Lexicon of terms

ASIC

This is a specifically designed chip. The aim is the fastest possible calculation of the SHA-256 with, at the same time, the lowest possible use of electricity. It’s mainly produced in China, where, for this reason, the majority of bitcoin mining takes places.

BIP32

BIP (Bitcoin Improvement Proposals) describe individual bitcoin improvements. BIP32 offers a big change regarding the backup process of the keys to bitcoin addresses. It eliminates the necessity of backing up new keys to newly generated addresses over and over again by introducing the seed. The keys are then generated from it. You therefore only need to back up the seed.

BIP39

It improves the seed in such way that only easy to remember words are used. It defines a list of 2000 English words, which are uniquely selected to avoid errors and facilitate remembering.

BIP44

It sets the order in which the new addresses are generated over the BIP32 protocol. It aims for compatibility between different types of wallets when generating addresses.

Bitcoin address

The bitcoin address is a unique identifier (a unique combination of symbols) that allows you to receive bitcoins. Here is an example of a bitcoin address: 1C2McBicWzrNDmDp3VtSaTjkyvbzpVRotE It could be also viewed as a combination of the account number and variable symbol. Many wallets generate a new address for every incoming payment to distinguish between the individual payments and to maintain the users’ payment history.

Block

The whole blockchain consists of individual blocks that are generated on average every 10 minutes. We can also understand it as a sheet of A4 paper on which there have been written all transactions carried out in the last 10 minutes. Each block carries a number, hash and a reference to the block that came immediately before it, which protects it from tampering.

Blockchain

The blockchain is a distributed ‘accounting record’ of all bitcoin transactions of all addresses. Blockchain is publicly accessible. It records transactions in the chronological order. The blockchain is shared by all bitcoin users. Every user therefore knows how many bitcoins are owned by any given bitcoin address. However, nobody knows who the owner of any particular address is.

BTC

BTC is the abbreviation for the bitcoin virtual currency.

BTX

This is the official abbreviation for the bitcoin currency used on the exchange.

FIAT currency

These are conventional currencies, issued by a central bank (dollars, euros, etc.).

Hash

The hash function is an algorithm that transfers input data into a ‘relatively’ small number. This function usually serves for quicker comparison of the chart or the data.

Hash rate (hashrate)

This is the measuring unit of the processing power within the bitcoin network. Its unit is ‘hash/s’ (the number of hashes per second).The average graphics card, for example, can generate 400 Mhash/s. The total hash rate of the bitcoin network was near 1 550 000 THash/s in August 2016.

HD wallet

The Hierarchical Deterministic (HD) is a type of wallet that derives addresses from a single starting point (the seed) which is generated during the wallet setting up process. All you have to do is to perform the backup using the 24 words which can then be used by users to generate again all their addresses with bitcoins.

Difficulty

It regulates the creation of new blocks in the network. If the processing power of the network doubled, so would the rate of creating new blocks, which would be undesirable. The network therefore regulates itself and increases the difficulty of finding a new block twice so that new blocks can be created approximately every 10 minutes.

Wallet

This is software that works with the bitcoin network. Its main purpose is to receive and send individual bitcoins.

Bitcoin pool

Given the vast number of miners in the bitcoin network, the probability of finding the correct hash over a block in time has been diminishing. So, the miners started to join their efforts, creating so called mining pools, where they, as one team, try to find the correct hash. If somebody manages to find new bitcoins, he shares them with others according to the amount of the computational capacity they provide to the pool.

The years 2030 and 2140

The vast majority of bitcoins will be already mined by 2030, but mining of the small amount of the remaining ones will continue until 2140. After that time new bitcoins will be no longer created and bitcoin miners will be only rewarded for collecting transaction fees. Each time a miner finds a new block (resolves it first), he receives a reward, including all transaction fees he confirmed.

Satoshi

The Satoshi is the smallest possible unit of the bitcoin currency. Each bitcoin can be divided up to 8 decimal places, therefore 1 satoshi = 0.00000001 BTC.

Scrypt

As a replacement for SHA-256, used by Bitcoin, Litecoin started to use so called Scrypt. It’s another method of calculating hash for transactions. Scrypt uses a lot of memory to compute hash, meaning manufacturing specialized ASIC hardware for it is much more difficult. 

Scrypt-N

Like Scrypt, Srypt-N too uses memory for calculating hash, but it adjusts it dynamically so that specialized hardware (ASIC) cannot be used for calculating this algorithm.

Seed

These are random phrases from which the bitcoin addresses are generated. The way modern wallets use them is, that, at the beginning, they generate 24 words for the user which the user then backs up and can then recover the wallet at any time.

SHA-256

SHA stands for Secure Hash Algorithm. This is an extended hash function which uses input data to create the output (imprint) of fixed length. The imprint is often called the checksum, fingerprint or just hash. Its most important feature is that even a slight change in the input results in a big change in the output (the imprint is very different). 

Mining

This is a process when, by confirming transactions across the bitcoin network, new bitcoins are created. So called bitcoin miners verify transactions of individual users and create new transaction blocks. The miner who first creates hash with the required difficulty over a block can then claim creating new bitcoins in the network. In this way bitcoin miners ‘mine’ new bitcoins including collecting transaction fees for the transactions they confirm. 

Volatility

Volatility tells us about the degree of variation in the currency rate. The bitcoin is highly volatile, it can easily drop or gain within a single week $100 of its value.

Xprivate

Like xpub, xprivate too is the main hash generated from the seed. Unlike xpub, it doesn’t generate addresses, but private keys to addresses, which are generated by xpub. This xprivate is usually very effectively protected, making its misuse literally impossible.

Xpub

This is the main hash that is generated from the seed. Individual bitcoin addresses are generated from xpub.

X11

This is a chain hashing algorithm used by DASH. It’s ASIC-resistant but doesn’t put as much strain on the graphics cards as Scrypt-N (it doesn’t overheat the card so much).

21 000 000 BTC

Why only 21 million bitcoins can ever be mined?

When the bitcoin network was launched, the reward started at 50 BTC and halves every 4 years. Towards the end of 2012, the bitcoin emission dropped to 25 BTC/10 minutes, in another 4 years, in 2016, it dropped again to 12.5 BTC/10 minutes and it will continue to drop until there are no more units to be divided. (the year 2140)