In an Airdrop, free coins or tokens are issued to the crypto community. Blockchain projects use this marketing strategy to draw attention to their ICO or token.
The so-called Altcoins (short for alternative coin) are alternative cryptocurrencies. Some of them try to be better than Bitcoin, the mother of all crypto currencies. Others want to convince with their own concepts.
Arbitrage Trading refers to the profiting of price differences on different crypto exchanges. In short, arbitrage traders buy crypto currencies from the lowest price crypto exchanges and sell them on the highest price crypto exchanges.
Meanwhile there are also bots that do this automatically for you. However, no profit is guaranteed with this trading method, because certain costs must be considered.
An Application Specific Integrated Circuit (ASIC) is a silicon chip specifically designed to do a single task. In the case of Bitcoin, they are designed to process SHA-256 hashing problems to mine new bitcoins. ASICs are considered to be much more efficient than conventional hardware (CPUs, GPUs). Using a regular computer for Bitcoin mining is seen as unprofitable and only results in higher electricity bill.
Acronym for "All Time High". Describes the highest price at which a token/coin has ever been traded.
Atomic Swaps enable cross-blockchain trading. This means that two different cryptocurrencies can be exchanged directly from user to user without having to trust a third party.
So-called Hash Time Locked Contracts (HTLC) ensure a secure and fair exchange. If a party is dissatisfied or does not keep the agreement, the exchange is aborted.
A bagholder is an investor who holds a cryptocurrency whose price falls until the coin is worth almost nothing. Those affected hold the cryptocurrency in the hope that the coin will rise again in order not to make a loss or at least to reduce the amount of the loss. However, this is rarely the case, because in most cases the bagholders lose a large part of their investment.
If you don't do sufficient research before buying a cryptocurrency, and instead invest in so-called shitcoins, then the risk of becoming a bagholder increases.
A blockexplorer typically is an online tool for exploring the blockchain of a particular cryptocurrency. It provides an overview over all the transactions happening on the blockchain. Blockexplorers can serve as blockchain analysis and provide information such as total network hash rate, coin supply, transaction growth and other metrics.
A blockchain consists of a series of blocks. The block height indicates which block you are talking about or the current length of the blockchain.
If you use the term block height, you always assume that the Genesis block (first block of a blockchain) is number 0.
A block reward serves as an incentive for those who make their computing power available for mining - the so-called miners. They receive the block reward when they find a valid block, which they then attach to the existing blockchain. The amount of the reward varies depending on the cryptocurrency that is mined.
A brainwallet refers to the concept of storing cryptocurrencies in one's own mind by memorizing a seed phrase. If the seed is not recorded anywhere, the cryptocurrencies can be thought of as being held only in the mind of the owner. If a brainwallet is forgotten or the person dies or is permanently incapacitated, the cryptocurrencies are lost forever. Using memory techniques allow them to be memorized and recalled easily.
Mnemonic seed phrases are the common practice to create and recover wallets. These are normally written down and stored safely. In best case they are additionally protected by a password.
An early old-style brainwallet was created by by memorization of a passphrase and converting it a private key with a hashing or key derivation algorithm (example: SHA256). That private key is then used to compute a blockchain address. This method was found to be very insecure and should not be used. Humans are not a good source of entropy. Using a single address also has problems associated with address reuse.
Cold storage in the context of cryptocurrencies refers to keeping a reserve of cryptocurrencies offline. Cold storage wallets are never connected to the internet. This is often a necessary security precaution, especially dealing with large amounts of cryptocurrencies.
For example, a cryptocurrency exchange typically offers an instant withdrawal feature, and might be a steward over hundreds of thousands of cryptocurrencies. To minimize the possibility that an intruder could steal the entire reserve in a security breach, the operator of the website follows a best practice by keeping the majority of the reserve in cold storage, or in other words, not present on the web server or any other computer. The only amount kept on the server is the amount needed to cover anticipated withdrawals.
Methods of cold storage include keeping cryptocurrencies:
The cost average effect is a strategy in which the same amount is invested in a cryptocurrency for a longer period of time at repeated intervals. Through regular investments, the average price of the respective cryptocurrency is achieved, whereby one can hedge against major market fluctuations. This means that you no longer have to worry about whether you invested at the right or the wrong time.
A Distributed Denial of Service Attack (DDoS) requires a large number of computers that have been placed under the control of an attacker to attack a central target. Small data packets are sent to the target in order to completely overload the resources (bandwidth) of the target. During a DDoS attack, the server can no longer send data to its users. In the past, several cryptocurrency exchanges were the target of such a DDoS attack.
Difficulty is a parameter in mining that Bitcoin and other cryptocurrencies use to keep the average time between blocks steady as the network's hash power changes.
The Bitcoin network difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that, on average, one block is added every ten minutes.
Double-spending is a potential flaw in a digital cash scheme in which the same single digital token can be spent more than once. Unlike physical cash, a digital token consists of a digital file that can be duplicated or falsified. As with counterfeit money, such double-spending leads to inflation by creating a new amount of copied currency that did not previously exist. This devalues the currency relative to other monetary units or goods and diminishes user trust as well as the circulation and retention of the currency. Fundamental cryptographic techniques to prevent double-spending, while preserving anonymity in a transaction, are blind signatures and, particularly in offline systems, secret splitting.
Acronym for Do Your Own Research.
Elliptic-curve cryptography (ECC) is an approach to public-key cryptography based on the algebraic structure of elliptic curves. It requires smaller keys compared to non-ECC cryptography to provide equivalent security. The most common applications of ECC include key agreement, digital signatures and (indirectly) encryption.
ERC-20 is the Ethereum token standard used for Ethereum smart contracts (associated with tokens). ERC-20 gives developers the ability to understand in advance how any new token based on the standard will behave on the Ethereum platform. Ethereum-based apps can then easily adapt to any new cryptocurrency or token that follows the ERC-20 standard.
When an intermediary is used to hold funds during a transaction, those funds are being held in escrow. This is usually a third party between the entity sending and the one receiving.
An Equity Token Offering (ETO) is a novel way of fundraising, which allows any kind of company – blockchain-based or not – to issue equity tokens on blockchain in a public or private placement. An ETO is a hybrid investment model which combines the advantages of an IPO, an ICO, and a VC round.
A faucet is usually a tool that issues free tokens and coins. In the past they were widespread. Nowadays they usually only exist to get tokens or coins for test networks.
A currency that has been established as a valid form of money, typically supported by a government regulation that declares it to be legal tender. The term fiat comes from the Latin and as a word used to describe a government decree, order or resolution. By definition, fiat money is a currency that does not have any intrinsic value as it is not backed by a physical commodity and is usually made of a worthless or low-value material (such as a small piece of paper). Even so, fiat money is widely accepted as a means of payment.
Finality is the assurance or guarantee that completed (cryptocurrency) transactions cannot be altered, reversed or canceled. The latency level of a blockchain will ultimately affect the chain's finality rate.
Finality is used to measure the amount of time one has to wait for a reasonable guarantee that crypto transactions executed on the blockchain will not be reversed or changed. In other words, they will not be lost (orphaned). Finality is an essential feature for ventures accepting cryptocurrencies because waiting endlessly on a blockchain network can have a high adverse effect for businesses or enterprises that accept cryptocurrencies as a means of payment. When creating a payment system, to be effective, it is crucial to have low latency.
Acronym for "Fear of Missing Out". In cryptospace, emotions often predominate. People suffer FOMO when they see a chart that is rapidly rising and then sell other assets without a clear mind in order to benefit from the steep rise as well. However, this rarely ends well.
A fork can happen variously:
when a blockchain diverges into two potential paths forward (eg. a situation that occurs when two or more blocks have the same block height)
Acronym for "Fear, Uncertainty and Doubt".
This strategy is used to spread fear among investors. Negative and often false news about a coin, a project, a company etc. is spread.
On the one hand, this technique is used by competitors to damage the image of an altcoin, ICO or company. On the other hand, speculators also make use of this strategy in order to influence the market and subsequently enter it more cheaply.
E.g. Jamie Dimon of JPMorgan spread FUD by saying Bitcoin was fraud.
A genesis block is the first block of a blockchain. Modern versions of Bitcoin number it as block 0, though very early versions counted it as block 1. The genesis block is almost always hardcoded into the software of the applications that utilize its block chain. It is a special case in that it does not reference a previous block, and for Bitcoin and almost all of its derivatives, it produces an unspendable subsidy.
A hard fork is a permanent divergence in the blockchain, which occurs when non-upgraded nodes can’t validate blocks created by upgraded nodes that follow newer consensus rules. Cryptocurrencies after hard fork share a transaction history up to a certain time and date. It can also be defined as protocol upgrade and only leads to a chain-split when the miners and node operators don't fully agree upon the new rules and build two factions (one decides to operate the old protocol version and the other operates the new protocol version). This is for example why Bitcoin Cash, Bitcoin Gold and Ethereum Classic exist.
A hardware wallet is a physical wallet. To be exact, this type of wallet is a special device that stores the user's private keys offline and securely.
A security element prevents the foreign reading of the private keys. Since the private keys stored on a hardware wallet will never touch the internet, they are a very secure variant against hacker attacks and external access to your cryptocurrencies.
A hash rate (also hash power, hash per second) is the measure of miner's performance (the speed at which a miner solves the mathematical problem). It is a unit representing the number of double SHA-256 computations performed in one second. Hash rate is used in every cryptocurrency that uses proof of work.
The hash per second is also used in calculations of the network's overall hash rate. The overall hash rate of the network is calculated based on the time between blocks, which is useful when measured over longer periods of time. For the current and historical values of Bitcoin hash rates, see this chart.
The term HODL originated from a typo in the Bitcointalk forum where a drunken user wrote "I AM HODLING" instead of "I AM HOLDING". HODL has since established himself as an insider in the crypto-scene.
The term is often used when the market capital of the entire market or of certain tokens or coins fall sharply. Those who are convinced of their investments should HODL and those who have only blindly followed the masses or invested without any research should perhaps rather sell.
A hot wallet is a cryptocurrency wallet which is or was connected to the internet. One of the advantages of hot wallets is that they can be used to make small everyday transactions. However, using it to keep larger amounts of coins is not recommended, as it is vulnerable to attacks. One of the most common types of hot wallets is software wallets and its subtypes. To achieve maximum security, it is recommended to use a hardware wallet, such as Trezor.
An Initial Coin Offering (ICO) is a process in which a project collects capital and in return issues tokens or coins. As a rule, these are so-called utility tokens. In contrast to the well-known IPO, an investor normally does not receive any shares in the company.
The Lightning Network is an off-chain, routed payment channel network built on top of the Bitcoin blockchain. The network consists of nodes connected by peer-to-peer channels. This allows low cost, near-instant payments to be trustlessly routed across the network via connected nodes. As a "Layer 2" payment protocol, transactions on the Lightning Network are underpinned by the security of the Bitcoin blockchain. Participants must complete on-chain transactions to open and close channels, but can make near-instant, free transactions within an open channel. As a result, the Lightning Network avoids the linear scalability problems faced by traditional proof-of-work blockchains.
Also referred to as a 51% attack or >50% attack. If the attacker controls more than half of the network hashrate, the previously-mentioned Alternative history attack has a probability of 100% to succeed. Since the attacker can generate blocks faster than the rest of the network, he can simply persevere with his private fork until it becomes longer than the branch built by the honest network, from whatever disadvantage.
No amount of confirmations can prevent this attack; however, waiting for confirmations does increase the aggregate resource cost of performing the attack, which could potentially make it unprofitable or delay it long enough for the circumstances to change or slower-acting synchronization methods to kick in. Bitcoin's security model relies on no single coalition of miners controlling more than half the mining power. A miner with more than 50% hash power is incentived to reduce their mining power and reframe from attacking in order for their mining equipment and bitcoin income to retain it's value.
In blockchains, a mempool is a collection of unconfirmed transactions held in the memory of network nodes.
In cryptography and computer science, a hash tree or Merkle tree is a tree in which every leaf node is labelled with the hash of a data block and every non-leaf node is labelled with the cryptographic hash of the labels of its child nodes. Hash trees allow efficient and secure verification of the contents of large data structures. Hash trees are a generalization of hash lists and hash chains.
Hash trees can be used to verify any kind of data stored, handled and transferred in and between computers. They can help ensure that data blocks received from other peers in a peer-to-peer network are received undamaged and unaltered, and even to check that the other peers do not lie and send fake blocks.
The concept of hash trees is named after Ralph Merkle who patented it in 1979.
Mining is the process of completing a new block of transactions and adding it to a blockchain. Miners are nodes in blockchain networks that select transactions from the mempool, validate that the transactions follow all protocol rules and include them in the created block.
Mining is typically a decentralized process. A successful valid block formation is a random event, the probability of which is proportional to the computing power of the miner's hardware. The reason why miners are motivated to commit their resources to mining is that they are rewarded by newly created cryptocurrency in each block they successfully create together with transaction fees from each transaction they add to valid block. Mining thus also constitutes the default way of decentralized cryptocurrency initial distribution. However, mining is not primarily process for creation of new cryptocurrency but serves as a mechanism by which is the security of the network decentralized.
Mining is a competition between miners (or typically mining pools). Every miner tries to solve a difficult mathematical problem based on a cryptographic hash algorithm. A solution (Proof-of-Work) is included in the found block and provides proof that the miner spent the necessary power or computing effort. SHA-256 hash function is used in the bitcoin mining process. Mining is the process of hashing the block header repeatedly, changing one parameter, until the resulting hash matches a specific target.
Miners join together with their resources in a mining pool. Together, they use their computing power to find the new block in the block chain and then confirm it (mining).
The probability of finding a block during solo mining is far lower, requires a lot of computing power and is very unlikely. As part of a mining pool, a block can be found more quickly because there are more people involved. However, the Block Reward is not paid out in full but distributed fairly, depending on how much computing power you have contributed.
Mining pools normally keep a small fee to cover operating costs.
Multisig is short for multisignature. It is a security mechanism that requires more than one person to authorize access to a system. Most cryptocurrencies support both single signature and multisig transactions. Multisig is useful for organizations that do not want a single individual in total control of its cryptocurrency wallet.
In cryptography, a nonce is an arbitrary number that can only be used once. It is similar in spirit to a nonce word, hence the name. It is often a random or pseudo-random number issued in an authentication protocol to ensure that old communications cannot be reused in replay attacks. They can also be useful as initialization vectors and in cryptographic hash functions.
Nonces are used in proof-of-work systems to vary the input to a cryptographic hash function so as to obtain a hash for a certain input that fulfills certain arbitrary conditions. In doing so, it becomes far more difficult to create a “desirable” hash than to verify it, shifting the burden of work onto one side of a transaction or system. For example, proof of work, using hash functions, was considered as a means to combat email spam by forcing email senders to find a hash value for the email (which included a timestamp to prevent pre-computation of useful hashes for later use) that had an arbitrary number of leading zeroes, by hashing the same input with a large number of nonce values until a “desirable” hash was obtained.
An oracle, in the context of blockchains and smart contracts, is an agent that finds and verifies real-world occurrences and submits this information to a blockchain to be used by smart contracts.
Smart contracts contain value and only unlock that value if certain pre-defined conditions are met. When a particular value is reached, the smart contract changes its state and executes the programmatically predefined algorithms, automatically triggering an event on the blockchain. The primary task of oracles is to provide these values to the smart contract in a secure and trusted manner.
Blockchains cannot access data outside their network. An oracle is a data feed – provided by third party service – designed for use in smart contracts on the blockchain. Oracles provide external data and trigger smart contract executions when pre-defined conditions meet. Such condition could be any data like weather temperature, successful payment, price fluctuations, etc.
Oracles are part of multi-signature contracts where for example the original trustees sign a contract for future release of funds only if certain conditions are met. Before any funds get released an oracle has to sign the smart contract as well.
Proof of stake (PoS) is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. In PoS-based cryptocurrencies, the creator of the next block is chosen via various combinations of random selection and wealth or age (i.e., the stake). In contrast, the algorithm of proof-of-work-based cryptocurrencies such as bitcoin uses mining; that is, the solving of computationally intensive puzzles to validate transactions and create new blocks.
Proof-of-stake currencies can be more energy efficient than currencies based on proof-of-work algorithms.
A proof of work is a piece of data which is difficult (costly, time-consuming) to produce but easy for others to verify and which satisfies certain requirements. Producing a proof of work can be a random process with low probability so that a lot of trial and error is required on average before a valid proof of work is generated. Bitcoin uses the Hashcash proof of work system.
One application of this idea is using Hashcash as a method to preventing email spam, requiring a proof of work on the email's contents (including the To address), on every email. Legitimate emails will be able to do the work to generate the proof easily (not much work is required for a single email), but mass spam emailers will have difficulty generating the required proofs (which would require huge computational resources).
Hashcash proofs of work are used in Bitcoin for block generation. In order for a block to be accepted by network participants, miners must complete a proof of work which covers all of the data in the block. The difficulty of this work is adjusted so as to limit the rate at which new blocks can be generated by the network to one every 10 minutes. Due to the very low probability of successful generation, this makes it unpredictable which worker computer in the network will be able to generate the next block.
For a block to be valid it must hash to a value less than the current target; this means that each block indicates that work has been done generating it. Each block contains the hash of the preceding block, thus each block has a chain of blocks that together contain a large amount of work. Changing a block (which can only be done by making a new block containing the same predecessor) requires regenerating all successors and redoing the work they contain. This protects the block chain from tampering.
The most widely used proof-of-work scheme is based on SHA-256 and was introduced as a part of Bitcoin. Some other hashing algorithms that are used for proof-of-work include Scrypt, Blake-256, CryptoNight, HEFTY1, Quark, SHA-3, scrypt-jane, scrypt-n, and combinations thereof.
Public-key cryptography (or asymmetric cryptography), is a cryptographic system that uses pairs of keys: public keys (which may be disseminated widely) and private keys (which are known only to the owner). The message sender uses the recipient's public key to encrypt a message. To decrypt the sender's message, only the recipient's private key may be used. In cryptocurrencies, this system is widely used as one of the means of securing transactions.
Satoshi Nakamoto is the original designer of Bitcoin and the inventor of the blockchain technology. Satoshi Nakamoto’s true identity is unknown and many believe the name is a pseudonym used by a person or team of persons who developed Bitcoin. Nakamoto has not been actively involved in Bitcoin since mid-2010.
Segregated Witness (SegWit) is an implemented protocol upgrade providing protection from transaction malleability and an increase of block capacity. SegWit defines a new structure called a witness that is committed to blocks separately from the transaction merkle tree. This structure contains data required to check transaction validity, but is not required to determine transaction effects. In particular, signatures and redeem scripts are moved into this new structure, which does not count towards the traditional 1 MB block size limit. Instead, a new weight parameter is defined, and blocks are allowed to have at most 4 million weight units (WU). A byte in the original 1 MB zone of the block weighs 4 WU, but a byte in a witness structure only weighs 1 WU, allowing blocks that are technically larger than 1 MB without a hardforking change.
SegWit was the last protocol change needed to make the Lightning network safe to deploy on the Bitcoin network.
A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible.
The aim of smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting. Various cryptocurrencies have implemented types of smart contracts.
With the present implementations, based on blockchains, “smart contract” is mostly used more specifically in the sense of general purpose computation that takes place on a blockchain or distributed ledger. In this interpretation, used for example by the Ethereum Foundation or IBM, a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.
A major limitation of smart contracts is that they are unable to communicate with resources external to the blockchain they are secured on. In practice, this means that smart contracts are not able to trigger based on real-life events. This is known as “the oracle problem”, after test oracles. Oracles provide external data and trigger smart contract executions when pre-defined conditions are met, providing connectivity to the outside world.
A soft fork is a change to the cryptocurrency protocol wherein only previously valid blocks and transactions are made invalid. Since old nodes will recognize the new blocks as valid, unlike a hard fork, a soft fork can still work with older versions of the protocol.
State channels enable highly scalable, trustless transactions of value and purely functional, easily verifiable Turing-complete smart contracts.
State channels offer a way to scale “off-chain” by only storing channel opening and closing information on the blockchain. Two parties deposit tokens into a channel when they open it and the sum of two deposits is the only amount of tokens that can be used within that channel. The state of the channel is the current balance of each party, co-signed by both parties. There can be multiple exchanges of state between the parties but only the last undisputed state becomes the final closing state of the channel. Each message in the channel carries an ever-increasing counter and the message with the highest counter value is considered to be the last state.
State channels come from the realization that, for most purposes, only the actors involved in a smart contract are required to know about it. Two or more actors lock a state and a contract on the blockchain and then perform signed transactions between themselves, off of the public network (or off-chain). The final state is then written to the blockchain. If the end result is disputed, the series of signed off-chain transactions can be uploaded to the blockchain for verification or dispute resolution.
A token is a digital asset that lives on a blockchain. The term token is often used in the meaning of user issued token, in opposition to native token that comes into existence along with the blockchain itself.
All blockchains have at least one token. This is a native token which is created along with the blockchain, is essential to its function and is often synonymous to it. For example Bitcoin has bitcoin (BTC) as its native token, while Ethereum has ether (ETH).
Some blockchains also support user asset issuance. Such assets are reffered to as a user tokens. For example Ethereum has a growing number of ERC-20 tokens issued by individual users and companies during ICOs or crowdsales.
It is quite common, that native tokens are reffered to as cryptocurrencies (or less formally as coins), while user tokens are called just tokens.
There is much work ongoing in this area and there are many different token standards popping up. Recently an International Token Standardization Association (ITSA) was formed and is promoting the development and implementation of a standardized approach for the identification, classification and analysis of blockchain- and DLT-based cryptographic tokens.
Wash trading is a method that is often used to artificially increase the trading volume of a cryptocurrency on an exchange in order to pretend an increasing interest of the respective coin.
In a wash trade, an investor sells a coin on a crypto exchange and then buys the same amount back - or vice versa. The amount remains in the same hands while the trading volume is manipulated.
The general process of wash trading falls under market manipulation and is strictly prohibited in the EU and under US law. In the crypto-sector, however, there are still no fixed regulations in this respect.
The Blockchain Transparency Institute e.g. analyses data on the exchanges and verifies whether they are free of wash trades.
A whale is a big player in the crypto-space that has a lot of capital. Since it has a very large proportion of one or more cryptocurrencies, e.g. Bitcoin, it can influence the price of these coins on a crypto exchange. This could be one of the reasons why the crypto market is volatile.
Whales can increase the price of a coin by investing a large amount in new coins, or they can sell a very high proportion of their cryptocurrencies and cause the coin price to drop.