Bitcoin Exposed: Today's Complete Guide to Tomorrow's Currency (12 page)

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Appendix C - Bitcoin Terminology

(Source:
http://www.Bitcoin.org
: With additional explanation by the author in parentheses.)

Address

A Bitcoin address is
like a physical address or an email
. It is the only information you need to provide for someone to pay you with Bitcoin. (We can have and should have for security reasons, multiple Bitcoin addresses per wallet.)

Block Chain

The block chain is a
public record of all Bitcoin transactions
, in chronological order. The block chain is shared between all Bitcoin users. It is used to verify the balance of Bitcoin addresses and to prevent
double spending
. (The block chain cleverly ties together current and future transactions with pieces of code that must “fit” together like a puzzle, verifying that they belong to the real Bitcoin network.)

Block

A block is a
record in the block chain that contains and confirms many waiting transactions
. Roughly every 10 minutes on average, a new block including transactions is appended to the
block chain
through
mining
.

BTC

BTC is the common unit of Bitcoin currency. It can be used similar to USD for US dollar instead of B⃦ or $.

Confirmation

Confirmation means that a transaction has been
verified by the network and is highly unlikely to be reversed
. One confirmation is pretty secure. Though for larger amounts (ex. 1000 $USD and above ), one can wait for a transaction to have more confirmations - 6 is a frequently chosen number. Each new confirmation decreases the risk of a reversal exponentially. (Confirmations can take about 10 minutes when we store our wallet offline, but can be instant if they are stored online. The online wallets are  part of the verification process continuously so they have instant confirmation essentially.)

Cryptography

Cryptography is the branch of mathematics that lets us create
mathematical proofs that provide high levels of security
. Online commerce and banking already uses cryptography. In the case of Bitcoin, cryptography is used to make it impossible for anybody to spend funds from another user's wallet or to corrupt the
block chain
. It can also be used to encrypt a wallet, so that it cannot be used without a password. (Bitcoin has already had an error in the code, and there are possibilities for more errors when new versions are released. This is not a perfect network, nor are there any.)

Double Spend

If a malicious user tries to
send their bitcoins to two different recipients at the same time
, this is double spending. Bitcoin
mining
and the
block chain
are there to create a consensus on the network about which of the two transactions will win.

Hash Rate

The hash rate is the
measuring unit of the processing power of the Bitcoin network
. The Bitcoin network must make intensive mathematical operations for security purposes. When the network reaches a hash rate of 10 TH/s, it means it can make ten trillion calculations per second.

Mining

Bitcoin mining is the process of
making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions
and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining and it is not an easy way to make money.

P2P

Peer to peer refers to
systems that work like an organized collective
by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting transactions of other users. And crucially, no bank is required as a third party.

Private Key

A private key is a
secret piece of data that proves your right to spends Bitcoin from a specific Bitcoin address
through a cryptographic
signature
. Each
Bitcoin address
has its own unique private key. Your private keys are stored in your computer if you use a software wallet while they are stored on some remote servers if you use a web wallet. Private keys must never be revealed as they allow you to spend bitcoins for their respective Bitcoin addresses.

Signature

A
cryptographic
signature is
a mathematical mechanism that allows someone to prove ownership
. In the case of Bitcoin, a
Bitcoin address
and its
private key
are linked by some mathematical magic. When your Bitcoin software signs a transaction with the appropriate private key, the whole network can see that the signature matches the Bitcoin address. However, there is no way for the world to guess your private key to steal your hard-earned bitcoins.

Wallet

A Bitcoin wallet is loosely
the equivalent of a physical wallet on the Bitcoin network
. The wallet actually contains your
private keys
which allow you to spend bitcoins allocated to your
Bitcoin addresses
in the
block chain
. Each Bitcoin wallet can show you the total balance of all Bitcoin addresses it contains and lets you pay a specific amount to a specific person, just like a real wallet. This is different to credit cards where you are charged by the merchant.