Our glossary offers you an overview and detailed explanations of all blockchain-specific technical terms.
In proof-of-work-based (PoW) blockchains (see “Proof of work (PoW)”), a potential attack, known as a 51% attack, may occur if over 51% of the network’s hashrate is controlled by a malicious entity. This type of attack makes double-spending possible for example, therefore it is very important for the hashrate to be high so as to make these attacks expensive. In addition, the hashrate should be decentralised to reduce the risks of an entity accumulating over 51% of the hashrate.
An airdrop involves receiving certain tokens in a wallet without any costs. There are three main types of airdrops. The first kind involves a marketing campaign to distribute free tokens to many wallets to increase awareness about the specific project or token. The second type is an airdrop for holders of certain tokens or for those who perform certain tasks as a reward. Finally, after a hard fork (see “Hard fork”) happens as in bitcoin (see “Bitcoin”) for example, holders of the original token receive an equivalent amount of the forked tokens automatically.
This term is used to describe tokens or cryptocurrencies that are not bitcoin (see “Bitcoin”). Since bitcoin was the first and original cryptocurrency, the rest are described as altcoins.
A blockchain designed for a specific use case such as security tokens and asset tokenisation, for example. Through the use of frameworks that facilitate the launch of a new blockchain, application-specific blockchains are becoming possible; starting a new blockchain used to be a complex and time-consuming process, therefore general purpose blockchains such as Ethereum were used to write smart contracts and dApps.
Application-specific integrated circuit (ASIC) is a type of hardware that has been optimised for a particular task (see “ASIC”). It refers to certain proof-of-work-based (PoW) cryptocurrencies (see “Proof of work (PoW)”) for which there is no advantage in using ASICs for mining compared to traditional GPU mining. ASICs in the case of PoW mining are designed to perform this task very efficiently and in the case of bitcoin mining for example, there is an advantage in using ASICs, therefore bitcoin is not considered ASIC-resistant.
Application-specific integrated circuit (ASIC) is a type of hardware that has been optimised for a particular task. In the case of bitcoin’s proof-of-work (PoW) system (see “Proof of work (PoW)”), mining ASICs are specialised and efficient in the mechanism that solves the PoW in order to increase the chances of producing new blocks and earning the block rewards. The advantage of ASICs is that they increase the hashrate (see “Hashrate”) and thus make the network more secure. However, it also increases the centralisation in several large mining farms (see “Mining farm”).
This is the percentage of the bitcoin market capitalisation compared to the rest of the combined market capitalisation of all altcoins (see “Altcoins”). Dominance was over 95% in 2013, then it decreased to a minimum of around 32% in January 2018 and in Q4 2019, it increased again with a value of over 65%.
Transactions are grouped into blocks by miners (see “Mining”) in proof-of-work (PoW) blockchains (see “Proof of work (PoW)”) or validators in proof-of-stake (PoS) blockchains (see “Proof of stake (PoS)”). The miner or validator (see “Miner”) who proposes a block receives a certain amount of block rewards (see “Block reward”). The contents of blocks are also hashed and all the blocks are linked by reference to the previous block contained in the block header. In this way, if a previous block is tampered with and modified in a PoW blockchain, the block header would change, would no longer match in the chain of blocks and therefore be quickly identified. In the case of PoS blockchains in which blocks are final, there is a time frame known as the unbonding period to prevent this type of attack known as a long-range attack. This is because in PoS systems, it would be easier to modify all the subsequent block headers after altering an old block, since there is no intensive proof of work involved. As an example, it takes around 10 minutes in bitcoin to solve the mathematical puzzle in order to find a new block.
Blockchain is a distributed ledger technology consisting of a decentralised and secure network of nodes that share and update the same transaction history and feature a security mechanism that makes it extremely hard to modify a previous block without being noticed or without any double-spending. This means that it can perform transactions without the need for an intermediary. Blockchains can be public in which anyone can participate, permissioned in which only a certain amount of whitelisted participants are allowed to take part, or private which are controlled by a single entity – in this case, they are very similar to a traditional database.
Bitcoin is the largest cryptocurrency by market capitalisation and it was also the first one introduced with the first block mined on 3 January 2009. Bitcoin was launched by an anonymous person or group called Satoshi Nakamoto. It is based on a proof-of-work (PoW) system (see “Proof of work (PoW)”) and the large hashrate (see “Hashrate”) which makes it the most secure current blockchain network. In addition, institutional trading products such as futures and options have been introduced and also custody solutions with insurance.
A contentious hard fork (see “Hard fork”) of Bitcoin (see “Bitcoin”) due to disagreements in the community about the focus of bitcoin as a store of value or means of payment. The hard fork happened in August 2017, increasing the block size to 8 MB and removing the segregated witness (see “Segregated witness (SegWit)”) which was a planned update on the Bitcoin blockchain to remove transaction signature data from Bitcoin transactions. This allowed more transactions to be included per block. As a result, Bitcoin Cash was the bitcoin network before SegWit to keep all the data on-chain and also include the increase of the block size for improved scalability.
Block explorers provide detailed information about blockchain networks such as addresses, transactions and other data and statistics. Block explorers are blockchain-specific, meaning they are designed to provide data only about a certain blockchain network. Block explorers are useful to check whether a transaction has been confirmed and also to check the number of confirmations (see “Confirmations”). They also allow specific addresses and the transaction history to be checked.
This represents the total amount of blocks confirmed in a certain blockchain network from the initial or genesis block. Block height is useful for checking and comparing against different copies of a blockchain to determine whether they are updated to the latest version. In proof-of-work (PoW) systems (see “Proof of work (PoW)”), the longest chain is considered the valid one – the block height is used to determine the longest chain.
In proof-of-work (PoW) networks (see “Proof of work (PoW)”), block rewards (see “Block reward”) are given to miners (see “Mining”) if they successfully mine blocks, and they consist of both transaction fee rewards and newly generated tokens. In proof-of-stake (PoS) networks (see “Proof of stake (PoS)”), token holders can participate in the consensus and block proposal processes by delegating their staking tokens to certain validators. Therefore, in PoS networks, token holders can earn block rewards similar to miners in PoW networks, and validators are equivalent to mining pools taking a percentage of the rewards as commission.
Mechanism used on certain blockchains in order to decrease the token supply permanently and therefore positively affect the price. For example, Binance carries out quarterly burning events of its BNB tokens.
Bitcoin improvement proposals (BIPs)
Bitcoin improvement proposals (BIPs) are used by anyone for suggesting potential changes to the bitcoin’s code. Nonetheless, the final changes to the codebase must be approved by the bitcoin core developers. Other blockchains such as Ethereum use a similar model of Ethereum improvement proposals (EIPs). There are three types of BIPs: standards track BIPs which involve changes to the bitcoin network protocol, block or transaction validation, informational BIPs which refer to guidelines or design issues, and process BIPs which suggest some modification to certain processes.
This will be the central and coordinating chain of Ethereum 2.0 (see “Ethereum 2.0”). The key functions of the beacon chain are to manage the proof-of-stake (PoS) protocol (see “Proof of stake (PoS)”) for itself and also for all the shard chains (see “Sharding”). It organises validators into committees to vote on proposed blocks, applies consensus rules, rewards and applies penalties to validators. In addition, it will be an anchor point on which shards register their states to facilitate cross-shard transactions. The beacon chain will be a PoS blockchain with a staking token called ETH2 (see “ETH2”); from early 2020, a deposit contract address will be added to Ethereum 1.0 (see “Ethereum”) in order to lock ETH (see “ETH”) and receive ETH2, which will be locked until the full launch of Ethereum 2.0.
In the context of blockchain, this refers to the ability of reaching a consensus, even if a certain amount of nodes are offline or malicious, for example. This is an important property to improve the security of blockchain networks. Usually, consensus mechanisms that are byzantine-fault-tolerant would halt the network if one-third of the participating nodes in the consensus are offline. If more than two-thirds of the nodes are malicious, the integrity of the data could not be guaranteed and a hard fork (see “Hard fork”) would be required.
The process of selecting a validator and putting tokens at stake (at risk) to contribute to the security of a proof-of-stake (PoS) network (see “Proof of stake (PoS”) and therefore receive a percentage of the block and transaction fee rewards (see “Block reward”).
A digital currency which is secured by cryptography (see “Cryptography”) against counterfeiting or double-spending and is not backed by a central bank. Rules regarding monetary policy such as inflation are included on the protocol. In the case of bitcoin, for example, the supply production is reduced by half around every four years, thus making it deflationary. Cryptocurrencies cannot be confiscated or affected by government interference or manipulation, and transactions are irreversible. The name cryptocurrency originates from the encryption techniques used to secure transactions and prevent fraud. Distributed ledger technologies (DLTs) (see “Distributed ledger technologies (DLTs)”) such as blockchains enable the creation of cryptocurrencies by ensuring the integrity of the ledger containing the transaction history.
In order to access cryptocurrencies or tokens, a private key (see “Private key”) is essential. In fact, ownership of a private key implies ownership of the tokens or cryptocurrencies linked to a specific private key. Therefore, secure storage and custody of private keys is of major importance in particular for institutional investors holding large amounts of crypto assets. While there are different custody options, the preferred and safest method is cold storage custody (see “Cold storage”) which keeps private keys offline and safe from hacking at all times.
One of the main three types of blockchain, the other two are private and public blockchains. Consortium or permissioned blockchains involve a number of whitelisted nodes that can participate in the network. Consortium blockchains are less decentralised than public blockchains in which anyone can participate, but more decentralised than private blockchains, which are controlled by a single entity.
Crypto exchanges facilitate the trading of crypto assets and are classified in several types. The majority of crypto exchanges are centralised, meaning that users are not in control of their funds, and actual trading and order book is off-chain for speed while deposits and withdrawals involve blockchain transactions. Decentralised exchanges (DEX) (see “Decentralised exchange (DEX)”) are safer since they involve peer-to-peer transactions and users are always in control of their funds, but the liquidity of DEXs is significantly lower than in centralised exchanges. In addition, some crypto exchanges offer only crypto-to-crypto trading pairs, while others provide a fiat gateway to trade fiat and crypto. Finally, there are spot exchanges and also derivative crypto exchanges offering products such as bitcoin futures and options.
A type of crypto asset custody that involves always keeping the private keys (see “Private key”) offline for safety against hacking. This type of custody involves manual confirmation before signing a transaction to ensure the amount and the receiving address are correct. Hardware wallets are used for cold storage (see “Wallet”).
A company that offers custody services for reducing the complexity of safely securing different types of crypto assets. Some leading custodians provide large insurance cover for clients. Custodians are different from products like the ledger vault which are targeted at self-custody.
In proof-of-work-based (PoW) blockchains (see “Proof of work (PoW)”), confirmations refer to the number of blocks confirmed after a certain transaction, which provide increased certainty that the transaction is on the valid chain. This is because the finality in PoW chains is probabilistic. In proof-of-stake (PoS) networks (see “Proof of stake (PoS)”) that provide instant finality, there are no confirmations, since each produced block is final.
This refers to the overall crypto asset class, covering cryptocurrencies, security, utility and payment tokens and also tokenised traditional assets through tokens.
Since blockchains are composed of a distributed network of nodes storing the history of transactions, it is necessary for agreement or consensus to be reached about the correct version of the record of transactions. In proof-of-work (PoW) blockchains (see “Proof of work (PoW)”) like bitcoin, the consensus is the chain with the most work done (computing power). This implies that network participants in bitcoin agree that the longest chain is the valid one in case of forks. In proof-of-stake-based (PoS) blockchains (see “Proof of stake (PoS)”), in which blocks are final, there are some algorithms that ensure consensus among validators before each block is confirmed.
These are blocks created by miners (see “Mining”) through the proof-of-work (PoW) mechanism (see “Proof of work (PoW)”); after the candidate block is broadcast to the network and verified, the miners receive the corresponding block rewards.
This is the field of study related to securing and ensuring the privacy of information, which is achieved through mathematical and computational models to facilitate the encryption and decryption of certain data. For example, cryptography is used in bitcoin for the public-private key pairs and also with the function SHA-256 (the most used hashing algorithm in blockchains) involved in the proof-of-work (PoW) process (see “Proof of work (PoW)”).
Decentralised application (dApp)
Decentralised applications (dApps) run on a distributed network of computers instead of a single centralised computer. For example, in Ethereum, the code of dApps is securely stored and immutable in the blockchain similarly to the transaction history, and these dApps can be activated and are processed by the Ethereum virtual machine (EVM) (see “Ethereum virtual machine (EVM)”), which is run by all nodes on the Ethereum network. Scalability is a key limitation of dApps in Ethereum due to the capacity of the EVM. However, with the launch of Ethereum 2.0 (see “Ethereum 2.0”), on-chain scaling solutions such as sharding (see “Sharding”) and off-chain improvements through state channels (see “State channels”), the scalability of dApps should become sufficient for mainstream usage such as traditional apps.
Decentralised exchange (DEX)
A decentralised exchange (DEX) is a type of crypto exchange in which users trade directly peer to peer with each other without a central intermediary and keep custody of their assets at all times. However, the liquidity of DEXs is significantly lower than in centralised crypto exchanges.
This is the process of assigning an amount of staking tokens to a validator in proof-of-stake (PoS) blockchains (see “Proof of stake (PoS)”). Through delegation, holders of staking tokens can participate in the consensus and security of the networks and thus receive staking rewards. Nonetheless, they must do proper due diligence when choosing validators (see “Validator”) because if their chosen validator misbehaves, they could lose a percentage of their staked tokens. In addition, holders of delegated staking tokens can participate in governance and redelegate their tokens to other validators.
This refers to systems in which there is no central authority that holds control, but rather a wide distribution of participants reducing the risk of a system failure due to a single entity. For example, blockchains are decentralised because there are many nodes worldwide with a copy of the network’s history and therefore no single point of failure.
Distributed ledger technologies (DLTs)
Distributed ledger technologies (DLTs) are technologies based on a decentralised network of nodes that store and share data, and they can be permissionless, permissioned or private. Blockchains are part of DLTs, but there are some non-blockchain DLTs that are also emerging such as directed acyclic graphs (DAGs) (see “Directed acyclic graph (DAG)”).
In proof-of-stake (PoS) systems (see “Proof of stake (PoS)”), delegators are staking token holders that select a validator (see “Validator”), or a group of validators, and lock their tokens with them to participate in the consensus and block production processes and receive staking rewards. Delegators can switch to different validators or undelegate their tokens after meeting certain conditions, such as a minimum locking time of several weeks after requesting an undelegation, for example.
Directed acyclic graph (DAG)
Directed acyclic graphs (DAGs) are a type of distributed ledger technology (DLT) (see “Distributed ledger technologies (DLTs)”) and an alternative to blockchains (see “Blockchain”). While blockchains are a linked chain of blocks, DAGs involve a tree structure and are useful for microtransactions. By accepting different forks and orphan blocks, DAGs are able to achieve a higher rate of transactions per second than blockchains. However, DAGs are considered to be less secure than blockchains and pure decentralisation has not yet been obtained in DAGs.
Decentralised autonomous organisation (DAO)
A decentralised autonomous organisation (DAO) is a digital organisation without a manager and a set of unchangeable rules of procedure embedded in its code, where participants can vote on how the organisational structure should develop in the future. DAOs can be enabled through the use of smart contracts (see “Smart contracts”) and on-chain governance (see “On-chain governance”). Contributors, community members and token holders participate in the governance, and the rules are defined through the code. There is no centralised legal entity and the law or code is self-enforcing through smart contracts. Furthermore, there is no hierarchical structure as in traditional organisations.
Decentralised finance (DeFi)
DeFi refers to decentralised finance, which are financial applications built on blockchain networks. DeFi is also the definition of a movement promoting open-source software and decentralised networks to build financial products and services. Some of the key functions of DeFi currently are advanced financial instruments such as tokenisation platforms or decentralised exchanges (DEXs), peer-to-peer lending platforms or the issuance of stablecoins. The advantages of DeFi compared to traditional financial products is the reduction in costs and improved security, since intermediaries are not required.
Since cryptocurrencies are digital, there is a risk of spending the same coins or tokens more than once. Due to the security of blockchain networks, double-spending attacks are prevented as long as the hashrate (see “Hashrate”), in the case of proof-of-work (PoW) blockchains (see “Proof of work (PoW)”), or the stake in proof-of-stake (PoS) chains (see “Proof of stake (PoS)”), is properly decentralised. However, when over 51% of the hashrate is controlled by a malicious entity for example, then there is a risk of double-spending attacks. This is why the large amount of hashrate currently in the bitcoin blockchain provides a very high security level against double-spending attacks and thus offers valuable integrity and overall security.
The dominance is the percentage of a crypto asset market capitalisation or trading volume compared to the overall market capitalisation. Bitcoin for example represents a major dominance in the crypto markets. Dominance can also refer to subsets of the industry such as stablecoins, in which Tether is the dominant stablecoin.
Ethereum 2.0 will be launched first with the beacon chain, which will be a new proof-of-stake (PoS) chain (see “Proof of stake (PoS)”) that will run in parallel with Ethereum 1.0 (see “Ethereum”). It will introduce shards and a new virtual machine (see “Ethereum virtual machine (EVM)”) called eWasm. Ethereum 2.0 is expected to be launched in early 2020 and be fully operational in 2021. In addition, it is expected that Ethereum 1.0 will be gradually used less and eventually all transactions will happen on Ethereum 2.0.
ERC-20 is a technical standard for tokens on the Ethereum network that defines six different functions ensuring a common standard to facilitate interoperability. These functions are related to token transfers between addresses and data related to the token smart contract such as symbol, name or supply. The ERC-20 standard reduces the effort needed to create and issue tokens on Ethereum.
Ether is the second largest crypto asset by market capitalisation and is the native token of the Ethereum network. Ether is used to pay fees for transactions or for activating smart contracts, for example. After the launch of Ethereum 2.0, Ether will be gradually locked and an equivalent amount of ETH2 (see “ETH2”), produced. ETH2 will serve as the staking token on Ethereum 2.0.
Ethereum is a blockchain focused on smart contract and decentralised application (dApp) which currently has the highest amount of developers and dApps. In addition, some major institutional projects chose Ethereum, given its track record and stability. Ethereum 2.0 (see “Ethereum 2.0”) is scheduled to launch in 2020 as a separate network and all operations are expected to gradually move from Ethereum to the new Ethereum 2.0 proof-of-stake-based (PoS) network (see “Proof of stake (PoS)”).
Ethereum Classic was a contentious hard fork (see “Hard fork”) of Ethereum which happened following the hack of the decentralised autonomous organisation (DAO). Part of the Ethereum community did not want to modify the transaction history to recover the DAO funds, as they claimed blockchains should be immutable, so they did not accept the new version of Ethereum and continued mining and supported the old chain rebranded as Ethereum Classic.
Ethereum Plasma is an off-chain scaling (see “Off-chain”) solution which consists of child chains attached in a tree structure to the main Ethereum chain. These plasma chains decrease the load on the main chain and therefore contribute to improving the scalability of Ethereum. There can be an unlimited number of plasma chains organised in a tree structure attached to the main Ethereum chain. Scalability is required for mainstream adoption of Ethereum decentralised applications (dApps), therefore Ethereum Plasma is an important part in the development of Ethereum.
Ethereum improvement proposal (EIP)
Ethereum improvement proposals (EIPs) are new ideas for the Ethereum network that can be proposed by any community member, as Ethereum is an open-source project. EIPs describe new improvements and standards. The main category of EIPs is standard track, because these changes affect most or all Ethereum implementations due to modifications to the network protocol, for example. Within standard track, the types of EIPs are core, networking, interface and Ethereum request for comment (ERC). There are also two other EIPs categories: meta-EIP, which involves changes in processes such as procedures or guidelines, and informational EIP which consists of general guidelines.
Ethereum virtual machine (EVM)
The Ethereum virtual machine (EVM) is a virtual state machine that functions as a runtime environment for smart contracts on Ethereum. The smart contract code, which executes in the EVM, is isolated from the network and other processes of Ethereum. Because every node in the Ethereum network runs the EVM and executes the same instructions as all the other nodes in order to maintain consensus about the state of the network, Ethereum has been defined as a world computer. Computations on the EVM cost more and are slower than in a normal computer, but it offers data integrity, which is censorship-resistant. EVM uses instructions called opcodes and it must keep track of several components, among them account or storage state.
ETH2 will be the staking token of Ethereum 2.0 (see “Ethereum 2.0”). Holders of ETH (see “ETH”) will be able to lock their ETH tokens in a smart contract and receive an equivalent amount of ETH2 tokens. However, ETH2 will not be transferable until the full launch of Ethereum 2.0, although they will be earning staking rewards while locked.
A full node is any device that stores the full blockchain data available and verifies the consensus rules of the proof-of-work (PoW) network (see “Proof of work (PoW)”). All miners (see “Mining”) are full nodes, but there are full nodes that are not miners. In contrast, a light node (see “Light node”) only stores block headers and can be run in low-capacity devices such as mobile phones, which cannot store the full blockchain history.
A fork happens when there is more than one version of a blockchain. In proof-of-work (PoW) blockchains (see “Proof of work (PoW)”), forks can happen with probabilistic finality, but the consensus is that the longest chain is the valid one. When there is a network update that is not backwards-compatible, then a hard fork (see “Hard fork”) is needed and all node operators need to upgrade to the new version. There are also soft forks that are backwards-compatible. Finally, when there is disagreement within the community such as in the case of Bitcoin Cash (see “Bitcoin Cash”) or Ethereum Classic (see “Ethereum Classic”), a hard fork happens and different communities support different forks. In the case of instant finality blockchains, forks cannot happen, but there can be network upgrades in which participants need to update. In this case, the latest state machine of the network is relevant and not the full chain of linked blocks, since each confirmed block previously updated the state machine and only the latest state is important.
Fiat currency refers to a currency established as legal tender by a government and backed by a central bank, ensuring price stability and avoiding inflation. Since fiat currencies are not backed by gold or other assets, central banks are able to modify the supply in order to intervene and improve a country’s economy, for example.
Fiat-pegged cryptocurrency is a type of stablecoin (see “Stablecoin”), which has a 1:1 value with a certain fiat currency (see “Fiat currency”), as with USD or EUR. Fiat-pegged stablecoins must be backed by a fiat reserve equal to the total amount of stablecoins to ensure that coins can be redeemed at any time to receive fiat.
Finality means that a block or transaction in a blockchain cannot be reversed or altered. In proof-of-work (PoW) systems (see “Proof of work (PoW)”), the finality is probabilistic, for example it is recommended to wait six blocks or 60 minutes in the case of bitcoin to be relatively sure that a transaction was included in the correct chain. Other proof-of-stake (PoS) blockchains (see “Proof of stake (PoS)”) provide instant finality, meaning that each block is finalised instantly after being proposed.
Gas is a pricing mechanism on Ethereum (see “Ethereum”) to calculate the fees for either executing a smart contract or performing a transaction. Gas is used as a measurement of the amount of computational resources required for certain tasks. The gas price is defined in ETH and there is also a gas limit, which indicates the total or maximum amount that a user is willing to spend for a certain task.
The genesis block is the first block of a blockchain and therefore has no reference to previous blocks. Because of this, genesis blocks are generally hard-coded into the software. In the case of bitcoin, the genesis block happened on 3 January 2009. Genesis blocks usually contain some form of message as a timestamp or with reference to the motivations of the project.
Gwei is a small denomination of ETH which is used to measure small values, such as gas prices. A Gwei is defined as one nano ETH or 10-9 ETH. The name Gwei comes from Wei, which is the smallest unit of ETH and defined as 10-18 ETH.
Gas limit is one of the two components used to determine transaction fees on Ethereum, which are calculated as gas limit multiplied by gas price. Gas limit indicates the total amount of gas units to be spent in a transaction.
The gas price corresponds to the cost of each gas unit and is usually indicated in Gwei (see “Gwei”). During token sales on the Ethereum network, the gas prices rise significantly and if transactions are sent with low gas prices, it could take more time than usual to include the transaction on a block.
A hard fork is a split of a blockchain due to a planned software upgrade, which is not backwards-compatible and requires all node operators to upgrade. A hard fork can also happen due to community disagreements such as in the case of Bitcoin Cash (see “Bitcoin Cash”) or Ethereum Classic (see “Ethereum Classic”) – this is known as a contentious hard fork.
Unlike cold storage solutions (see “Cold storage”), hot storage solutions are connected to the Internet and therefore the risk of hacking is higher. This is the reason, for example, why exchanges keep most of their funds in cold storage and only a small percentage in hot storage for the required transactions. Hot wallets are used for this type of storage (see “Wallet”).
This is the process of reducing the issuance of new coins in blockchain networks. It implies a reduction in the block rewards (see “Block reward”) that miners (see “Mining”) receive for each mined block (see “Block”). Halving ensures a gradual deflationary mechanism until the maximum supply is reached. In the case of bitcoin, halving occurs every 210,000 blocks, which is around four years, and the block rewards are reduced by 50% after each halving event. The initial block reward for bitcoin was 50 BTC, falling to 25 BTC in 2012, then 12.5 BTC in 2016; the new block reward will be 6.25 BTC in the next halving event in 2020.
Hashrate is the term described for the speed at which computers are able to perform hashing computations, and in the context of blockchains based on proof of work (PoW) (see “Proof of work (PoW)”), it represents the efficiency and performance of mining machines to compute valid block hashes in order to produce blocks and earn the block rewards. A higher hashrate indicates more probability to mine a block and receive the block reward (see “Block reward”). With the introduction of application-specific integrated circuit (ASIC) miners, for example, the hashrate of the bitcoin network increased significantly. An increase of hashrate is positive to improve the network security against 51% attacks, but it is more challenging to participate in the mining process without ASIC mining machines or a large hashrate. In the bitcoin network, the mining difficulty is adjusted according to the hashrate to keep the average block time around 10 minutes.
During a token sale, the hard cap is the maximum amount of tokens to be sold. In contrast, soft cap indicates the minimum viable funding for the project in order to start the development. Hard cap can also refer to the maximum supply of tokens in a certain network, for example in the case of bitcoin, the hard cap will be 21 million BTC.
Initial coin offering (ICO) or initial token offering (ITO)
An initial coin offering (ICO) or initial token offering (ITO) is a new way of raising funds enabled by blockchain technology. Participants send either BTC, ETH or sometimes other crypto or fiat currencies (see “Fiat currency”), and they receive a certain amount of tokens. However, these tokens do not represent any ownership rights in the companies that are doing the ICO or ITO. The majority of ICOs and ITOs have been done on the Ethereum network as ERC-20 tokens.
Initial exchange offering (IEO)
An initial exchange offering (IEO) is a fundraising mechanism similar to initial coin offerings (ICOs), but administered by an exchange, usually a large and well-known exchange, instead of smart contracts. The participation process is simpler for users than in an ICO because they only need an account on the specific exchange and some funds in their account. Exchanges provide a higher level of trust for IEOs and are considered safer since there are know-your-customer (KYC) and anti-money laundering (AML) measures involved. In addition, companies doing an IEO benefit from the marketing provided by the exchanges and also from the listing on their platform.
Internet of Things (IoT)
The Internet of Things (IoT) is a technological innovation referring to a network of connected objects that can identify each other and perform tasks such as micropayments. Blockchains can add value to IoT by facilitating trust in IoT networks through blockchain-based micropayments which could be triggered by external data provided to smart contracts via oracles.
Interoperability is the ability of different blockchains to communicate and exchange data between each other or being able to trigger smart contracts from one blockchain to another one. The interoperability could be either between private blockchains, public blockchains or between both.
Know your customer (KYC)
The know-your-customer (KYC) process is a process used by all financial entities, including crypto exchanges, in order to collect the required information from customers to prevent and reduce the risk of certain criminal activities such as money laundering and terrorism financing. KYC facilitates the identification of a customer’s location to determine whether that jurisdiction is allowed. KYC is generally required to comply with regulations, and some exchanges allow higher trading volume depending on the level of KYC verification.
Key can indicate a public or private key (see “Public key” or “Private key”). Public keys are used for transactions or to check the record of transactions in the blockchain history. A private key is used for signing transactions, but is never disclosed publicly. Crypto users have a seed in order to restore a lost private key and recover access to their funds.
In the context of blockchains, the ledger is the immutable and distributed record of transactions. The advantage compared to traditional ledgers or databases is that many nodes share the same ledger in a decentralised way and these have consensus about the correct version of the ledger. In addition, it is almost impossible to modify old transactions or blocks, in particular in the bitcoin blockchain given the large mining hashrate (see “Hashrate”), which provides high security. Unlike centralised ledgers or databases, there is no central authority or intermediary that can modify the ledger, therefore blockchains provide data integrity in a trustless and decentralised way.
Layer 2 refers to off-chain (see “Off-chain”) scaling solutions that are attached to the main chain. Two important examples of layer 2 solutions are the bitcoin lightning network (see “Lightning network”), which consists of payment state channels (see “State channels”), and Ethereum Plasma (see “Ethereum Plasma”). Layer 1 or main chain provides security and records the final state, for example after state channels are closed, and layer 2 solutions provide improved scalability (see “Scalability”) throughout the network and take the load off the main chain.
A layer 2 (see “Layer 2”) solution for bitcoin that consists of payment channels allowing instant bitcoin microtransactions to be sent at low cost. The lightning network could allow bitcoin to function as a medium of exchange or payment instead of a store of value. With the required confirmation times in bitcoin, it is less convenient for micropayments than the lightning network. Only the opening and closing of a lightning network channel requires interaction with the main bitcoin blockchain, which provides the security and integrity for the payment channels.
Light node is a type of blockchain node client that only downloads the block headers and not the entire contents of blocks, thus reducing the storage requirements dramatically and enabling low processing capacity devices such as mobile phones to run light nodes. However, light nodes do not directly interact with blockchains or the consensus process.
Mainnet refers to a blockchain that has been fully developed and launched, and transactions are being broadcasted, verified and recorded on a distributed ledger. Testnets are used by developers to test different features before introducing them to the main chain. Some projects that raised funds through ERC20 tokens usually do a mainnet token swap for the native token on the new blockchain’s mainnet.
Mining farms are large groups of miners (see “Mining”) that share hashrate (see “Hashrate”) resources and block rewards (see “Block reward”). With the mining difficult to increase in some blockchain networks such as bitcoin, individual mining was not sufficient to successfully mine blocks. Hence, mining farms were created, often using application-specific integrated circuit (ASIC) mining equipment. Substantial mining farms are usually based in large warehouses and some individual miners can also contribute hashing power remotely. There are several types of calculations to distribute rewards in mining farms.
In proof-of-work (PoW) chains (see “Proof of work (PoW)”), mining is the process of participating in PoW systems in order to find and propose blocks and hence earn the block rewards (see “Block reward”). Initially mining was done with computers and then specialised mining equipment called application-specific integrated circuits (ASICs) was developed, increasing the difficulty to mine blocks. Mining is usually done through mining pools that concentrate the hashrate (see “Hashrate”). In the case of proof-of-stake (PoS) networks (see “Proof of stake (PoS)”), mining pools are the equivalent of validators, and staking tokens perform the same function as hashrate, meaning that the larger the amount of staking tokens, the higher the probability of mining and proposing a block.
The market capitalisation of crypto assets is the multiplication of the available circulating supply by the price. It allows the magnitude of different crypto assets to be compared. Bitcoin and Ethereum are the two largest crypto assets by market capitalisation.
The mempool is the area of nodes for unconfirmed transactions. Each node has a different version of the mempool and before including a transaction into its mempool, each node completes a series of required checks. Only if the transaction is allowed into the mempool does the node start broadcasting it. When nodes receive new valid blocks, they remove all transactions contained in that particular block from their mempool, resulting in a drop in the mempool size. If the mempool reaches full capacity, then nodes set up a minimal fee threshold to prioritise transactions based on the fees.
The Merkle tree is a data structure used in blockchain networks for efficient data verification, use of resources and security through the use of hashes. Transactions within a block are hashed and linked together until a final hash value called the Merkle root is obtained. If anything is changed within a block, this would automatically result in a different Merkle root which can easily be identified. The block would no longer match in the blockchain, since the block header containing the Merkle root would be different, allowing any tampering or modification of previous blocks to be quickly identified.
Multisignature is a method that requires several private keys (see “Private key”) to authorise and sign transactions. Multisignatures are important when the control of certain tokens has to be shared among different individuals. For example, multisignatures are used in cold storage custody which is normally set up as m-of-n addresses, indicating that m private keys out of the total number n must sign a transaction before it can be added to the blockchain. For example, a 2-of-3 multisignature requires at least two private keys to create a valid transaction. Multisignatures provide additional security if several trusted parties have to approve a certain transaction, rather than all the trust being placed on one individual.
Every computer connected to a blockchain (see “Blockchain”) via the download of its (open-source) software is considered a node. The computer then acts as a transmitter of data to other nodes (computers). Thus, the sum of all the nodes is the administrative body of a blockchain and maintains its integrity. A node can be either a full or a light node (see “Full node” and “Light node”).
The nothing-at-stake problem proposes a theoretical model within the realm of the proof-of-stake (PoS) consensus algorithm (see also “Proof of stake (PoS)”). There can be an incentive for validators in a PoS environment because unlike as in proof-of-work (PoW) systems, it is computationally inexpensive to build on every fork (see “Fork”). Furthermore, validators are expected to build on every fork because they will collect transaction fees on every fork that ends up winning, hence they have a financial self-interest to do so. In theory, this enables cheaper attacks on the network compared to PoW systems. To circumvent this problem, blockchains like Ethereum penalise validators by losing a portion or all of their security deposit (the stake) when building on all forks.
The term off-chain refers to (trans)actions happening outside a blockchain environment.
The technology is rapidly evolving, thus for further improvement, new technological accomplishments must be embedded in the existing networks. But who decides what changes are to be implemented and how? This poses a great obstacle, as a public network inherently does not belong to anyone. On-chain governance is a system that provides a solution. Changes in code can be proposed by everyone, and token holders can vote whether or not those changes should be integrated into the existing protocol.
For clarification of what a wallet is, please refer to “Wallet”. A paper wallet is nothing more than a printed version of the private key or the seed (see “Seed phrase”) on paper. Because this storage solution happens offline, it is considered a very safe solution because it is not hackable. However, the piece of paper (with the private key on it) is exposed to other dangers such as damage through elements (fire and water) as well as physical theft. Hence it is advisable to store the paper wallet as securely as possible (e.g. bank vault).
The private key can be seen as a combination of the number of a credit card and the associated PIN code. It consists of a string of numbers and letters and grants access to the crypto assets associated with a wallet (see “Wallet”). If the private key is lost, so are the crypto assets that it would grant access to – forever. Therefore, it is crucial for the private key to be stored safely beyond the reach of tricksters and fraudsters. Hence this information should never be stored on a personal computer or sent online (e.g. via e-mail or WhatsApp), since it would be extremely easy for a professional to get hold of this information.
Unlike the private key, the public key is open for everyone on the network to see. It acts as an address where tokens (see “Token”) can be received or sent, thus is somewhat comparable to an IBAN address. In combination with the private key (see “Private key”), the public key is used in the encryption of information on a blockchain. When thinking about blockchain as a transcript of transactions, every transaction is associated with a public key. Therefore, it is publicly known which public key holds what amount of crypto assets. It is unclear, however, who holds the private key to access these assets. Hence, despite the public key being public, these mechanics provide anonymity or pseudonymity to the holder of the private key.
While everyone can participate in a public blockchain, access in private blockchains is restricted to only a select group of people to participate. Individual owners of the blockchain exercise power and decide who can participate in the network. Unlike public blockchains, the number of participants is likely to be smaller, hence the security of the network is probably not as tight as in open-to-all networks. However, the purpose of a private blockchain is rather different compared to a public one, so there is no need for enhanced security in the network. Private blockchains are likely to be used by similar-minded parties (e.g. a consortium of business partners) where no one has the incentive to harm the network. If there is more than one participant in a private blockchain, it is called a permissioned or a consortium blockchain.
As the name suggests, there are no restrictions when it comes to participation in the network. Due to the design of the blockchain technology, a network becomes more secure as more participants take action on the network. Therefore, public blockchains are regarded as being more secure than private blockchains due to the fact that they have a vastly larger user base. These networks are open-source by default and nobody is responsible for the network. As nobody exercises control over the network, it is truly decentralised and new blocks are verified through the whole system. There is no need for a trusted party to oversee the network. The most prominent examples of public blockchains are Bitcoin and Ethereum.
Often also referred to as a currency token, a payment token is the essence of the meaning of the word cryptocurrency and is one of the main categories of crypto assets together with payment tokens (see “Payment token”) and utility tokens (see “Utility token”). It is important to note that these classifications are by no means a common global standard. For example, Liechtenstein law uses the definition of a token as a container, an empty vessel, which can be “filled” with any right. Unlike the utility or security token, the payment token has no intrinsic value and does not have any right associated with it. It is solely used as a means of payment, thus aiming to replace money. The most famous payment token is bitcoin (BTC).
Proof of stake (PoS)
Next to proof-of-work (PoW) systems (see “Proof of work (PoW)”), proof-of-stake (PoS) systems are one of the most used consensus mechanisms (see “Consensus”) and often considered a viable solution to the power intensive PoW consensus mechanism. The idea behind this mechanism is that in order to build a block, a computer has to prove that it holds an amount of tokens (see “Token”). The more tokens the computer holds, the higher its chances of building a block and claiming the rewards.
A pump-and-dump scheme originally describes a fraudulent scheme in the stock market with penny stocks and is as old as the stock market itself. In crypto terms, this means that fraudulent investors agree on moving in a predefined Altcoin (see “Altcoin”) in a predefined time. When the number of investors increases and therefore the money spent on the Altcoin, they raise its price and using sophisticated marketing, create the fear of missing out (FOMO) for other unsuspecting investors. When a time or a price limit is met, all the fraudulent investors sell the Altcoin at the same time at a tremendous profit and ultimately crash the price of the Altcoin. The unsuspecting investors who came in late (in this scheme also known as the bag holders) bought the Altcoin at a high price and are left with significant losses.
Peer-to-peer (P2P) network
A peer-to-peer (P2P) network refers to a network where a number of computers are connected to each other. Those computers communicate on the same level within the network and can provide each other with applications, services or data. There is no central server, therefore a P2P network is a decentralised network where the participants are on an equal footing. Compared to centralised networks with servers managing the network, the threat of a breakdown and coordinated attacks from outside the network is lessened considerably.
Proof of work (PoW)
The proof-of-work (PoW) mechanism is probably the most prominent but also the most infamous consensus mechanism (see “Consensus”) due to its extensive power consumption. The basic principle of this mechanism is that miners (see “Mining”) have to prove that they have put effort in the network (thus the exorbitant energy consumption). To do that, the miners have to solve a complex mathematical problem. Basically billions of arithmetic operations are required to solve such a problem, and the first computer that gets it right is allowed to build a new block containing transactions. This process is called mining and any miner building a block is entitled to a reward. The most prominent blockchain using PoW is bitcoin.
In the realm of blockchains and cryptocurrencies, scalability is one of the most discussed and studied features and is considered the bottleneck of the most cryptocurrencies used today. For example, Visa currently theoretically allows for 24,000 transactions per second, while the bitcoin limit lies at seven transactions per second. However, it is crucial to find a solution to this problem, for mass adoption of cryptocurrencies is only possible within the right framework.
Satoshi Nakamoto was the author of the original paper discussing the blockchain technology and bitcoin for the first time, thus claiming to be the inventor of bitcoin, the first ever cryptocurrency. The name is a pseudonym and it remains unclear whether the person behind it is male or female, an individual or even a collective.
A security token represents ownership rights over a tokenised asset (see “Tokenisation”) and is one of the main categories of crypto assets together with payment tokens (see “Payment token”) and utility tokens (see “Utility token”). It is important to note that these classifications are by no means a common global standard. For example, Liechtenstein law uses the definition of a token as a container, an empty vessel, which can be “filled” with any right. Mostly, the security tokens are used to represent financial securities such as stocks or bonds and the corresponding rights associated with them. However, other tokenised assets can also represent ownership rights over other assets, such as classic cars or real estate. It is important to note that there is no generally accepted definition of a security token and that there is no selective distinction of what is considered a “security” and what not.
Shilling is defined as the act of using propaganda to advertise a certain token for a financial incentive. This expression is often used in a negative way when someone is actively/aggressively promoting a coin or a network in order to earn some money.
Segregated witness (SegWit)
Segregated witness (SegWit) is a process that changes the way data is stored in a blockchain to improve scalability. Segregate means to separate and witness refers to transaction signatures. SegWit was implemented in Bitcoin to increase scalability by pulling signature data from Bitcoin transactions, which occupy a large part of the space in transactions. The SegWit update was not welcomed by some elements of the Bitcoin community, which decided to create a contentious hard fork (see “Hard fork”) known as Bitcoin Cash (see “Bitcoin Cash”).
Sharding refers to an on-chain scaling solution for blockchains. It consists of separating nodes into subgroups or shards to allow transactions to be processed faster in parallel and therefore increase the scalability. However, separating nodes into smaller subgroups may also increase the vulnerability of the network to certain attacks.
The term side chain defines a separate blockchain which works independently, but is tied to a main chain (the parent blockchain). The connection between a side chain and the main chain allows for the transfer of assets to a predefined rate. There can be multiple side chains supporting the main chain. Probably the most prominent example of a network using side chains is Bitcoin (see “Lightning network”) to increase its scalability without putting the integrity of the main chain in danger (see also “Trilemma”).
Also known as seed recovery phrase or backup seed phrase, the seed phrase is a set of words that allows you to get access to funds despite losing the private key (see “Private key”). If the wallet is lost, the device where the wallet is installed is lost and the wallet is not functional either, the seed phrase is the backup tool to effectively restore the wallet and thus the funds. It is advisable to only store the seed phrase physically to minimise the threat of theft.
This term describes a process where coins are put on hold in a wallet in order to create new coins. This process is used in the realm of the proof-of-stake (PoS) consensus mechanism (see “Proof of stake (PoS)”). Contrary to proof-of-work (PoW) systems (see “Proof of work (PoW)”) where mining is used to verify and validate blocks, staking is used to produce and validate new blocks. Usually the user with the highest amount of coins on hold has the highest chance of validating the next block, thus claiming the next block reward. Therefore instead of competing with computer power to validate the next block, the stakers compete with the amount of coins they have.
A cryptocurrency is considered stable if it is pegged to an asset such as the euro or gold. Although never being issued by a central bank, it can be a means of payment without the volatility to which cryptocurrencies are currently subject and with worldwide reach. For every currency, price stability is paramount, otherwise buyers or sellers would be at risk of significant losses due to price volatility. Stablecoins can be fiat- or crypto-backed or not backed at all. Fiat-backed stablecoins are expected to hold custody of their full value in the corresponding fiat currency. Similarly, stablecoins like MakerDAO are pegged to the US dollar, but hold the corresponding amount of Ether (see “Ether”) as collateral. There are stablecoins that are pegged, but hold no collateral whatsoever. In this case, the supply of the currency (and hence its price) is controlled mechanically (e.g. via consensus), which is similar to a central bank mechanism of increasing or decreasing the monetary supply.
State channels are an off-chain scaling solution for blockchains. They improve scalability by taking transactions off-chain and only require on-chain transactions for the opening and closing of a channel. A common use case is a payment channel such as the bitcoin lightning network (see “Lightning network”) due to privacy advantages, for example since only the opening or closing of a channel is public.
Being neither smart nor a contract, the smart contract is a computer protocol with a few lines of code that can execute when a certain event has occurred. They are fully automated and do not need any human interaction to be executed. Thereby the code consists of if-then conditions: if the predefined requirements are met, the next, also predefined action, is executed by the smart contract. The most known and used network with the ability to implement smart contracts is Ethereum. As of today, the standard technology of the smart contract is the ERC-20 token on the Ethereum network (see “ERC-20” and “Ethereum”).
Token and Trustworthy Technologies Service Provider Law (TTTL)
The Token and Trustworthy Technologies Service Provider Law (TTTL) came into force on 1 January 2020. It is regarded as a very innovation-friendly law, as it does not set the rules on how market participants should do business. In fact, the law introduces new service providers and legally separates them by function and task. This ensures that the law is also applicable when new services and products are established on the market.
A token represents an asset or a commodity. While coins have their own blockchain associated with them, a token can be implemented in an existing blockchain and does not necessarily have its own associated blockchain. The term token is an umbrella term, hence token can be payment, utility or security tokens (see “Payment token”, “Utility token” and “Security token”). On top, ERC-20 tokens on the Ethereum network, also known as smart contracts (see “Smart contracts”) are a special form of token. Therefore, to understand what a token does, it is important to understand what the token represents.
Blockchains (see “Blockchain”) make existing values and assets tradable through tokenisation. Through the process of tokenisation, assets of all classes (not only financial) can be represented by a digital token. Hence, tokenisation is used as a synonym for denomination and digital securitisation. Tokens can be created to specifically represent part of an asset (e.g. real estate or a classic car). This digital denomination allows the owner of the asset to sell an arbitrary number of parts of the asset. Through the distribution on the blockchain, the access barriers for small and private investors are much lower than in traditional financial markets. Hence, tokenisation is deemed to substantially widen the possible spectrum of investors.
Being neither coins (see “Payment token”) nor digitised assets (see “Security token”), utility tokens do not grant property rights on an asset and cannot be minted or mined (see “Proof of work (PoW)” and “Proof of stake (PoS)”). Utility tokens are one of the main categories of crypto assets together with payment tokens (see “Payment token”) and utility tokens (see “Utility token”). It is important to note that these classifications are by no means a common global standard. For example, Liechtenstein law uses the definition of a token as a container, an empty vessel, which can be “filled” with any right. Utility tokens have been commonly used in the past to finance networks within the scope of an initial coin offering (ICO) (see “Initial coin offering (ICO)”). Typically, these tokens grant investors rights to use some of the products or access the network at a future point in time when the business is up and running.
In proof-of-stake (PoS) blockchains (see “Proof of stake (PoS)”), validators are the equivalent entities of mining pools in proof-of-work (PoW) blockchains (see “Proof of work (PoW)”). However, the probability of proposing a block is not based on the amount of hashrate as in PoW systems, but is rather based on the amount of staking tokens assigned to a validator. The staking tokens can be the validator’s own tokens or other tokens delegated (see “Delegating”) to them by token holders.
Digital wallets are very similar to real wallets and purses. They “store” the value of the tokens and coins held by the wallet owner. Consisting of a private and public key (see “Private key” and “Public key”), a wallet represents an address (public key) which is in turn associated with transactions effected on the blockchain’s general ledger. The balance on the wallet is effectively the sum of all the transactions on the blockchain associated with the wallet address. There are different types of wallets. Online wallets are accessed through the Internet browser and are typically wallets held on exchanges. The fact that those wallets are connected to the Internet make them highly vulnerable to attacks. Computer and mobile wallets, meaning applications stored on personal computers or mobile phones and tablets, are also connected to the Internet and are only as secure as the computer or mobile and portable they are installed on. Wallets connected to the Internet are also referred to as hot wallets. A more secure way to “store” crypto assets is to use hardware wallets (commonly in the form of USB sticks). They are also often referred to as cold wallets, due to the fact that they are not connected to the Internet.
A white paper originates in politics, where facts and figures where summarised on a few pages in order to prepare for a political discussion. Therefore the purpose of the document is to outline specialised information about a specific subject. In the crypto space, it is often used to present a business case and outline the proof of concept and plans for the future. Notably during the boom of initial coin offerings (ICOs) (see “Initial coin offering (ICO)”), white papers were used as a source of information for investors, although they had no legal significance. White papers are by no means legally binding and only constitute the management’s opinions. It is therefore very risky to make investment decisions based on white papers alone.
The yellow paper is the more sophisticated and technical version of the white paper. It presents scientific details of the technology in use in a very concise way. While the white paper is vague and is more of a proposal, the yellow paper can be a continuation for presenting all the specific details.
Zero-knowledge-proof protocols are cryptographic mechanisms, where a prover can prove to a verifier that he knows something without revealing the information. The zero-knowledge proof is particularly interesting when using fully anonymous blockchains and transactions (e.g. bitcoin is pseudo-anonymous because there are ways to connect addresses to their rightful owners through mechanisms outside the blockchain such as IP-address analysis). Another advantage of zero-knowledge-proof mechanisms is that they make the computing time and memory-heavy processes of the blockchain more efficient