Blockchain and Decentralization
Decentralized Finance (DeFi)
- An address is an alphanumeric string denoting the location of a digital asset on the blockchain. The address is communicated from payee to payor for the payor to send funds to that address. The address specifies where the digital asset’s ownership data is stored and it is where changes are registered upon transaction. In Bitcoin, addresses are derived hashes of public keys that are more compact than the public key itself.
- Air Gap
- An air gap is a method of securing a network or computer by physically isolating it from the public internet and unsecured networks. An air gapped computer or network has no connections to any other network. The term “air gapped” refers to the fact that there is physical space between the network or computer and other networks or the broader internet.
- An airdrop is a token distribution from a team, project, company, or smart contract, which requires no purchase to receive and is delivered to a set of predefined addresses.
- Any cryptocurrency that is not Bitcoin. Since Bitcoin was the first decentralized digital asset, all subsequent digital currencies are known as alternative coins, or “altcoins.”
- Atomic Swap
- The direct exchange of one cryptocurrency for another at current rates, powered by smart contract technology, without a centralized intermediary like an exchange.
- Binary Hash Tree
- A binary hash tree, or Merkle tree, contains cryptographic hashes in a data structure used to summarize and verify the integrity of large amounts of data.
- Bitcoin means the first system of global, decentralized, scarce, digital money as initially introduced in a white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto, released on the Cypherpunk Mailing List on October 31, 2008. When written with a capital “B,” Bitcoin denotes the system, the protocol, and the network. When written with a lower-case “b,” bitcoin denotes the currency and unit of account.
- A block is a batch of confirmed transactions on the digital ledger. Blocks are added to an existing blockchain as transactions occur on the network. Depending on the sybil resistance mechanism, miners or validators are typically rewarded for “mining” a new block, either with newly minted coin issuance or transaction fees (or both).
- Block Height
- The block height specifies the number of blocks created to date. The first block in a blockchain is the genesis block, which has a block height of zero.
- Block Reward
- A block reward is given to the first miner to calculate a valid hash, or proof-of-work puzzle, during mining. The reward is an incentive for miners to continue contributing to the security of the blockchain.
- Blockchain means a cryptographically secure digital ledger that maintains a record of all transactions that occur on the network and follows a consensus protocol for confirming new blocks to be added to the blockchain. These blocks are cryptographically linked as they are mined, creating a chain.
- Bridges enable different blockchains to communicate with each other. They can be trusted (custodial and controlled by a central entity) or trust minimized (non-custodial and powered by smart contracts) and enable users to transfer information and assets between two different blockchains or blockchain layers. Given the complexity of integrating blockchains with different designs, bridges are especially vulnerable to hacks and many of the largest crypto thefts have been from hacks on bridges.
- BTC is the original currency code used for bitcoin, used by cryptocurrency exchanges as an indicator linked to the current value of bitcoin. (Some organizations use XBT as bitcoin’s currency code, because the International Organization for Standardization [ISO] denotes currency not connected to a country with an X.)
- A coin is a cryptocurrency or digital asset that is independent of any other platform, native to its own blockchain, e.g. BTC, ETH, LTC, XRP.
- Cold Storage
- Cold storage means the storage of private keys in any fashion that is disconnected from the internet. Common cold storage examples include offline computers, “hardware wallets,” USB drives, or paper records.
- Consensus means agreement among parties. Public blockchain networks use a combination of software, networking, economic and game theoretical mechanisms to achieve consensus among unknown parties on the state of the ledger.
- Crypto is a broad term for any cryptography and is often used today to refer to the components of a cryptocurrency market, system, application, or decentralized network.
- Cryptocurrency refers to cryptographic currencies like Bitcoin and alternative coins or ‘altcoins,’ launched after the success of Bitcoin. This category of digital asset is designed to work as a medium of exchange, store of value, or to power applications. This category is distinct from others like security tokens, non-fungible digital collectibles, or governance tokens.
- Cryptoeconomy refers to the open financial system built upon public blockchain networks.
- Cryptography is the study and method of using tactics to secure information in the presence of adversaries. From the Greek kryptós (hidden, secret) and graphein (to write, study), cryptography has been utilized as early as 1900 B.C.E. and primarily relied upon linguistic lexicographic patterns. Modern cryptography relies on computation, number theory, abstract algebra, and other forms of advanced mathematics and engineering.
- Custodial and Non-Custodial
- Custodial and non-custodial refer to methods for storing private cryptographic keys and therefore digital assets. Custodial services are provided by third-parties who facilitate user access to digital assets via some off-chain process in which the user is relieved from storing the private keys to their digital assets and instead relies on that third party to do so on their behalf. Non-custodial services, such as Bitcoin hardware wallets, allow users to manage their private keys and therefore digital assets without relying on any third-party.
- Decentralization is the practice of removing intermediaries in a process and pushing power over a process or system to the edges of the system. Decentralization occurs when individuals or nodes work collectively in a distributed manner to achieve an objective without reliance on a centralized intermediary.
- Decentralized Application (dApp)
- A dApp is an application that runs on a P2P network of computers rather than a central computer, thus uncontrolled by any single entity.
- Decentralized Autonomous Organization (DAO)
- A DAO is an organization run by rules hard-coded in smart contracts, which define what actions the organization can or will take. DAOs are one type of emergent dApp built on public blockchains.
- Decentralized Finance (DeFi)
- DeFi refers to a peer-to-peer, decentralized, and software-based network of protocols that can be used to facilitate traditional financial services like borrowing, lending, trading derivatives, insurance and more through non-custodial smart contracts carried on public blockchain networks.
- Digital Asset
- Digital assets are any asset built using blockchain technology, including cryptocurrencies, stablecoins, non-fungible digital collectibles, and security tokens.
- Digital Signature
- A unique alphanumeric “code” that is generated for every transaction. Just like your signature provides the proof of ownership on a document, similarly, a digital signature provides the proof that the transaction is genuine. Unlike a handwritten signature, a digital signature is unique for every transaction.
- Double Spend
- Double spending is the act of spending the same coins twice. If money can be double spent, it cannot function properly as money as it loses its scarcity and counterparties cannot trust that they alone have received payment. Solving the double-spend problem without the use of a central intermediary had never been accomplished until Bitcoin. Satoshi Nakamoto prominently featured the fact that Bitcoin solved this problem in the Bitcoin White Paper. The third sentence of the Bitcoin White Paper reads “we propose a solution to the double-spending problem using a peer-to-peer network.”
- ERC-20 is the fungible token standard and technical specification for the Ethereum blockchain. ERC-20 is a set of rules that define a standard for the creation of fungible tokens to function properly in the Ethereum ecosystem.
- Ethereum is a decentralized, public blockchain network that supports composable smart contracts which can be used to create decentralized applications and tokens and facilitate peer-to-peer transfers. “Ether” (ETH) is the native cryptocurrency of the Ethereum network.
- A cryptocurrency exchange is a platform that allows its customers to trade cryptocurrencies for other cryptocurrencies, stablecoins, or fiat currency.
- Fiat Currency
- Fiat currencies are issued and backed by governments, such as the U.S. dollar and the eurozone euro. In the context of money, the term “fiat,” from the Latin fiat (let it be done), refers to the use of authority to designate an acceptable form of money.
- Fifty-One Percent (51%) Attack
- A 51% attack occurs then more than half of the mining hash rate or computer power is controlled by an individual or a group of people. A successful 51% attack can be used by an attacker to disrupt the network, either by refusing to mine blocks, mining empty blocks, or by performing a double-spend attack, whereby a coin or coins are spent and then “unspent” on the attacker’s longest chain. This attack is possible due to the nature of Nakamoto Consensus, in which nodes accept the heaviest chain (that is, the chain with the most accumulated computational work) as canonical.
- A fork is an event in open-source software development when part of a community breaks away by making changes to the software. The openness of open-source software development allows for deep peer review and collaboration, resulting in fantastic breakthroughs. But the community-driven development model also results in disagreements, schisms, and even feuds between rival factions. When these disagreements over the direction of a project are not resolved, developers may decide to break away the project, taking the source code with them. The new project is a different “branch” of the original, keeping some or all the original source code but adding changes or upgrades which the original community had rejected or could not agree upon. Similarly, a blockchain fork occurs when the rules of the blockchain are changed but, notably unlike other types of open-source software, blockchain forks can result in the creation of two or more distinct digital assets. A fork can result from an upgrade to the features of the blockchain, a bug in the consensus algorithm, or changes to the node software. A hard fork refers to a change in rules that is not backwards compatible, and it can result in the creation of a new digital asset (if there is contentious disagreement among the network stakeholders, or simply if some nodes don’t upgrade in time). A hard fork may not create a new digital asset if all participants agree to the changes, install new software, and update dependent software wallets. A soft fork is a backwards compatible update to a blockchain, which add new features without making older versions of the software incompatible with the new upgrade. Soft forks do not result in the split of the blockchain and therefore do not create distinctly new digital assets.
- Genesis Block
- A Genesis Block is the first block in a blockchain. Because it is the first block in the chain, the Genesis Block does not reference any prior block, as all subsequent blocks will. In Bitcoin’s Genesis Block, Satoshi Nakamoto embedded a message—“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”—a headline from The London Times. It is believed that Satoshi included this message both as a political statement positioning Bitcoin as an alternative to the current monetary system and as a sort of “proof of life” to prove to the world that Satoshi hadn’t “premined” the blockchain (unfairly mined blocks ahead of the network’s public launch).
- Halving is when the portion of Bitcoin’s block reward comprised of newly minted issuance is cut in half, which occurs every 210,000 blocks. This mechanism, and the schedule on which Satoshi enacted it controls the number of new bitcoins in circulation, as well as Bitcoin’s terminal fixed supply.
- Hardware Security Module (HSM)
- A hardware security module (HSM) is a physical cryptographic processor that manages, processes, and stores cryptographic keys. A HSM is ordinarily a plug-in card or external device that connects to a computer or a network server.
- Hash or Hash Function
- A hash function enables the mapping of data of variable size to a new set of data at a fixed size in a way that the reverse computation is impossible. Said differently, a hash function allows the ability to create a unique fingerprint for a set of data, but the fingerprint cannot be used to reveal the content of the underlying data that it represents. Cryptographic hash functions require specific properties to be secure, and different digital assets may use different hash functions.
- Hash Rate
- The hash rate is the sum count of attempted hashes by Proof of Work miners during a given time interval. Individual mining machines, mining operations, or the entire Bitcoin network can be said to have a hash rate. The higher the hash rate is, the more attempts are being made to create a Bitcoin block. As of September 2021, the 90-day average of all bitcoin miners combined hashrate is more than 117 EH/s (117,000,000,000,000,000,000 per second), which is more computations than all the world’s other computers combined.
- Originally a typo made by a user on the BitcoinTalk.org forum, where Satoshi also posted early in Bitcoin’s history, HODL has been adopted as a shorthand call for investors to hold a digital asset instead of trading or selling it, regardless of market fluctuations.
- IBC stands for Inter-Blockchain Communication Protocol, an interoperability network created as part of the Cosmos and Tendermint projects. It is an open-source protocol enabling independent blockchains to communicate with each other.
- Keys are the alphanumeric codes that facilitate cryptographic digital asset transactions using asymmetric cryptography. A public key is used to encrypt a message, and a private key decrypts that message. Public keys can be made public, while private keys must be kept secret. Regardless of legal claims of ownership, anyone with access to a private key can effect the transfer of digital assets under its control.
- Layer 1
- Layer 1 is a term used to describe an underlying or base layer blockchain protocol, such as Bitcoin, Ethereum, or Solana, and which acts as infrastructure for other applications to build on top of.
- Layer 2
- Layer 2s are separate protocols built on top of Layer 1 blockchains like Ethereum and Bitcoin. Layer 2s are often used as scaling solutions for Layer 1s, reducing fees and increasing transaction throughput while preserving some or all the security guarantees of the Layer 1 blockchain, while also relying on the security of the Layer 1 in crucial ways. An additional benefit of a layered scaling approach is that Layer 2s may add features or functionality to the Layer 1’s ecosystem without compromising the underlying fidelity of the Layer 1. Popular Layer 2s include the Lightning Network (BTC), Optimism (ETH), Arbitrum (ETH), and Starknet (ETH).
- A ledger tracks the movement of assets. Blockchain technology creates a decentralized, permanent, public, unalterable ledger of all transactions recorded.
- Market Capitalization
- Market capitalization (or Market Cap) of digital assets is determined by multiplying the current coin supply by the last known trade price of that particular coin.
- Maximum Coin Supply
- The maximum coin supply is the total number of coins that can be created for a specific digital asset. For example, Bitcoin’s maximum coin supply is 21 million. Some coins do not have a fixed maximum coin supply.
- One-thousandth of a bitcoin, or 0.001 BTC. Also known as a millibitcoin.
- Merkle Tree
- A Merkle tree, or binary hash tree, contains cryptographic hashes in a data structure used to summarize and verify the integrity of large amounts of data.
- Miners are the individuals or entities who operate a computer or group of computers that add new transactions to blocks and submit those blocks to the rest of the network in a Proof-of-Work blockchain. Bitcoin miners earn their revenue by collecting transaction fees included by spenders as well as by generating newly minted BTC. The rate at which BTC is minted reduces by 50% every 210,000 blocks (halvings).
- Mining is the process by which new blocks are created in a Proof-of-Work blockchain, and thus new transactions are added to the blockchain. The process involves miners trying to solve a puzzle that requires computational work and, if they are successful, they publish a block of new transactions to the blockchain and collect a reward. While the term “miner” typically refers to an entity that participates in block production on a Proof-of-Work network, “validator” typically refers to an entity that participates in block production on a Proof-of-Stake network.
- Mining Pool
- A mining pool, also known as group mining, is when miners band together and agree to share winnings if one of the miners in the pool solves a block. While individual mining operations are likely to receive rewards proportionate to their hash rate on a long enough time scale, the frequency of successfully finding a block and thus earning a reward is variable, mining pools are useful because they smooth out the frequency of rewards and thus make it easier to operate a sustainable mining business.
- Multi-sig is short for “multi-signature” and is a feature of Bitcoin and other digital asset networks that enables the creation of addresses that require some number of multiple private keys to be used to sign a transaction and move funds. Pragmatically speaking, multi-sig setups add additional security, because a user can require that a certain threshold of keys must sign before a transaction is considered valid, making it possible for one or several keys to be lost or compromised without losing access to the underlying digital assets. Digital asset custodians typically use multi-sig setups.
- A node is software that can function as non-mining transaction validators and digital asset wallets for the network and network participants they serve. Bitcoin full nodes download the entire copy of the blockchain—the history of every transaction ever conducted, including Satoshi’s first mined block and the first BTC transfer to Hal Finney—and validate that each new transaction and block adhere to the network’s rules. Nodes typically also relay transactions to other nodes, forming an essential piece of a public blockchain’s network topology. In addition, users can use their own nodes to send and receive transactions without reliance on any third-party. Nodes also form an important part of Bitcoin’s governance triumvirate along with miners and developers and, when coordinating together, can provide an essential check on the powers of miners and developers.
- Non-Fungible Tokens (NFT)
- NFTs are non-fungible tokens, meaning that no one unit is identical and equally tradeable for another. For example, money (or a single unit of bitcoin) is fungible—each one unit is considered equal to any other unit of identical size. Conversely, artwork is not fungible—no two paintings are identical. Non-fungible tokens represent unique digital property, whether a collectible, artwork, intellectual property, or something else, which are not inherently exchangeable 1:1 with another unit.
- A nonce is an arbitrary number used to vary the input to a hash function and change its output in an unpredictable way.
- On-chain and Off-chain
- On-chain and Off-chain refer to transactions that occur on the main public blockchain network vs. outside the public blockchain network. Off-chain transactions may eventually settle on-chain, such as in the case of Bitcoin’s Lightning Network or transactions that occur on Ethereum’s rollup platforms Arbitrum or Optimism. Crucially, the development of a robust off-chain ecosystem that inherits the security properties of the on-chain network is viewed as an important avenue to scale blockchains.
- Open-source refers to a software license under which the source code is made freely available and may be redistributed and modified.
- Optimistic Rollups
- Optimistic Rollups are a Layer 2 scaling solutions that execute transactions off from the main chain, where the end results of the transactions are then published in a compressed data format. The transaction data is sent to and batched together by an aggregator called a sequencer. Optimistic rollups assume that submitted transactions are valid by default; only if the submission is disputed will the rollup execute a fraud proof, which re-computes all transactions to determine whether fraud had occurred.
- An Oracle is an entity or process that submits data from off-chain to be used by on-chain participants, including smart contracts. Public blockchains cannot be aware of off-chain events without being told about them, a function performed by oracles. These events could include the market price of a digital asset, the weather, political actions, the outcomes of sporting events, or the result of a contract between parties.
- Perpetual Futures (Perps)
- Perpetual Futures are a type of futures contract without an expiry date, allowing users to open positions without the need to ever roll exposure. Perpetual futures are anchored to spot via funding rates. For example, if the futures contract is worth less than the spot price, then short positions will pay long positions a rate proportional to the deviation and vice versa.
- Private Key
- In asymmetric cryptography, a Private Key is a piece of data held in secret by an individual or entity that is used to compute digital signatures upon other data that can be verified by a third-party cheaply simply by knowing the public key. Private keys can be used to create nearly infinite numbers of associated public keys.
- Proof-of-Stake (PoS)
- PoS is the mechanism by which some public blockchain networks issue new assets and decentralize the block creation process. In contrast to Proof-of-Work (PoW), in a PoS system the cost to create a block is borne by the opportunity cost of locking the funds, and the risk that, if blocks are incorrectly produced, those funds will be seized and destroyed by the network. In PoS, validators are assigned the right to create a block, usually random with the likelihood proportionate to the size of their stake, rather than competing through costly computation with others, as in PoW.
- Proof-of-Work (PoW)
- PoW is the mechanism by which Bitcoin creates a cost of production for bitcoin the asset and ensures immutability of the ledger in a trustless manner. The cost of production is primarily derived from the energy expenditure required to conduct the necessary computational work to create new blocks. Because each update to the ledger block contains a costly proof of work, this cost makes it expensive to re-write the ledger, increasing Bitcoin’s security. PoW is difficult to create but trivially easy to verify, making it ideal for Bitcoin miners, nodes, and the network.
- A Protocol is a set of standards. This is true for diplomatic protocols, parliamentary protocols, or computer protocols. In the cryptoeconomy, the term protocol often refers to a blockchain network like Bitcoin, or a set of interlocking smart contracts, which has a set of rules that must be followed by participants who seek to interact with it.
- Ring Signature
- A ring signature is a type of digital signature used to increase privacy. A ring signature fuses the input of multiple signers with the original sender’s to protect the identity of the actual signer.
- Satoshi (or “sat”) is the name of the smallest denomination of a bitcoin today. One bitcoin can be split into one hundred million units, and each unit is called a satoshi, or a “sat” for short. Thus, one satoshi = 0.00000001 BTC.
- Satoshi Nakamoto
- Satoshi Nakamoto is the creator or creators of Bitcoin. Satoshi Nakamoto presented the concept of Bitcoin in a publicly released white paper, Bitcoin: Peer-to-Peer Electronic Cash System, released to the Cypherpunk Mailing List on October 31, 2008. Nakamoto registered Bitcoin.org and communicated regularly with developers via email and on BitcoinTalk.org under this pseudonym. Despite the claims of many, no person has ever presented valid proof they are Satoshi Nakamoto, and Nakamoto’s true identity remains unknown to this day.
- Segregated Witness (SegWit)
- Segregated Witness was a soft-fork upgrade to the Bitcoin network that activated in August 2017 and allowed for the movement of certain transaction data (signatures and scripts) outside of the main part of a block as a way to fix a transaction malleability problem. In fixing transaction malleability, SegWit also enabled for the creation of Bitcoin’s Lightning Network. Additionally, the SegWit upgrade offers an important scaling improvement by allowing the Bitcoin network to change the way the “weight” of adhering transactions is calculated, offering a significant reduction and therefore increasing the number of transactions that can fit inside a block.
- Sharding involves partitioning a blockchain into multiple pieces known as “shards” and storing them separately. By dividing up the data and the processing of transactions into shards, the computational requirements can be reduced, allowing the network to process larger transaction volumes.
- Smart Contract
- A Smart Contract is software, typically carried on a decentralized public blockchain, that can execute or enforce pre-determined actions or agreements without the intervention of a centralized intermediary.
- Soft Fork
- Soft forks change the rules of a digital asset blockchain, but unlike hard forks, soft forks are backward-compatible, and do not split the blockchain or result in the existence of two sets of digital assets.
- Stablecoins are tokens designed to track the price of an underlying asset, such as another digital asset, or most commonly, a fiat currency or an exchange-traded commodity, such as U.S. dollars. Most commonly, stablecoins are collateralized by reserves, and referred to as fiat-backed stablecoins; the stability of such a stablecoin results from the underlying assets backing the stablecoin that are held by the issuer in segregated or omnibus accounts, among other factors such as the stablecoin’s convertibility into other assets, and the ability of a holder to redeem the stablecoin from its issuer for underlying collateral. Another form of stablecoin, referred to as algorithmic stablecoins, is not backed by collateral assets, but is instead designed to maintain parity with a fiat currency or exchange-traded commodity via some other means, often through an algorithmic relationship with a cryptocurrency backing the stablecoin.
- Staking is the act of participating in the validation process of a Proof-of-Stake system. Staking typically involves locking up funds (putting funds “at stake”).
- Sybil Attack
- A Sybil Attack is the act of using many fake identities simultaneously to overwhelm or manipulate a peer-to-peer network. Public blockchains must be designed to mitigate the threat of sybil attacks and often do so through the imposition of fees, computation requirements, or penalties for bad behavior.
- A token is any digital asset built using blockchain technology, including cryptocurrencies, stablecoins, security tokens, and NFTs.
- Total Circulating Coin Supply
- The total number of coins that a given digital asset has in circulation.
- Transaction Fee
- A transaction fee is a payment made by a user for using the blockchain for their transaction. Transaction fees are often paid to the miner or validator who successfully adds to the blockchain the block containing the transaction, although different networks implement transaction fees differently. Transaction fees are an important tool for preventing spam—by imposing a cost to transact, attackers are disincentivized from broadcasting large amounts of junk transactions to the network.
- One millionth of a bitcoin, or 0.000001 BTC. Also known as a microbitcoin.
- Virtual Currency
- Virtual Currency is another is another term that may be used interchangeably to refer to cryptocurrencies or digital assets.
- A Wallet is a tool that stores public and private keys and enables the user to use those keys to interact with a blockchain network. Wallets can be software, hardware, or physical (paper, metal, etc.).
- Wrapped Bitcoin (WBTC)
- WBTC stands for “Wrapped Bitcoin” and is an Ethereum-based tokenized version of a bitcoin. The bitcoin itself is held in escrow by a custodian using the Bitcoin blockchain, and WBTC is an Ethereum-based synthetic representation of that locked bitcoin.
- Wrapped Ether (WETH)
- WETH stands for “Wrapped Ether” and is an Ethereum-based tokenized version of an ETH. A user can deposit ETH into an escrow smart contract and receive an ERC-20 version of it (WETH) in a 1:1 ratio. Because WETH is ERC-20 compliant, it can be used in Ethereum-based dApps that adhere to the ERC-20 standard.
- Zero-Knowledge Proof (ZKP)
- A Zero-Knowledge Proof (ZKP) allows a party to cryptographically prove an action, such as evidence of a transaction or event, without revealing details of the transaction or event. An observer can verify the authenticity of the claim without evaluating the underlying details used to create it.
- Zero-Knowledge Rollups (ZKR)
- Zero-Knowledge Rollups (ZKR) are a Layer 2 scaling solution that execute transactions off from the main chain, where the end results of the transactions are then published in a compressed data format. The transaction data is sent to and batched together by an aggregator often called a relayer, which is also responsible for generating an easily verifiable cryptographic proof that demonstrates the validity of off-chain transactions.