Blockchain Key Concepts, Definitions and Terminologies

Updated: Oct 12, 2020


This is the continuation of our blockchain for beginners’ series. The Initiative was inspired by the feedback from the readers and is intended to provide insights which accommodate all levels of audience.


In the first contribution of this series we explained blockchain technology in details, paying attention to the basics. In this second contribution we explore the key concepts and terminologies used in blockchain space.

A


Address (Wallet Address)

A wallet is an alphanumeric character string, which can also be symbolized as a scannable QR code. It is used to send and collect transactions on a blockchain network.


Airdrop

Airdrop is a token distribution method used to send cryptocurrency or tokens to wallet addresses. It can also be used for marketing reasons to reward some activities such as shares, referrals, or app downloads.


Air-gapping

Air-gapping is a method used to secure computers in which the machine does not connect to the Internet.


Altcoin

Altcoins are all other cryptocurrency and digital currency which were born after Bitcoin "alternative to Bitcoin". There are thousands of altcoins.


ASIC (Application Specific Integrated Circuit)

ASIC is used for mining cryptocurrencies; the ASIC performs a computation to find values that give a required solution when placed into a hashing algorithm.


B


Bitcoin (BTC)

The first cryptocurrency. It is based on the blockchain Proof of Work consensus algorithm. Bitcoin was initially unveiled in 2009 by Satoshi Nakomoto. Satoshi Nakamoto is a fictitious name for an individual whose real identity is unknown. The concept of cryptocurrency was summarized in a white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." Bitcoin has inspired the conception of thousands of other coins "Altcoins".


Blockchain

A distributed ledger comprises immutable and digitally recorded data in packages known as blocks. Every block is 'chained' to the next block using a cryptographic signature. Blockchains operate like a ledger, which can be shared with and accessed by anyone with the appropriate permissions. The types of Blockchain include Public permissioned or permissionless Blockchain, Private permissioned or permissionless and Federated Blockchain.


Blockchain as a Service (BaaS)

Blockchain-as-a-Service refers to third-party cloud-based infrastructure and management for companies building and operating blockchain apps. It allows businesses to use cloud-based solutions to build, host and use their blockchain applications on the blockchain infrastructure developed by a vendor. Many major cloud services providers such as IBM, Microsoft, Amazon, Alibaba and Oracle now provide Blockchain-as-a-Service.


Block Height

Block height refers to the number of blocks connected on a Blockchain. For example, Height 0 represents the first block, which is also called the Genesis Block.


Block Reward

Block reward is the reward given to a minor after it has Completely hashed a block. Block rewards may be a mixture of coins and transaction fees.


Byzantine Fault Tolerance (BFT)

Byzantine fault tolerance (BFT) is a blockchain consensus algorithm where a blockchain network still reaches consensus even if some of the nodes can fail or act maliciously.


C


Central Bank Digital Currency (CBDCs)

Central bank digital currency refers to the digital form of fiat money. Bitcoin inspired the current concept of CBDCs. However, CBDCs differ from cryptocurrency. Cryptocurrencies are not issued by the state and lack the legal tender status declared by the government. The launch of CBDCs could disrupt the financial sector, especially since it might disintermediate the financial sector. Customers would have direct access to central banks leaving commercial banks, Funds Managers and other financial services intermediaries less useful


Coin

A coin or altcoin is a digital representation of asset value in the form of a currency that is generated via their independent Blockchain


Cold Wallet / Cold Storage

An offline wallet that is never connected to the Internet. These wallets protect cryptocurrencies from getting hacked online.


Confirmation / Block Confirmation

A confirmation means that the network has verified the blockchain transaction. The confirmation happens through various consensus mechanisms such as Proof of Work (PoW) Proof of Stake, Power of Stake and BFT. Once a transaction is successfully verified it cannot be reversed. The more the number of confirmations a transaction has, the harder it becomes to perform a double-spend attack.


Consensus mechanism/ Consensus protocol

The consensus mechanism is a protocol used to make sure that each new block that is added to a Blockchain network is the only version of the truth that is agreed upon by all nodes in the Blockchain. It aims at finding a standard agreement that is a win for the entire network.

The types of consensus mechanism include Proof of Authority (PoA), Proof of Burn (PoB), Proof of Capacity (PoC), Proof of Stake (PoS), Proof of Work (PoW)


Cryptocurrency

Cryptocurrencies are digital currencies which are created on maths and use encryption methods to regulate the design of units of currency as well as verifying the transfer of funds. Cryptocurrencies operate independently of a central bank.


Cryptography

Cryptography is a method utilized to secure communication using code. Blockchain networks use Symmetric-key cryptography to perform transactions such as transfer of cryptocurrencies from one Wallet to another. Wallets use addresses generated by Blockchain. Such address is paired with private keys that allow the transfer of cryptocurrency from A to B. Paired public and private keys allow funds to be unlocked.


D


DAO (Decentralised Autonomous Organisation)

Also known as the digital decentralised autonomous organisation (DAO). It is an organisation represented by rules encoded as a transparent computer program, controlled by the organisation members and not influenced by a central government. The DAO serves as a form of investor-directed venture capital fund, which is sought to provide enterprises with new decentralised business models. It is Ethereum-based and open source.


Decentralisation

Decentralisation is the process of transferring of authority and responsibility from a centralised organisation, government, or party to a distributed network.


Decentralised Application (DApp)

A DApp is an open-source, software application with backend code running on a decentralised peer-to-peer network rather than a centralised server.


Decentralised Finance (DeFi)

Decentralised finance or DeFi or open finance, refers to the economic paradigm shift enabled by decentralised technologies, particularly blockchain networks. DeFi represents a shift from a centralised financial system to an open and accessible economy which is built on open protocols which are interoperable and programmable.

Whereas the traditional financial system runs on centralised infrastructure that is managed by central authorities, institutions, and intermediaries, decentralised finance is powered by code that is running on the decentralised infrastructure of the Ethereum blockchain. By deploying immutable smart contracts on Ethereum, DeFi developers can launch financial protocols and platforms that run exactly as programmed and that are available to anyone with an Internet connection


Deposit

Deposit is a digital property which is put into a smart contract such that if certain conditions in the contract are not satisfied that property is automatically forfeited to the identified counterparty.


Digital Asset

A digital asset refers to anything that can be stored and transmitted electronically and can be owned and thus, can have ownership and usage rights associated with it. It is a commodity that is scarce, electronically transferable, and intangible and has a value. Cryptocurrencies and tokens are examples of digital assets built on Blockchain


Digital Currency

Digital currencies are balances or a record stored in a distributed database on a blockchain network. Examples of digital currencies include cryptocurrencies, virtual currencies, central bank digital currencies and e-Cash.


Digital Identity

Digital Identity is the network or Internet equivalent to the real identity of a person or entity (business or government agency) used for identification in connections or transactions on a network. When used in Blockchain, refers to an online or networked identity adopted by an individual, organisation, or electronic device.


Digital Signature

A code generated by public-key encryption and attached to an electronic document or digital transactions in order to verify and authenticate the contents.


Distributed Denial of Service (DDoS) Attack

DDoS is a type of cyber-attack in which the perpetrator continuously overpowers the system with demands in order to prevent service of genuine requests.


Distributed Ledger

A distributed ledger is a type of database which spreads across the users of the network. Transactions are stored sequentially in a continuous ledger known as blocks. The distributed ledger data can be either "permissioned" or "permissionless" to control who can view it or write on it.


Double Spend

It is a potential flaw in a digital cash scheme in which the same single digital token can be spent more than once. The event during which someone on a blockchain network tries to send the same cryptos to two different recipients at once. However, each crypto transaction is confirmed; it becomes almost impossible to spend it double. The more the number of confirmations/validations that a particular transaction has, the decreased likelihood of double-spend occurrence


E


Enterprise Ethereum Alliance (EEA)

EEA is a group of Ethereum core developers, start-ups, and large companies working together to commercialise and use Ethereum for different business applications. It is governed by the Board which consists of Accenture, Consensys, intel, Microsoft and Santander.


Ethereum Improvement Proposals (EIP)

EIPs are the protocols which describe standards for the Ethereum platform, including core protocol specifications, client APIs, and contract standards.


Encryption

Encryption is a procedure used to combine a document with a shorter string of data referred to as a key in order to generate an output (ciphertext). The output can be decrypted back into the original plaintext by someone else who has the key.


ERC20 Token Standard

ERC is the abbreviation for Ethereum Request for Comment and is followed by the assignment number of the standard. ERC20 is a technical standard for smart contracts the majority of Ethereum tokens follow. This list of rules states the requirements that a token must fulfil to be able to function within the Ethereum network.


ERC721 Token Standard

A non-fungible Ethereum token standard. This token standard is used to represent a unique digital asset that is not interchangeable.


Ether (ETH)

Ether is the native currency of the Ethereum blockchain network. Ether is also referred to as ETH works as a power of the Ethereum ecosystem by acting as a means of incentive and form of payment for network participants to execute essential operations.


Ethereum

Ethereum is a public blockchain network and decentralised software platform on which blockchain developers create and operate applications.


Ethereum Virtual Machine (EVM)

EVM allows anyone, anywhere to execute arbitrary EVM Byte Code. All Ethereum nodes run on the EVM. The project is designed to prevent denial of service attacks. It is a home for smart contracts based on the Ethereum blockchain.


Exchange

A place to trade cryptocurrency. Centralised exchanges, operated by companies like Coinbase and Binance, function as intermediaries, while decentralised exchanges do not have a central authority.


F


Federated Blockchain

Federated blockchain is a hybrid type of Blockchain (lays between public and private Blockchain); where only selected multiple parties (nodes) have rights to read and write on the ledger.


Fiat Currency

It is a Government-issued currency such as US Dollars (USD), Euros (EUR), Yuan (CNY), and Yen (JPY)


Fork

A fork is an alternative version of a blockchain and is often authorised to apply upgrades to a blockchain network. There are types of fork (soft and hard fork). Soft Forks provide two chains with compatibility, whereas Hard Forks create a full new version of the chain which has been adopted in order to maintain the participation. Some cases such as contentious Hard Fork can create two versions of a blockchain network.


G


Gas

Gas is a measure of the computational steps required for a transaction on the Ethereum network that equates to a fee for network users paid in small units of ETH.


Genesis Block

The genesis block is the initial block of data computed in the history of a blockchain network.


H


Hash

A hash is a function that transforms an input into an output of an alphanumeric string known as the hash value. Each block in a Blockchain comprises the hash value of the previous block combined with its own hash value. A Hash confirms the validity of a transaction on a Blockchain.


Halving

Halving is a scarce property of many cryptocurrencies. It suggests that there is a finite supply, which makes it a scarce digital commodity. In the case of Bitcoin, the total amount of Bitcoin which will be issued is 21 million BTC


Hard Forks

A hard fork is a scenario which arises when there is an upgrade in a Blockchain application which is not compatible with older versions. It requires all participants on the older version to upgrade to the newer version to be able to keep theirs on the network.


Hardware Wallet

It is a physical device that can be connected to the web and interact with online exchanges but can also be used as cold storage not connected to the Internet.


Hot Wallet / Hard Storage

Hard Wallet refers to a wallet that is always directly connected to the Internet, such as one that is held on a centralised exchange. Hard wallets are deemed to have lower security than cold storage systems.


Hybrid Consensus Mechanism

It is protocol is a consensus protocol that utilises a combination of Proof of Stake (PoS) and Proof of Work (PoW) consensus. Hybrid consensus mechanism enables the validation of blocks not only miners but also voters (stakeholders) to form balanced network governance.


I


Immutability

Immutability is the inability to be altered or changed over time. Immutability is the critical component of Blockchain. It means that once data is written onto a blockchain ledger cannot be altered. The immutability provides the basis for trust and transparency on a blockchain network.


Initial Coin Offering (ICO)

An ICO is a process of selling advanced tokens in exchange for upfront capital.


Initial Exchange Offering (IEO)

Initial exchange offering is a variant on initial coin offerings, operated directly by cryptocurrency exchanges. The fundraising is to be conducted on a well-known exchange's fundraising platform.


Interoperability

Interoperability refers to the ability of more than one system to communicate and exchange data. Due to differences in the design, such as consensus mechanisms; most blockchain applications are not interoperable yet. However, there are many joint projects that are working to connect various blockchains.


InterPlanetary File System (IPFS)

IPFS is a decentralised file storage and referencing system for the Ethereum blockchain. IFPS is an open-source protocol that enables storing and sharing hypermedia (text, audio, visual) in a distributed manner without counting on a single point of failure. The IPFS enables applications to run faster, safer and more transparently.


L


Liquid Democracy/Delegative Democracy

Liquidity Democracy is a governance system where votes can be delegated or proxied to other individuals such as friends or subject matter experts. For example, in liquid democracy, Alice could give Bob her voting rights, and Bob would vote for both himself and Alice A liquid democracy has been explored as a governance mechanism for DAOs where every participant can vote or delegate their vote to another individual.


Libra

Libra is a permissioned blockchain digital currency proposed by Facebook. The currency and network do not yet exist, and only rudimentary experimental code has been released. The announcement of Facebook's Libra project has been a catalyst to blockchain adoption and triggered regulators' reactions and actions. It accelerated the development of critical projects such as Central Bank Digital Currencies.


M


Mainnet

Mainnet is the primary network where the transactions take place on a particular distributed ledger. In the case of Ethereum, Mainnet is the public Blockchain where network validation and transactions take place.


Merkle Tree

Merkle three concept is similar to the family tree. It is a data structure where a single hash code function splits into smaller branches. This type of data structure enables for quicker authentication of a transaction on a blockchain


Mining

Mining is a process by which a transaction is validated, and new blocks are created and added to a blockchain. In order to verify a block, miners use the computer to solve cryptographic problems. Once a computer has solved the problem, a block is considered mined or verified. In some blockchain networks such as Bitcoin or Ethereum, the first computer to mine or verify the block is rewarded by bitcoin or ether, respectively.


Multi-Signature

Mult-Signature is a wallet that requires multiple keys to access where a specified number of people are required to approve a transaction before they can access the Wallet. Most wallets only require one signature to validate transactions.


N


Node

A node is any computer connected to a blockchain network. A full node refers to a computer that can validate transactions and download the entire data of a blockchain. A light node cannot download the entire data of a blockchain and therefore, uses a different confirmation method.


Oracle

an oracle is an entity that is relied on to report the output of an event. In a blockchain network, an oracle helps communicate data to a smart contract. It is an application that connects blockchain applications to legacy applications.


Open-source

Open-source is a software product that includes permission to use, enhance, reuse or modify the source code, design documents and contents of the product.


P


Peer-to-peer (P2P)

A P2P process refers to the direct relationship between two or more parties without a need for a third party intermediary. Regarding a blockchain network, individuals can transact between one another without depending on a single point of failure on a blockchain network.


Permissioned Ledger

Permissioned ledger is the type of a blockchain network in which access to the ledger requires permission. Permissioned ledgers may have one or many validators. Validation on a permissioned ledger is performed by the trusted users, such as government agencies, corporations, banks and other known entities.


Private Blockchain

A Private blockchain is a type of Blockchain that has a closed network where a single entity controls participants. In a private blockchain, new participants require approval. It may also limit which individuals are able to participate in the consensus of the blockchain network.


Private Currency

Private currency is a currency or a token issued by a private firm, and its use is limited within the network of the issuing firm.


Private Key

A private key is an alphanumeric string of data that corresponds to a single specific wallet or a public address. Private keys can be thought of as a password which enables an individual to access their Wallet. It is advisable to never reveal the private key to anyone. Also, if one loses his private key, then he loses access to his Wallet.


Proof of Authority (PoA)

PoA is a consensus mechanism used in private blockchains to grant a single node the authority to generate all blocks or validate transactions.


Proof of Stake (PoS)

PoS is a type blockchain consensus protocol in which a validator uses his cryptocurrency to validate transactions. Validators stake their cryptocurrency on whichever transactions they choose to validate. If the individual validates a block correctly, he is rewarded. And if he validates an incorrect transaction, he loses the cryptocurrency that he had staked.


Proof of Work (PoW)

PoW is a protocol for establishing consensus across a system that ties mining capability to computational power. Hashing a block, which is an easy computational process, now requires each miner to solve for a set, complex variables. The process of hashing each block is a competition between miners; it takes time and computational effort. As a result, a hashed block is considered Proof of Work.


Protocol

A protocol is a set of rules that dictate how data is exchanged, transmitted and validated. It refers to the formal rules that outline how actions are performed on a blockchain network


Public Blockchain

Public Blockchain is a type of Blockchain where the network is open to the general public. In public Blockchain, any participant can execute the consensus mechanism to assist in validating transactions and determining which blocks to be added to the chain.


Public Key

A public key is acquired and utilized to encrypt messages before sending to the recipient who has the matching private key for decryption. By pairing a public key with a private key, transactions not dependent on trusting involved parties or intermediaries are possible. The public key encrypts a message into an unreadable format, and the corresponding private key makes it readable again for the intended party.


S


Satoshi Nakamoto

A pseudonymous individual or entity who created the Bitcoin protocol, solving the digital currency issue of the "double spend." Nakamoto first published their white paper describing the project in 2008, and the first Bitcoin software was released one year later.


Security Token Offerings (STOs)

A security token offering / tokenized IPO is a type of public offering in which tokenized digital securities, or security tokens, are sold in cryptocurrency exchanges, or security token exchanges. They are like ICOs made by selling digital tokens to the general public in established cryptocurrency exchanges. The main difference stands in the fact that STO tokens are the offered cryptocurrency's actual coins, entirely digital, and classified as utilities while ICOs may be classified as equity.


Serialisation

Serialisation is the process of converting a data structure into a sequence of bytes.


Scalability

Scalability is a possibility of change in size in order to manage the network's demands. It is the ability of a blockchain project to handle network traffic, future growth, and capacity in its intended application.


Slashing condition

A slashing condition refers to the situation that triggers the validator's deposit to be demolished when they trigger it.


Smart contract

A smart contract refers to a set of programming rules whose terms are written in a digital language. Smart contracts are actions that can be executed once a set of conditions and rules is met.


Soft Fork

A soft fork refers to a change in the blockchain software protocol where only previously valid blocks become invalid. Because old nodes can recognise the new blocks as valid, a soft fork is backwards-compatible. However, this can result in a potential divider in the Blockchain, because the old blockchain software creates blocks which read as invalid according to the new rules.


Solidity

Solidity is the programming language which Ethereum blockchain developers use to write smart contracts.


Stablecoin

Stablecoins are cryptocurrencies which are pegged to a stable asset, like fiat money or gold. It remains stable in price as it is measured against a known amount of an asset not subject to fluctuation.


Standardisation

Standardisation or standardisation is the procedure of implementing standards based on the consensus of different parties that include firms, users, interest groups, standards, organisations and governments. A lack of standards in blockchain space give developers and coders freedom and makes it difficult for blockchain platforms to communicate without translation help. Standardisation could help enterprise collaboration and application development validate proofs of concept and share blockchain solutions as well as make it simpler to integrate with the existing systems.


T


Testnet

Testnet is an alternative software which blockchain developers use to test applications in a near-live environment.


Token

In Blockchain, a token represents cryptographic and programmable assets or access rights, managed by a smart contract and an underlying distributed ledger. It can represent anything from a store of value to a set of permissions in the physical, digital, and legal world. A Token represents an asset which is built on an existing blockchain. Tokens are designed in such a way that they are secure, unique, liquid, secure, digitally scarce and instantly transferable.


Tokenomics

Tokenomicis is the study, design and implementation of monetary management and distribution based on blockchain technology.


Transaction Block

Transaction block is a set of transactions on a blockchain network grouped into a block through validation protocol and added to the Blockchain.


Transaction Fee

A small fee charged on some transactions sent across a blockchain network. The transaction fee is granted to the miner that hashes the block containing the relevant transaction. Blockchain enables free or minor financial transaction fees. It makes economically viable small financial transactions.


Transaction Per Second (TPS)

A TPA is a measurement of the speed of a blockchain, the number of transactions performed per second. The low TPS of most blockchains can be a barrier to using Blockchain for business, especially financial applications.


Transparency

Transparency is a central property of public blockchains whereby all participants in a system or transaction can view the transactions on the Blockchain.


Trustless

Trustless is a mechanism of the elimination of trust needs from a transaction on Blockchain. Blockchain is considered as a trustless system because the parties (nodes) performing a transaction do not need to trust one another. The properties of Blockchain, such as digital signatures and cryptography, provide trust.


V


Validator

A validator is a participant in Proof of Stake consensus protocol. Validators must submit a security deposit in order to get included in the validator set.


Vyper

Vyper is a Python-like programming language for the Ethereum blockchain built for security, language and compiler simplicity, and auditability.


W


Wallet

A Wallet is a designated storage location for a digital asset that has an address for sending and receiving funds. A Wallet can be online, offline, or on a physical device.


Z


Zero-Knowledge

Zero-Knowledge refers to a non-interactive argument of Knowledge, a cryptographic proof system that allows a user to validate a transaction without disclosing the actual data of the transaction. They also don't interact with the user who published the transaction.


#


51% Attack

If more than half the computer power or mining hash rate on a network is run by a single person or a single group of people, then a 51% attack is in operation. This means that this entity has full control of the network and can negatively affect a cryptocurrency by taking over mining operations, stopping or changing transactions, and double-spending coins.

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