Introduction to Bitcoin
In this article, we will be looking at the details that make Bitcoin what it is and why it has become so popular in the world.
But first, let’s talk a little bit about cryptocurrency.
Bitcoin! Cryptocurrency!! You will agree with me that these words have become very popular in today’s world. Have you ever wondered why? It’s often said that change is the only constant thing, that is true because the world has constantly been changing on a daily basis. There’s a need to accumulate as much information as possible regarding these things. Cryptocurrency, particularly Bitcoin, which is regarded as the future of the world.
What is a Cryptocurrency?
There are a couple of definitions to what a cryptocurrency actually is. But the one I like most and probably the most comprehensive is the definition from investopedia; a crypto currency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Key features of a cryptocurrency
- A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
- Experts believe that blockchain and related technology will disrupt many industries, including finance and law.
- The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure.
- The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.
Cryptocurrencies are underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. The word “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions. Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Bitcoin is the most popular and valuable cryptocurrency.
What is Bitcoin?
Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
Before we dive further into bitcoin, let’s take a look at some of the terminologies used in bitcoin as they would come in handy for a better understanding of this enlightening journey.
Terminologies used in Bitcoin
The world of Bitcoin can be a bit overwhelming at times. Below are words associated with Bitcoin and cryptocurrency terms. Some of them will be familiar to you, while others might be new.
- Address: a Bitcoin address is used to send and receive Bitcoin transactions. The address is made up of a sequence of letters (both upper and lower case) and numbers, but can also be represented as a QR Code [see below].
- Altcoin: the name for cryptocurrencies that are alternatives to Bitcoin. Litecoin is an example of an altcoin.
- ASIC: the acronym for Application Specific Integrated Circuit, which is a chip meant to do one thing. In Bitcoin’s case – they are used to process hashing problems to mine Bitcoins.
- Bitcoin ATM: like a regular ATM, Bitcoin ATMs provide people with Bitcoins after depositing regular currencies.
- Bitcoin Whitepaper: written by Satoshi Nakamoto in 2008, it describes the original plan and protocol for Bitcoin.
- Blockchain: this is a list of every block that has been mined since Bitcoin began. Each block has a reference to a block before it, which is why they are “chained” together forming a blockchain. All Bitcoin transactions are displayed within blocks in the Blockchain in order to provide transaction transparency and an independently verifiable distributed transaction ledger.
- BPI: The Bitcoin Price Index, showing the price of Bitcoin against a number of other crypto and fiat currencies.
- BIP: Bitcoin Improvement Proposal: the formal proposals that anyone can suggest to upgrade the network. There must be a consensus around a BIP to push the changes through.
- BTC: the shorthand name for Bitcoin, and also the unit for 1 Bitcoin.
- Cold Storage: a security measure to store Bitcoin private keys offline. It could be a paper wallet [see below], USB stick or hardware wallet.
- Confirmation: hashing a Bitcoin transaction successfully, which provides a reference to it on the distributed ledger/Blockchain.
- Difficulty: a number defining how difficult it is to hash a new block. As computing power for hashing increases, the difficulty level increases.
- Dogecoin: a cryptocurrency featuring a Shiba Inu dog from the famous “Doge” internet meme. This is one of the top altcoins.
- Exchange: a platform to exchange currencies. Bitcoin exchanges are used to convert fiat currencies into Bitcoin and vice versa, or to exchange Bitcoin with other cryptocurrencies.
- Faucet: a resource that provides free Bitcoins, usually in the form of hourly or daily deposits of several Satoshis [see below].
- Fiat Currency: traditional currencies such as Dollars or Pounds that are backed by a government and issued by a central bank but have no intrinsic value.
- Genesis Block: the very first block in the Blockchain.
- Gigahashes/sec: The amount of hashes possible every second, measured in billions of hashes.
- Hash: Hashing is an action of performing a hash function to output data. Used in order to confirm and process Bitcoin transactions.
- Hashrate: the level of performance of mining computer hardware expressed in hashes/second.
- Hodl: holding onto Bitcoin rather than selling even when times are rough. Coined by a reddit user posting under the influence of alcohol.
- Input: the input side of a given Bitcoin transaction is the side where the Bitcoin payment is coming from. Usually, this is expressed with a Bitcoin address.
- Liberty Reserve: a digital currency processor located in Costa Rica that was shut down and seized by the United States government after it was found to be laundering money.
- Lightning Network (LN): a second layer built as an independent network that allows users to send and receive micro payments quickly without paying high fees. At the end of a given period, those payments are settled on the blockchain.
- mBTC: 1 thousandth of a Bitcoin (0.001 BTC).
- Microtransaction: the ability to pay for things in very small sums thanks to the fact that Bitcoin may be extended to 8 decimal places. Microtransactions are especially important to Bitcoin casinos by providing players the ability to deposit and gamble fractions of Bitcoins.
- Mining: the act of minting or releasing new Bitcoins using computer hardware.
- Mixing Service: the act of combining Bitcoins from different people by switching their addresses. This can help improve privacy and anonymity, but also can be used for money laundering.
- Mt. Gox: one of the first Bitcoin exchanges that began liquidating after more than 850,000 of its users’ Bitcoins were lost or stolen – an amount equal to more than $450,000,000 at the time.
- Namecoin: an altcoin allowing people to use the currency to purchase domain names.
- Node: a computer connected to the Bitcoin network that runs the software necessary to broadcast, relay and independently verify transactions.
- Output: the output side of a given Bitcoin transaction is the side where the Bitcoin payment is being sent to. Usually, this is expressed with a Bitcoin address.
- Paper Wallet: paper versions of Bitcoins that are meant to be more secure due to being offline.
- Pre-mining: mining of a cryptocurrency before it is actually public and live, generally performed by its creator.
- Private Key: an alphanumeric string of characters used to sign messages and transactions on cryptocurrency networks. It should be kept private because whomever has the private key tacitly owns the cryptocurrency associated with its public address. This, in connection with the public key, is used for digital communication and completing Bitcoin transactions.
- Proof of work (PoW): Proof of work (PoW) is a form of cryptographic proof in which one party (the prover) proves to others (the verifiers) that a certain amount of a specific computational effort has been expended
- Public Key: used in connection with the private key, and also known as the Bitcoin address.
- QR Code: like a barcode on products, the QR Code contains a pattern that is meant to be scanned by cameras and can be used to directly connect to a Bitcoin address.
- Reward: when mining for new Bitcoins, the miner may claim new coins in a new block as a reward for helping to add new Bitcoins into circulation.
- Satoshi: a Bitcoin “cent”, the smallest Bitcoin denomination. One Bitcoin is equal to 100 million Satoshis
- Satoshi Nakamoto: the creator of Bitcoin and the author of the original Bitcoin whitepaper and code. His real identity is unknown to the world.
- SegWit : or Segregated Witness, is a malleability fix that allows users to segregate the transaction signature, keeping it off a block. This frees up space on the block to record more transactions and enables compatibility with the Lightning Network.
- Signature : a series of bytes that is a digital signature to connect someone to their public key in performing Bitcoin transactions.
- Silk Road: an underground website, as part of the “dark web”, that was essentially the black market online. One could purchase illegal drugs, organs or hire assassins online. The site used cryptocurrencies such as Bitcoin and was shut down in 2013 by the FBI.
- Stale: when a Bitcoin clock is successfully hashed, the act of hashing it becomes ‘stale’, which means that no other miner may attempt to hash it.
- Testnet: an alternative to the Blockchain, used for testing, as the name suggests.
- TOR: a program used by internet users for anonymity online. Also used many times by those attempting to access the Silk Road.
- uBTC: the unit for a microbitcoin (0.000001 BTC).
- Vanity Address: a Bitcoin address that is personalized, like a vanity license plate.
- Wallet: a method for storing Bitcoins, and is generally the first step for anyone looking to buy or own Bitcoins. There are various forms of wallets – online, offline (software), hardware and paper – with varying levels of security.
- Zero-Confirmation Transaction: during a Bitcoin transaction, the seller may choose to send the product before the transaction has received confirmations. This is generally a show of good faith but also runs the risk of using the Bitcoins twice.
So far, we understand what Cryptocurrency and Bitcoin are, how they relate to each other and most importantly, the terminologies associated with them. This article will definitely come in handy as we go through this exciting journey of learning about Bitcoin together, particularly the Terminologies in Bitcoin. There’s more to come as we will be looking at a brief history of bitcoin in our next article. Did you learn something new? Are you as excited as I am? Leave a comment below.