An address is a "payment instruction" for a digital
asset. When receiving payment, a payee communicates an address to the
payor, and the payor sends funds to that address. A set of addresses
used together comprises a wallet.
Bitcoin (with a capital B), which launched
in 2009, established the world's first decentralized digital asset
platform. Bitcoin uses blockchain technology to create a digital asset
that is entirely decentralized and managed across a wide network of
computers rather than by a single entity. The virtual coins on the
Bitcoin platform are called bitcoins (lowercase b). In this sense, the word bitcoin is written in lowercase, much like the words penny and nickel.
A bitcoin is simply a coin that is on the platform and that can be used
for purchases or to store value. While digital assets are speculative
and present risks, the longevity and saturation of the Bitcoin and
Ethereum platforms, and their coins, have made them leading candidates
for product support, such as custody and execution services.
A block is a set of updates to the
blockchain ledger. Using Bitcoin as an example, a block is basically a
virtual container of bitcoin transactions. A block can hold a limited
amount of data, allowing for a certain number of transactions and the
corresponding data to be stored in each block. A bitcoin node receives
these blocks, validates all transactions in them, and then applies the
updates to the global ledger. A bitcoin miner is tasked to validate all
transactions in the block and then solve a complicated mathematical
equation that cryptographically ties this block to previous blocks. Once
broadcast to other nodes and miners, this block is added to the string
of blocks that make up the chain. The whole blockchain is a publicly
viewable record that keeps track of every transaction that has ever
occurred within that digital asset.
This is a number that specifies how many blocks have
been globally produced at the present time. The very first block
created in a blockchain (known as the genesis block) has a
height of zero because it is the first block in the chain. The fifth
block to be added will have a height of four because four blocks came
before it. As of October 2018, the Bitcoin block height is almost
550,000 and the Ethereum block height is almost 6,500,000.
The first miner to solve the proof-of-work puzzle in
a block receives a block reward of new coins as compensation for the
miner's expenditure in solving the puzzle. With bitcoin, the reward
given is cut in half every four years in order to control the
distribution of coins released.
Blockchain is the underlying technology that Bitcoin
and most other digital assets use to record and validate transactions.
It is a linked list of transaction updates to a virtual digital public
ledger. A blockchain consists of a group of transactions in "blocks."
These blocks are cryptographically connected to one another as they are
mined, creating a long "chain." The nature of the cryptographic tie from
one block to previous blocks means that previous blocks cannot be
altered by anyone.
BTC is the original shorthand for bitcoin.
This designation is often used on digital asset exchanges to denominate a
bitcoin's current value. However, there has been an increase in the use
of XBT as an alternate designation. The reason for this is that the
International Organization for Standardization (ISO), which keeps a
listing of all currencies, uses Xto symbolize a currency that
is not attached to a specific country (which is the case for all digital
assets, because they are decentralized).
Cold storage is a mechanism where private keys used
to sign withdrawal transactions are kept in secure locations that are
not connected to the internet. It is one of many security techniques
used by INTJ to secure customers' funds.
Cryptocurrencies, also known as digital assets and digital currencies,
are issued and transferred electronically. This is in contrast to USD
and government-issued currencies, which exist both in physical and
electronic form. Bitcoin and ether are two widely-recognized
cryptocurrencies. Other types of cryptocurrencies are sometimes referred
to as altcoins. Some examples of so-called altcoins are litecoin, XRP, and Zcash.
A digital signature is a mechanism that uses
public-key cryptography to create un-forgeable proof that a transaction
is authorized by the owner of the coins. The most common algorithm used
by digital assets is the Elliptic Curve Digital Signature Algorithm
(ECDSA), though there are many such algorithms, including Schnorr and
BLS signatures, whose use is increasing. The signature itself is a
65-byte number, which in combination with a message and a public key can
be validated by the signature algorithm.
The preferred public-key cryptography approach for
cryptocurrencies to authorize asset transfer. It is favored over older
mechanisms based on prime numbers because of the relatively small size
of keys and digital signatures and is based on solving equations using
an elliptic curve with values in a finite field. The most common
elliptic curves used for digital assets are called secp256k1 (e.g.,
Bitcoin, Ethereum) and ed25519. They are accompanied by an algorithm to
create digital signatures that can be publicly validated.
Ether tokens are a cryptocurrency created within the
Ethereum network and, like bitcoins, are tradeable digital assets.
Unlike bitcoins, the focus of ether tokens is not as a store of value or
payment system but rather as a system for creating and paying for the
execution of "smart contract" logic.
A decentralized, blockchain-based computing platform
that allows developers to build and deploy decentralized applications,
including smart contracts. In the Ethereum blockchain, mining computers
work to earn ether, a digital asset that supports the Ethereum network.
An exchange is a platform that allows buyers and
sellers to trade a range of digital assets using both fiat currencies
and other digital assets. Some exchanges facilitate trading bitcoins for
fiat currency, while others enable trading among different digital
A fork occurs when the rules of a blockchain are
changed, possibly creating two (or more) distinct digital assets. This
may result from an upgrade to the features of the blockchain, a bug in
the consensus algorithm, or changes to the node software. See Hard Fork and Soft Fork.
Digital asset miners are compensated, or "rewarded,"
for their work, which aids the process of validating and processing
transactions. In Bitcoin, the reward amount for successfully mining a
block is cut in half every four years. This is done to control the
distribution of new digital assets in circulation. It is the technical
mechanism by which the creator implemented the monetary policy of the
A hard fork is the splitting of a digital asset's
blockchain in a backward-incompatible way, resulting in two distinct
digital assets. The code and data are replicated from the original
digital asset to create the new one, adding backward-incompatible
changes. Once the hard fork occurs, the two digital assets are
non-fungible with each other but share some transaction and ledger
history. Hard forks occur for two key reasons: The first is when
competing visions of a digital asset's future development fail to reach
agreement. The second is unforeseen bugs or intentional fixes to
system-critical issues. When a hard fork occurs, developer and miner
support are key components in determining whether the digital assets
gain or lose value and relevancy. If poorly implemented, hard forks can
also cause instability in the digital asset's network, because of
transactions that may be valid on both networks.
When used as a feature upgrade mechanism, hard forks require everyone
using the digital asset to simultaneously upgrade their node software
(called a flag day). Coordination of flag days is extremely
difficult and, as digital asset networks grow, may become impossible.
For this reason, some digital assets such as Bitcoin do not use hard
forks as an upgrade mechanism. See also Soft Fork and Segregated Witness.
When miners run software to create blocks, the algorithm they run is called a hash. Miners compute a lot of hashes; the sum of how many hashes they compute in a given unit of time is called their hash power.
Hash power is directly correlated with miner earnings. Increasing one's
hash power by installing new mining devices increases the miner's
profits. As of October 2018, all bitcoin miners combined compute 50 EH/s
(50,000,000,000,000,000,000 hashes per second), which is more
computations than all the world's other computers combined. These
computations are special purpose, useful only for mining bitcoin and
cannot be repurposed to solve other problems. Hash functions are
commonly used for proof-of-work algorithms and are integral to digital
A hash is the function of mapping data of variable
size to a new set of data at a fixed size in such a way that the reverse
computation is effectively impossible. Cryptographic hash functions
require specific properties to be considered secure, and different
digital assets may use different hash functions. The SHA-256 hashing
algorithm is used in Bitcoin, and SHA-3 with Ethereum, for example.
What began as a typing error on a Bitcoin forum in
2013 has become a beloved rally cry for long-time bitcoiners. It
expresses the belief that long-term value is better obtained by holding a
digital asset rather than actively trading it. Don't rush to correct
someone when you see this term; instead, ask them to tell you the story.
The term key pair describes public and private keys used in public-key (or asymmetric)
cryptography, where the key used to encrypt data is different from the
key used to perform decryption. In Bitcoin, public keys are used as a
transaction output in addresses, functioning similarly to an account
number or payment instruction, while the private key is known only to
the funds' owner and can be used to sign transactions moving those
funds. See Keys.
Keys are long numeric codes that are involved in
digital asset transactions, often encoded as hex or alphanumeric
strings. Bitcoin uses public-key cryptography, also known as asymmetric
cryptography (see Key Pair). There are two kinds of keys: public and private.
Traditional accounting practices use a ledger to
keep track of money movements in and out of accounts, with each party
keeping its own ledger and requiring reconciliation between the ledgers
of different parties. The Bitcoin network maintains a public ledger that
records all transactions. As transactions are executed, updates to the
ledger ("blocks") containing sets of recent transactions are distributed
to millions of computers around the world. Because of the wide
distribution of the ledger history, no central point of failure exists,
and therefore it is practically impossible for the ledger to be altered
by either malice or mistake. The transactions recorded on the Bitcoin
ledger are unalterable, permanent, and nearly impossible to erase.
The term market capitalization comes from
the world of equities and is determined by multiplying the total
outstanding shares of an asset by the last available share price. The
term has been adopted for use in the digital asset space and is computed
by multiplying the total coin supply by the current market value of
each coin. Some prefer the term implied network value, as the coins are digital assets of decentralized networks rather than shares in a company.
This is the total number of coins that can be minted
for a particular digital asset. Most digital assets have been designed
with caps on the total supply that can be created by the network in an
attempt to drive value by creating digital scarcity. A digital asset's
maximum coin supply is a fundamental feature of its design, and some
have no fixed maximum supply at all. Bitcoin's maximum coin supply is
set at 21 million.
A bitcoin can be split into very small parts. Each
bitcoin is divisible to the eighth decimal place, so each bitcoin can be
split into 100,000,000 units (satoshis). An mBTC is one thousandth of a bitcoin, or 0.001 BTC. It is also called a millibitcoin. See also uBTC and Satoshi.
Mining is the method by which digital assets like
Bitcoin and Ethereum are minted and released into circulation. Mining is
also the method by which transactions are incorporated into the
blockchain. Finally, mining provides a mechanism to cause the unit of
account to acquire a cost of production, which causes the blockchain to
become a financial asset and not just a database entry. Miners perform
all the same duties as nodes, and additionally attempt to solve a
proof-of-work puzzle that, given a successful solution, gives them the
right to publish a block of new transactions and allocate new coins to
themselves. They do this by computing a hash repeatedly with different
inputs, creating a proof-of-work algorithm. Mining is competitive and
requires powerful dedicated hardware, energy consumption, and time.
Due to the variance of whether a given miner will
win a block or not, miners often band together into mining pools. In a
mining pool, one node validates transactions and distributes a candidate
block to multiple different miners. By agreeing to share winnings if
one of the miners in the pool wins the block, pools help reduce variance
for its members.
Multi-signature, or multi-sig, is a feature of
bitcoin and other digital assets that requires that multiple private
keys be used to sign a transaction and move funds. Practically speaking,
multi-sig can be used to add an extra layer of security to digital
asset transactions by requiring an additional approval from a third
party before a transaction is approved. Digital asset custodians
typically use multi-sig wallets and processes to help secure client
Nodes are software that run on internet-connected
computers and function as non-mining transaction validators as well as
digital asset wallets for the network they serve. In Bitcoin, for
example, "full nodes" download the entire blockchain and validate each
transaction per the agreed-upon rules of the network and relay
transactions and blocks to others.
A nonce is a random number that is used to vary the input to a cryptographic hash function (see Hash), modifying the output in an unpredictable way. In the context of proof of work,
the nonce is what miners repeatedly modify to find an output hash
numerically smaller than the target, thereby winning the block.
Off-chain transactions are valid bitcoin
transactions that are not sent to the main Bitcoin network. New research
using off-chain transactions is under development by several companies
and enables a large increase in the effective transaction capacity of
the network. They use multiple off-chain transactions to create a
"payment channel" between counterparties.
A P2P network is created when two or more computer
systems are connected to each other through the internet for file
sharing and work distribution, all without a central server. Examples of
P2P networks include file-sharing protocols like BitTorrent, the
Invisible Internet Project (I2P) anonymity network, and digital asset
protocols like Bitcoin and Ethereum.
Proof of Work (PoW) is the mechanism by which
Bitcoin creates a cost of production for the unit of account and ensures
immutability of the ledger in a trustless manner. Because each update
to the ledger ("block") contains a costly proof of work, this cost makes
it expensive to rewrite the ledger.
Quick response (QR) codes are sometimes used in
place of the long string of letters and numbers that make up a Bitcoin
address like this: 16r61N8tB03FTQGwZCRXLLygNqVL8MEsrR. For convenience,
wallets will provide the option of converting a Bitcoin address into a
QR Code for use in sending or receiving, or to transact a coin exchange
directly between two smartphones, for example.
A ring signature is a type of cryptographic digital
signature. In a peer-to-peer transaction, such as that used with
cryptocurrencies, a ring signature enables an individual of a group to
sign a transaction without revealing the identity of the actual signer.
A satoshi is currently the smallest
denomination of a bitcoin. A bitcoin can be split into one hundred
million units. Each of these units is called a satoshi. So, a satoshi = 0.00000001 BTC. See also mBTC, uBTC andSatoshi Nakamoto.
The idea for Bitcoin was presented to the public in a
white paper, Bitcoin: Peer-to-Peer Electronic Cash System, written by
Satoshi Nakamoto, a person or persons whose identity remains unknown.
Nakamoto has communicated with developers under this pseudonym but has
never publicly come forward to take credit for the invention of Bitcoin.
Each transaction recorded on a blockchain has a
signature that proves it is a valid transaction. How many can fit into
each block depends on the maximum defined size of the block. Segregated
Witness was one of many soft-fork upgrades to the Bitcoin network, and
it altered the format of transactions. It moved some transaction data
("witness data"—signatures and scripts) outside of the main block,
mainly in an effort to fix a technical deficiency called transaction malleability.
By moving some data out of the main block, SegWit had the side benefit
that it increased the effective block size of Bitcoin by up to 3.5
times, depending on uptake of the feature by users. As of October 2018,
approximately 50% of the transactions on Bitcoin are using the SegWit
A soft fork can be viewed as a backward-compatible
software update for a digital asset blockchain. Soft forks can refine
the governance rules and functions of a digital asset blockchain but,
unlike hard forks, are compatible with the previous blockchain. This
means that a soft fork does not result in a split of the blockchain into
two digital assets. For a soft fork to be implemented, a specific level
of readiness to enforce the new rules must be signaled by miners. Soft
forks are optional for all users in the system, and it is not necessary
for users to immediately upgrade, unless they want to use the new
features. See also Hard Fork.
Store of Value is one of the core functions of
money, alongside Medium of Exchange and Unit of Account. An asset is
considered to be a good Store of Value if the purchasing power does not
degrade over time.
This is the total number of coins that have been
minted for a particular digital asset, although not all coins minted may
be in circulation. It can also mean the total number of coins that will
ever exist, as in 21 million for Bitcoin.
A transaction fee is an amount of cryptocurrency
that is attached to a transaction and that incentivizes miners to
process the user's transaction. In Bitcoin, a transaction fee is not
mandatory, nor is it prescribed by the code. Users can choose how much
to pay for their transactions to be processed. That is why during times
of network congestion, the average transaction fee goes up, as users are
trying to incentivize miners to process their transactions over other
users' transactions. On the other hand, when network traffic slows down,
average transaction fees also decline.
Bitcoin does not operate on the account model (like
Ethereum) but on the unspent transaction output (UTXO) model. Every
transaction has inputs and outputs. Outputs that have not been spent are
the set of bitcoins in circulation (i.e., spendable bitcoins). Unspent
outputs are used as inputs in new transactions.
A digital asset wallet is a piece of software that
maintains keys and manages addresses. A wallet is comprised of a set of
addresses. If the wallet has the private keys for these addresses, it is
capable of sending transactions. If it does not have the private keys
for these addresses, it is called a watch-only wallet, as might be used by an auditor.
While BTC was and often still is the original shorthand for bitcoin,
there has been an increase in the use of the term XBT. The reason for
this is that the International Organization for Standardization (ISO),
which keeps a listing of all currencies, uses X to symbolize a
currency that is not attached to a specific country (which is the case
for all digital assets, because they are decentralized).
Yap Island is a part of the Federated States of
Micronesia. It is estimated that from AD 1000 to 1500, Yap islanders
sailed hundreds of miles to the neighboring island of Palau, where they
obtained large chunks of limestone and carved the stone into circular
stone disks of various sizes. The disks were then carried home and
served as a means of monetary exchange. Known as Rai stones,
they were considered valuable because of the rarity of the rock itself
(there was no limestone on Yap), the history of its ownership, and the
significant labor required to obtain, carve, and transport the stones
back to Yap. The story of the Rai stones is often used to illustrate the
way societies establish payment methods and stores of value.