Blockchain Jargon for Newbies

This article is for anyone who wants to learn about Blockchain and Bitcoin yet has no clue where to start and what some of those words mean.

Block-chain

Blockchain — Blockchain is identified as a technology which was initially created for digital currency — Bitcoin. The specialty of this technology is that it allows data to be distributed and freely available, yet, at the same time it is powerful enough to prevent data from being copied or pirated. The name blockchain has arisen due to a large number of transactions being available as a chain of blocks. Block is made up of a block header and a number of transactions (Example: 500 trans). Each of the blocks contains a hash of the previous block and it contains up to the very first block of the blockchain.

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
Don & Alex Tapscott, authors Blockchain Revolution (2016)

This technology is capable to impact on many industries though it started with crypto-currency. It’s stated that it would provide space for creating Smart Contracts starting from Copy Rights to Asset Title Registration, Governance, Internet Of Things, Data Management — including Anti Money Laundering and Know-Your-Customer systems to so many more streams.

When it comes to the blockchain architecture it is basically a distributed ledger system made by a peer to peer network that can record transactions, verify and validate transactions via digital signatures — protocols, public and private keys. The design of blockchain technology is such that a network of computers jointly manage the blockchain and cannot be controlled by a single entity resulting it to be a decentralized technology. Refer ‘ Ledger’ for more elaborated description.

“Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a merkle tree root hash).” Wikipedia

Bitcoin — Bitcoin is only one derivative or branch of block-chain. It is a form of digital currency and belongs to the category of crypto-currency.

Bitcoin market performance (https://coinmarketcap.com/currencies/bitcoin/)

It uses the blockchain technology to carry out transactions. Hence, there is no central administration body nor are there any intermediaries required to exchange bitcoins in the Bitcoin network. Bitcoin can be traded and exchanged with other currencies. Although certain financial bodies and governing entities are yet to accept Bitcoin as a currency. Bitcoin.org was set up in 2008. Yet, it is recorded that the bitcoin software as an open-source code was released in January 2009.

There are several other bitcoin types derived from the Bitcoin core as this is an open source project. These are known as ‘ forks’. Few types of Bitcoin forks are Bitcoin Cash, Bitcoin XT, Bitcoin Unlimited, and Parity Bitcoin.

Bitcoin

Satoshi Nakamoto — This is not a tech term yet you would hear this name quite often. Satoshi Nakamoto is the creator of Bitcoin and authored the Bitcoin whitepaper who is unidentified and stayed anonymous. It has not been identified whether it is one individual or a group of individuals. Satoshi Nakamoto may be an anagram or some encrypted text. It is said that Satoshi Nakamoto as an individual is worth $99.4 billion and would be the 44th richest person in the world.

You will be able to find the research which he/she/ they authored by clicking on this link: Bitcoin: A Peer-to-Peer Electronic Cash System.

Ledger — Ledger is an accounting term which fundamentally states that there is always a debit entry for a credit entry and vice versa, balance brought forward, balance carried down, account type and etc. Blockchains uses a distributed ledger system to maintain and facilitate its transactions.

“… a distributed ledger is a database held and updated independently by each participant (or node) in a large network. The distribution is unique: records are not communicated to various nodes by a central authority, but are instead independently constructed and held by every node. That is, every single node on the network processes every transaction, coming to its own conclusions and then voting on those conclusions to make certain the majority agree with the conclusions. Once there is this consensus, the distributed ledger has been updated, and all nodes maintain their own identical copy of the ledger.” Coindesk

Thus because of the distributed ledger system, it makes it harder for anyone to manipulate as there are several nodes maintaining a transaction record.

Mining — Mining is as popular as investing in Bitcoins. This is because Bitcoins are rewarded for mining entities.

Mining keeps records of the transactions occurring and eventually group them. It shall then be broadcasted to the whole network. Mining takes a lot of processing power. When a new block is created both vertical and horizontal verification happens via broadcasting to verify and agree similar to a voting system. The data of the majority will be accepted. Hence, this would prevent manipulation of the blocks.

All transactions are broadcast to the network and usually begin to be confirmed within 10–20 minutes, through a process called mining.

Cryptography — This can be referred to as converting plain text to unreadable text which could be decrypted via a key using an algorithm for security purposes.

Crypto-currency — A digital medium of exchange which constitutes high-security mechanisms via cryptography to secure transactions and prevent/ minimize fraudulent actions.

FinTech — FinTech is the new technologies, concepts, processes, and applications moving the Financial industry to digitize and compete the traditional models with innovation.

Genesis Block — Genesis block is the first block of a blockchain. It is currently known as Block 0 but previous versions identified it as Block 1.

Hashcash — Hashcash was introduced by Adam Back in 1997 which was similar to the protocol introduced by Dwork and Naor known as ‘ Pricing Function’. It was used as a system to limit spams and denial-of-service attacks. It gained popularity once again for being used in Bitcoin’s mining algorithm.

A hashcash stamp constitutes a proof of work which takes a parameterizable amount of work to compute for the sender.

Bitcoin uses the SHA256 algorithm which has 256 bits, which is a bit similar to Hashcash.

Merkle tree — Merkle tree defines the structure which the blockchain data is organized for secure verification of data. This is defined as a binary tree of all hash lists in a block derived from linking nodes to create one node. This is an integral part of a blockchain and is extremely useful for blockchain users and bitcoin miners.

“Merkle trees are created by repeatedly hashing pairs of nodes until there is only one hash left (this hash is called the Root Hash, or the Merkle Root).” https://hackernoon.com/merkle-trees-181cb4bc30b4

The advantage is that it takes up only less space while the computations are easier, hence faster.

This is also used for Simplified Payment Verification a mechanism to verify if certain transactions are included in a block without checking the whole block.

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Blockchain is not only an interesting concept anymore. It is a technology which would evolve to impact many more industries in the future. It would be imperative for all industries to be updated on what blockchain would offer for effective usage of this concept/ technology.

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Sources

  • BTCMANAGER | Bitcoin, Blockchain & Cryptocurrency News
  • Bitcoin – Wikipedia
  • Bitcoin’s mysterious inventor is now one of the world’s 50 richest people
  • What is Blockchain Technology? A Step-by-Step Guide For Beginners
  • What is a Distributed Ledger? – CoinDesk
  • Merkle Trees
  • How does Bitcoin work? – Bitcoin
  • Bitcoin Wiki


Blockchain Jargon for Newbies was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.