10 Blockchain Terms You Should Know

To newcomers, the terms bandied about can often be extremely confusing, especially if they do not mean anything to the average joe. Unlike cryptocurrency and trading terminology, blockchain is often much more technical and is a whole different world. To get on the bandwagon, here are 10 key blockchain terms you should learn.

Node

Nodes are key to the existence, maintenance, and verification of the blockchain. In short, they are computers that are connected to the blockchain network, and each have a copy of the blockchain and related data.

A full node follows all rules or the protocol of the blockchain without exception, and must verify all blocks and transactions in the past, present, and future. Most computers on the network are light nodes, but the core existence and functionality of the blockchain network depends on full nodes.

Public ledger

Essentially, this is what the term “blockchain” refers to. It is a record of every single transaction that has occurred and is viewable by anyone due to its decentralized nature. All nodes have a copy of this ledger; a randomly selected node verifies all transactions within a 10 minute period.

Central ledgers work similarly but are controlled by a central agency or party. Distributed ledgers also follow the same basic premise, with the exception that data is stored across many decentralized nodes, with records either permissioned or unpermissioned to control who can access and edit them.

Block

These are data packages that contain permanent and immutable records on the blockchain network. The genesis block refers to the first block in a chain, with subsequent blocks linked to one another — hence the term “blockchain”.

Block height refers to the number of blocks that are connected on the blockchain. All blocks past and present can be viewed using block explorer tools, allowing viewers to take note of pending transactions or network hash rates.

Hash

This is the process of a miner verifying a transaction via a hash function. In short, this process ensures the integrity and accuracy of the data. All blocks must be hashed before they can be added to the chain, with a reward given to the miner that successfully hashes a block.

Mining

Blockchain transactions are validated through a process known as mining, which helps to ensure that there is no double spending. This involves the solving of cryptographic problems using specialized hardware, with miners rewarded with coins or a transaction fee, depending on the protocol of the blockchain. Miners often run mining rigs dedicated to hashing blocks, with the hash rate measured in hashes per second — this represents the performance of the rig.

Halving

This is the process by which the reward for mining blocks is halved. Using the example of Bitcoin, the reward for successfully mining Bitcoin blocks will half every 210,000 blocks, which is approximately four years.

In the early days, each mined block would be worth 50 Bitcoins to the miners, but this has since been halved to 25. There will only ever be a maximum of 21 million Bitcoins that can be mined, making it a finite digital commodity.

Proof of work / Proof of stake

The system known as proof of work is designed to allocate rewards to miners depending on how much “work” their rig has done. This is pro-rated based on the computational power provided during the block hash. Miners that offer more power are rewarded with more coins.

Proof of stake is a different system from proof of work. It works by taking the amount of cryptocurrency you own to calculate an amount that you can mine in the future. In theory, this should deter users from creating forks as this will lower the value of their stake.

Fork

An alternate blockchain is created during a fork, with both blockchains running at the same time parallel to one another.

A hard fork will reverse every transaction prior to it, rendering valid transactions invalid, or vice-versa. These forks are rarer and will require all existing nodes and users to update their protocol to the latest version. For example, Bitcoin Cash was created following a hard fork from the Bitcoin cryptocurrency, resulting in the formation of a new blockchain.

Soft forks refer to a change to protocol, which means all previous transactions on the blockchain remain valid, but all future ones must adhere to the new restrictions. Full nodes will enforce the new protocol.

Address

This is a string of alphanumeric characters that can send or receive cryptocurrency on the blockchain network. They are public and all transactions going in and out are viewable by anyone who knows the address. Although the content or transaction records cannot be altered, the ability to see what goes on within the address ensures accountability for all parties involved. Only the owner of the private keys can access this address on the blockchain.

Multi-signature addresses are increasing in popularity due to the additional security it provides. It requires multiple keys to sign off or authorize any transactions, with the number of keys needed to be determined when the address is created. The extra layer of security makes it harder for funds to be stolen or hacked, even if one key is compromised.

Smart contract

The main difference between legal contracts and smart contracts is that it is stored on the blockchain and will be executed automatically once the pre-determined rules and requirements have been met. Instead of being drafted and signed on paper, it is coded into the system. Think of it as an escrow type service, where the funds are held and only released upon the agreements or requirements being met.

Blockchain networks such as Ethereum and NEO allow for less restrictive smart contracts which cover a wider range of instructions, as opposed to Bitcoin which only allows for transactions related to the currency’s usage.

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