * b = B * a because (G * a) * b == (G * b) * a. Then this point C can be used as an AES encryption key to protect their communication channel.

Escrow

The act of holding funds or assets in a third-party account to protect them during an asynchronous transaction. If Bob wants to send money to Alice in exchange for a file, but they cannot conduct the exchange in person, then how can they trust each other to send the money and file to each other at the same time? Instead, Bob sends the money to Eve, a trusted party who holds the funds until Bob confirms that he has received the file from Alice. She then sends Alice the money.

Extra Nonce

A number placed in a coinbase script and incremented by a miner each time the nonce 32-bit integer overflows. This is not the required way to continue mining when nonce overflows, one can also change the merkle tree of transactions or change a public key used for collecting a block reward.

Faucet

A technique used when first launching an altcoin. A set number of coins are pre-mined, and given away for free, to encourage people to take interest in the coin and begin mining it themselves.

51% attack

It’s also known as >50% attack or a double spend attack.

An attacker can make a payment, wait till the merchant accepts some number of confirmations and provides the service, then starts mining a parallel chain of blocks starting with a block before the transaction. This parallel blockchain then includes another transaction that spends the same outputs on some other address. When the parallel chain becomes more difficult, it is considered a main chain by all nodes and the original transaction becomes invalid.

Having more than a half of the total hash rate guarantees the possibility to overtake a chain of any length, hence the name of an attack (strictly speaking, it is “more than 50%”, not 51%). Also, even 40% of the hash rate allows making a double spend, but the chances are less than 100% and are diminishing exponentially with the number of confirmations that the merchant requires.

This attack is considered theoretical as owning more than 50% of hash rate might be much more expensive than any gain from a double spend.

Another variant of this attack is to disrupt the network by mining empty blocks, thus censoring all transactions.

This attack can be mitigated by blacklisting blocks that most of “honest” miners consider abnormal. Under normal conditions, miners and mining pools do not censor blocks and transactions as it may diminish trust in Bitcoin and thus their own investments. A 51% attack is also mitigated by using checkpoints that prevent reorganisation past a certain block.

Fork

Refers either to a fork of a source code (see altcoin) or, more often, to a split of the blockchain when two different parts of the network see different main chains.

In a sense, a fork occurs every time two blocks of the same height are created at the same time. Both blocks always have the different hashes (and therefore different difficulty), so when a node sees both of them, it will always choose the most difficult one. However, before both blocks arrive to a majority of nodes, two parts of the network will see different blocks as tips of the link:../m/Main_main chain.

The term fork (or hard fork) also refers to a change of the protocol that may lead to a split of the network (by design or because of a bug). On March 11 2013 a smaller half of the network running version 0.7 of BitcoinD could not include a large (>900 Kb) block at height 225430 created by a miner running newer version 0.8. The block could not be included because of the bug in v0.7 which was fixed in v0.8. Since the majority of computing power did not have a problem, it continued to build a chain on top of a problematic block. When the issue was noticed, majority of 0.8 miners agreed to abandon 24 blocks incompatible with 0.7 miners and mine on top of 0.7 chain. Except for one double spend experiment against OKPay, all transactions during the fork were properly included in both sides of the blockchain.

Freicoin

A cryptocurrency based on the inflation-free principles outlined by the economist Silvio Gessell.

Full Node

A node which implements all of Bitcoin protocol and does not require trusting any external service to validate transactions. It is able to download and validate the entire blockchain. All full nodes implement the same peer-to-peer messaging protocol to exchange transactions and blocks, but that is not a requirement. A full node may receive and validate data using any protocol and from any source. However, the highest security is achieved by being able to communicate as fast as possible with as many nodes as possible.

Genesis Block

The very first block in the blockchain with hard-coded contents and an all-zero reference to a previous block. The Genesis block was released on 3rd of January 2009 with a newspaper quote in its coinbase: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” as a proof that there are no secretly pre-mined blocks to overtake the blockchain in the future. The message ironically refers to a reason for Bitcoin existence: a constant inflation of money supply by governments and banks.

Halving

Reducing the reward every 210 000 blocks (approximately every 4 years). Since the genesis block to a block 209999 in December 2012 the reward was 50 BTC. Till 2016, it will be 25 BTC, then 12.5 BTC and so on till 1 satoshi around 2140 after which point no more bitcoins will ever be created. Due to reward halving, the total supply of bitcoins is limited: only about 2100 trillion satoshis will ever be created.

Hard Fork

Some people use term hard fork to stress that changing the Bitcoin protocol requires an overwhelming majority to agree with it, or some noticeable part of the economy will continue with the original blockchain, following the old rules.

Hash

To compute a hash function of some data. If hash function is not mentioned explicitly, it is the one defined by the context. For instance, “to hash a transaction” means to compute Hash256 of binary representation of a transaction.

Hash160

SHA-256 hashed with RIPEMD-160. It is used to produce an address because it makes a smaller hash (20 bytes vs 32 bytes) than SHA-256, but still uses SHA-256 internally for security.

It’s known as BTCHash160() in CoreBitcoin, Hash160() in BitcoinQt. It is also available in scripts as OP_HASH160.

Hash256

When not speaking about arbitrary hash functions, hash refers to two rounds of SHA-256. This means that you should compute a SHA-256 hash of your data and then another SHA-256 hash of that hash.

It is used in block header hashing, transaction hashing, making a merkle tree of transactions, or computing a checksum of an address.

It’s known as BTCHash256() in CoreBitcoin, Hash() in BitcoinQt. It is also available in scripts as OP_HASH256.

Hash Function

The Bitcoin protocol mostly uses two cryptographic hash functions: SHA-256 and RIPEMD-160. The first one is almost exclusively used in the two round hashing (Hash256), while the latter one is only used in computing an address (see also Hash160).

Scripts may use not only Hash256 and Hash160, but also SHA-1, SHA-256 and RIPEMD-160.

Hash Rate

A measure of mining hardware performance expressed in hashes per second. As of September 5 2013, the hash rate of all Bitcoin mining nodes combined is around 647 000 Gh/s. For comparison, AMD Radeon graphics cards produce from 200 to 800 Mh/s depending on the model.

Key

Could mean an ECDSA public key or ECDSA private key, or AES symmetric encryption key. AES is not used in the protocol itself (only to encrypt the ECDSA keys and other sensitive data), so usually the word key means an ECDSA key. When talking about keys, people usually mean private keys as public keys can always be derived from a private one.

Lightweight Client

Compared to a full node, a lightweight node does not store the whole blockchain and thus cannot fully verify any transaction. There are two kinds of lightweight nodes: those fully trusting an external service to determine wallet balance and validity of transactions (e.g. blockchain.info) and the apps implementing Simplified Payment Verification (SPV). SPV clients do not need to trust any particular service, but are more vulnerable to a 51% attack than full nodes.

Lock Time

A 32-bit field in a transaction that means either a block height at which the transaction becomes valid, or a UNIX timestamp.

Zero means transaction is valid in any block. A number less than 500000000 is interpreted as a block number (the limit will be hit after year 11000), otherwise a timestamp.

M-Of-N Multi-Signature Transaction

A transaction that can be spent using M signatures when N public keys are required (M is less or equal to N).

Multi-signature transactions that only contain one OP_CHECKMULTISIG opcode and N is 3, 2 or 1 are considered standard.

Main Chain

A part of the blockchain which a node considers the most difficult. All nodes store all valid blocks, including orphans and recompute the total difficulty when receiving another block.

If the newly arrived block or blocks do not extend the existing main chain, but create another one from some previous block, it is called reorganisation.

Mainnet

Main Bitcoin network and its blockchain. The term is mostly used in comparison to testnet.

Mempool

A technical term for a collection of unconfirmed transactions stored by a node until they either expire or get included in the main chain. When reorganisation happens, transactions from orphaned blocks either become invalid (if already included in the main chain) or moved to a pool of unconfirmed transactions.

By default, BitcoinD nodes throw away unconfirmed transactions after 24 hours.

Merkle Tree

Merkle tree is an abstract data structure that organises a list of data items in a tree of their hashes (like in Git, Mercurial or ZFS).

In Bitcoin the merkle tree is used only to organise transactions within a block (the block header contains only one hash of a tree) so that full nodes may prune fully spent transactions to save disk space.

SPV clients store only block headers and validate transactions if they are provided with a list of all intermediate hashes.

Miner

A person, a software or a hardware that performs mining.

Mining

A process of finding valid hashes of a block header by iterating millions of variants of block headers (using nonce and extra nonce) in order to find a hash lower than the target (see also difficulty).

The process needs to determine a single global history of all transactions (grouped in blocks).

Mining consumes time and electricity and nowadays the difficulty is so big, that energy-wise it’s not even profitable to mine using video graphics cards. Mining is paid for by transaction fees and by block rewards (newly generated coins, hence the term “mining”).

Mining Pool

A service that allows separate owners of mining hardware to split the reward proportionally to submitted work. Since probability of finding a valid block hash is proportional to miner’s hash rate, small individual miners may work for months before finding a big per-block reward.

Mining pools allow more steady stream of smaller income. The pool owner determines the block contents and distributes ranges of nonce values between its workers. Normally, mining pools are centralised. P2Pool is a fully decentralised pool.

Mixing

A process of exchanging coins with other persons in order to increase privacy of one’s history. Sometimes it is associated with money laundering, but strictly speaking it is orthogonal to laundering. In traditional banking, a bank protects customer’s privacy by hiding transactions from all 3rd parties. In Bitcoin any merchant may do a statistical analysis of one’s entire payment history and determine, for instance, how many bitcoins one owns. While it’s still possible to implement KYC (Know You Customer) rules on a level of every merchant, mixing allows to to separate information about one’s history between the merchants.

Most important use cases for mixing are:

receiving a salary as a single big monthly payment and then spending it in small transactions (“cafe sees thousands of dollars when you pay just $4”);

making a single payment and revealing connection of many small private spendings (“car dealer sees how much you are addicted to coffee”).

In both cases your employer, a cafe and a car dealer may comply with KYC/AML laws and report your identity and transferred amounts, but neither of them need to know about each other. Mixing bitcoins after receiving a salary and mixing them before making a big payment solves this privacy problem.

mBTC

1 thousandth of a bitcoin (0.001 BTC).

Node

Node, or client, is a computer on the network that speaks Bitcoin message protocol (exchanging transactions and blocks). There are full nodes that are capable of validating the entire blockchain and lightweight nodes, with reduced functionality.

Wallet applications that speak to a server are not considered nodes.

Non-Standard Transaction

Any valid transaction that is not standard. Non-standard transactions are not relayed or mined by default BitcoinQt nodes (but are relayed and mined on Testnet). However, if anyone puts such a transaction in a block, it will be accepted by all nodes. In practice it means that unusual transactions will take more time to get included in the blockchain. If some kind of non-standard transaction becomes useful and popular, it may get named standard and adopted by users.

Nonce

Stands for “number used once”. A 32-bit number in a block header which is iterated during a search for proof-of-work. Each time the nonce is changed, the hash of the block header is recalculated. If nonce overflows before valid proof-of-work is found, an extra nonce is incremented and placed in the coinbase script.

Alternatively, one may change a merkle tree of transactions or a timestamp.

Opcode

An 8-bit code of a script operation. Codes from 0x01 to 0x4B (decimal 75) are interpreted as a length of data to be pushed on the stack of the interpreter (data bytes follow the opcode). Other codes are either do something interesting, or disabled and cause transaction verification to fail, or do nothing (reserved for future use).

Orphaned Block

A valid block that is no longer a part of a main chain. Usually happens when two or more blocks of the same height are produced at the same time. When one of them becomes a part of the main chain, others are considered orphaned. Orphans also may happen when the blockchain is forked due to an attack (see 51% attack) or a bug. Then a chain of several blocks may become abandoned. Usually a transaction is included in all blocks of the same height, so its confirmation is not delayed and there is no double spend.

Paper Wallet

A form of cold storage where a private key for a Bitcoin address is printed on a piece of paper (with or without encryption) and then all traces of the key are removed from the computer where it was generated. To redeem bitcoins, a key must be imported in the wallet application so it can sign a transaction.

Pay-To-Script Hash

A type of the script and address that allows sending bitcoins to arbitrary complex scripts using a compact hash of that script. This allows payer to pay much smaller transaction fees and not wait very long for a non-standard transaction to get included in the blockchain. Then the actual script matching the hash must be provided by the payee when redeeming the funds. P2SH addresses are encoded in Base58Check just like regular public keys and start with number “3”.

Pool

A collection of mining clients which collectively mine a block, and then split the reward between them. Mining pools are a useful way to increase your probability of successfully mining a block as the difficulty rises.

Pre-mining

The mining of coins by a cryptocurrency’s founder before that coin has been announced and details released to others who may wish to mine the coin. Pre-mining is a common technique used with scamcoins, although not all pre-mined coins are scamcoins.

Private Key

A 256-bit number used in the ECDSA algorithm to create transaction signatures in order to prove ownership of certain amount of bitcoins.

It can also be used in arbitrary Elliptic Curve Arithmetic operations. Private keys are stored within wallet applications and are usually encrypted with a pass phrase. Private keys may be completely random (see Key Pool) or generated from a single secret number (“seed”).

Proof of Stake

An alternative to proof of work, in which your existing stake in a currency (the amount of that currency that you hold) is used to calculate the amount of that currency that you can mine.

Proof-of-Work

A number that is provably hard to compute. That is, it takes measurable amount of time and/or computational power (energy) to produce. In Bitcoin it is a hash of a block header. A block is considered valid only if its hash is lower than the current target (roughly, starts with a certain amount of zero bits). Each block refers to a previous block thus accumulating previous proof-of-work and forming a blockchain.

Proof-of-work is not the only requirement, but an important one to make sure that it is economically infeasible to produce an alternative history of transactions with the same accumulated work. Each client can independently consider the most difficult chain of valid blocks as the “true” history of transactions, without need to trust any source that provides the blocks.

Note that owning a very large amount of computational power does not override other rules enforced by every client. Ill-formed blocks or blocks containing invalid transactions are rejected no matter how difficult they were to produce.

Public Key

A 2D point on an elliptic curve secp256k1 that is produced by multiplying a predefined “generator” point by a private key. Usually it is represented by a pair of 256-bit numbers (“uncompressed public key”), but can also be compressed to just one 256-bit number (at the slight expense of CPU time to decode an uncompressed number).

A special hash of a public key is called an address. Typical Bitcoin transactions contain public keys or addresses in the output scripts and signatures in the input scripts.

Reference Implementation

BitcoinQt (or BitcoinD) is the most used full node implementation, so it is considered a reference for other implementations. If an alternative implementation is not compatible with BitcoinQt it may be forked, that is it will not see the same main chain as the rest of the network running BitcoinQt

Relaying Transactions

Connected Bitcoin nodes relay new transactions between each other on best effort basis in order to send them to the mining nodes. Some transactions may not be relayed by all nodes. E.g. non-standard transactions, or transactions without a minimum fee.

The Bitcoin message protocol is not the only way to send the transaction. One may also send it directly to a miner, or mine it themselves, or send it directly to the payee and make them to relay or mine it.

Reorganisation

An event in the node when one or more blocks in the main chain become orphaned. Usually, newly received blocks are extending the existing main chain. Sometimes (4-6 times a week) a couple of blocks of the same height are produced almost simultaneously and for a short period of time some nodes may see one block as a tip of the main chain which will be eventually replaced by a more difficult block(s). Each transaction in the orphaned blocks either becomes invalid (if already included in the main chain block) or becomes unconfirmed and moved to the mempool. In case of a major bug or a 51% attack, reorganisation may involve reorganising more than one block.

Reward

Amount of newly generated bitcoins that a miner may claim in a new block. The first transaction in the block allows miner to claim currently allowed reward as well as all transaction fees from all transactions in the block. The reward is halved every 210 000 blocks, approximately every 4 years.

As of April 26, 2014 the reward is 25 BTC (the first halving occurred in December 2012).

For security reasons, rewards cannot be spent before 100 blocks are built on top of the current block.

SHA-256

The cryptographic function used as the basis for bitcoin’s proof of work system.

Satoshi

The first name of the Bitcoin’s creator Satoshi Nakamoto and also the name of the smallest unit used in transactions.

1 bitcoin (BTC) is equal to 100 million satoshis.

Satoshi Nakamoto

A pseudonym of an author of initial Bitcoin implementation.

There are multitude of speculations on who and how many people worked on Bitcoin, of which nationality or age, but no one has any evidence to say anything definitive on that matter.

Script

A compact turing-incomplete programming language used in transaction inputs and outputs.

Scripts are interpreted by a Forth-like stack machine: each operation manipulates data on the stack. Most scripts follow the standard pattern and verify the digital signature provided in the transaction input against a public key provided in the previous transaction’s output. Both signatures and public keys are provided using scripts.

Scripts may contain complex conditions, but can never change amounts being transferred. Amount is stored in a separate field in a transaction output.

ScriptPubKey

Original name in BitcoinD for a transaction output script. Typically, output scripts contain public keys (or their hashes; See address) that allow only owner of a corresponding private key to redeem the bitcoins in the output.

Scrypt

An alternative proof of work system to SHA-256, designed to be particularly friendly to CPU and GPU miners, while offering little advantage to ASIC miners.

Secret Key

Either the private key or an encryption key used in encrypted wallets.

The Bitcoin protocol does not use encryption anywhere, so a secret key typically means a private key used for signing transactions.

Sequence

A 32-bit unsigned integer in a transaction input used to replace older version of a transaction by a newer one. It’s only used when the lock time is not zero. A transaction is not considered valid until the sequence number is 0xFFFFFFFF. By default, the sequence is 0xFFFFFFFF.

Signature

A sequence of bytes that proves that a piece of data is acknowledged by a person holding a certain public key. Bitcoin uses [ECDSA] for signing transactions. Amounts of bitcoins are sent through a chain of transactions: from one to another. Every transaction must provide a signature matching a public key defined in the previous transaction. This way only a proper owner a secret private key associated with a given public key can spend bitcoins further.

Simplified Payment Verification

It’s usually abbreviated as SPV

It’s a scheme to validate transactions without storing the whole blockchain (only block headers) and without trusting any external service.

Every transaction must be present with all its parent and sibling hashes in a merkle tree up to the root. SPV client trusts the most difficult chain of block headers and can validate if the transaction indeed belongs to a certain block header. Since SPV does not validate all transactions, a 51% attack may not only cause a double spend (like with full nodes), but also make a completely invalid payment with bitcoins created from nowhere. However, this kind of attack is very costly and probably more expensive than a product in question.

The Bitcoinj library implements SPV functionality.

Soft Fork

Sometimes the soft fork refers to an important change of software behaviour that is not a hard fork (e.g. changing mining fee policy).

Spent Output

A transaction output can be spent only once: when another valid transaction makes a reference to this output from its own input.

When another transaction attempts to spend the same output, it will be rejected by the nodes already seeing the first transaction. The blockchain as a proof-of-work scheme allows every node to agree on which transaction was indeed the first one. The whole transaction is considered spent when all its outputs are spent.

Stale

When a bitcoin block is successfully hashed, any others attempting to hash it may as well stop, because it is now ‘stale’. They would simply be repeating work that someone else has already done, for no reward. The term is also used in mining pools to describe a share of a hashing job that has already been completed.

Standard Transaction

Some transactions are considered standard, meaning they are relayed and mined by most nodes.

More complex transactions could be buggy or cause DoS attacks on the network, so they are considered non-standard and not relayed or mined by most nodes. Both standard and non-standard transactions are valid and once included in the blockchain, will be recognised by all [Node|[nodes]].

Standard transactions are: 1. sending to a public key, 2. sending to an address, 3. sending to a P2SH address, 4. sending to an m-of-n multi-signature transaction where N is 3 or less.

Taint

An analysis of how closely related two addresses are when they have both held a particular bitcoin. A taint analysis could be used to determine how many steps it took for bitcoins to move from an address known for stolen coins, to the current address.

Target

A 256-bit number that puts an upper limit for a block header hash to be valid. The lower the target is, the higher the difficulty to find a valid hash.

The maximum (easiest) target is 0x00000000FFFF0000000000000000000000000000000000000000000000000000.

The difficulty and the target are adjusted every 2016 blocks (approx. 2 weeks) to keep interval between the blocks close to 10 minutes.

Testnet

A set of parameters used for testing a Bitcoin network. Testnet is like mainnet, but has a different genesis block (it was reset several times, the latest testnet is Testnet3).

Testnet uses a slightly different address format to avoid confusion with main Bitcoin addresses and all nodes are relaying and mining non-standard transactions.

Timestamp

UNIX timestamp is a standard representation of time as a number of seconds since January 1st 1970 GMT. It’s usually stored in a 32-bit signed integer.

Transaction

A chunk of binary data that describes how bitcoins are moved from one owner to another. Transactions are stored in the blockchain.

Every transaction (except for coinbase transactions) has a reference to one or more previous transactions (inputs) and one or more rules on how to spend these bitcoins further (outputs).

Transaction Fee

Also known as “miners’ fee”, an amount that an author of a transaction pays to a miner who will include the transaction in a block.

The fee is expressed as difference between the sum of all input amounts and a sum of all output amounts.

Unlike traditional payment systems, miners do not explicitly require fees and most miners allow free transactions. All miners are competing between each other for the fees and all transactions are competing for a place in a block.

There are soft rules encoded in most clients that define minimum fees per kilobyte to relay or mine a transaction (mostly to prevent DoS and spam).

Typically, the fee affects the priority of a transaction. As of September 5, 2013 average fees are below 1 BTC per block.

Transaction Input

A part of a transaction that contains a reference to a previous transaction’s output and a script that can prove ownership of that output. The script usually contains a signature and thus called scriptSig.

Inputs spend previous outputs completely. So if one needs to pay only a portion of some previous output, the transaction should include extra change output that sends the remaining portion back to its owner (on the same or different address). Coinbase transactions contain only one input with a zeroed reference to a previous transaction and an arbitrary data in place of script.

Transaction Output

An output contains an amount to be sent and a script that allows further spending. The script typically contains a public key (or an address, a hash of a public key) and a signature verification opcode.

Only an owner of a corresponding private key is able to create another transaction that sends that amount further to someone else.

In every transaction, the sum of output amounts must be equal or less than a sum of all input amounts.

UTXO Set

A collection of unspent transaction outputs. Typically used in discussions on optimising an ever-growing index of transaction outputs that are not yet spent.

The index is important to efficiently validate newly created transactions. Even if the rate of the new transactions remains constant, the time required to locate and verify [Spent Output|unspent outputs]] grows.

Possible technical solutions include more efficient indexing algorithms and a more performant hardware. BitcoinQt, for example, keeps only an index of outputs matching user’s keys and scans the entire blockchain when validating other transactions. A developer of one web wallet service mentioned that they maintained the entire index of UTXO and its size was around 100 Gb when the blockchain itself was only 8 Gb.

Some people seek social methods to solve the problem. For instance, by refusing to relay or mine transactions that are considered dust (containing outputs smaller than a transaction fee required to mine/relay them).== Unconfirmed Transaction

A transaction that is not included in any block. It’s also known as a “0-confirmation” transaction.

Unconfirmed transactions are relayed by the nodes and stay in their mempools. An unconfirmed transaction stays in the pool until the node decides to: – throw it away, – finds it in the blockchain, or – includes it in the blockchain itself (if it’s a miner).

uBTC

One microbitcoin (0.000001 BTC)

Vanity Address

A bitcoin address with a desirable pattern, such as a name.

VarInt

This term may cause confusion as it means different formats in different Bitcoin implementations.

Virgin Bitcoin

Bitcoins purchased as a reward for mining a block. These have not yet been spent anywhere.

Wallet

An application or a service that helps keeping private keys for signing transactions.

A wallet does not keep bitcoins themselves (they are recorded in the blockchain). “Storing bitcoins” usually means storing the keys.

Web Wallet

A web service providing wallet functionality: ability to store, send and receive bitcoins.

The user has to trust the counter-party to keep their bitcoins securely and ready to redeem at any time. It is very easy to build your own web wallet, so most of them were prone to hacks or outright fraud. The most secure and respected web wallet is Blockchain.info.

Online exchanges also provide wallet functionality, so they can also be considered web wallets. It is not recommended to store large amounts of bitcoins in a web wallet.

XBT

Informal currency code for 1 bitcoin (defined as 100 000 000 satoshis). Some people proposed using it for 0.01 bitcoin to avoid confusion with BTC. Recently it was reported that it is used in Bloomberg terminal to display a bitcoin price ticker.

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