Mining is the process of verifying cryptocurrency transactions on a proof-of-work blockchain. In order to successfully verify transactions and add them to the blockchain, a miner must complete mathematical problems. Mining is also the means by which new crypto tokens are issued: in return for dedicating computing power to producing new blocks, miners are granted fractions of the relevant cryptocurrency as a reward.
Proof-of-work is a system used to decide who can add new blocks to a blockchain. Miners use their computational power to win the right to create the next block with its record of transactions. Proof-of-work helps ensure the integrity of the blockchain as a whole and prevent double spending and sybil attacks.
An alternative to proof-of-work, proof-of-stake is another type of system used to add blocks to a blockchain. In a proof-of-stake system, validators (instead of miners) may add new blocks to the blockchain based on their commitment of the chain’s native cryptocurrency as a “bond” (their “stake”) which helps ensure their correct functionality and the overall integrity of the ledger of transactions.
The coinbase transaction directs the network where to send a reward for completing the transaction verification process – usually the miner's cryptocurrency wallet. The coinbase transaction occupies the very first transaction slot in a given block.
A block is a component of a wider blockchain and contains a series of transactions grouped together during a specific period of time. Blocks contain permanently recorded transaction data and, once deeply embedded in the wider blockchain, cannot be removed. Blockchains are comprised of hundreds of thousands of blocks.
Gas is a unit of measurement relating to the computational resources needed to process a transaction or execute a contract on the Ethereum network. Each computational operation requires a certain amount of gas.
The gas limit in an Ethereum transaction indicates how much computational resources the transaction sender is willing to pay for. A typical transaction that sends ETH from wallet A to wallet B uses 21000 gas.
The gas price in an Ethereum transaction indicates how much a transaction sender is willing to pay for each unit of gas. It is typically given as GWei (which is one billionth of an ETH) per unit of gas.
Every computer that is connected to a blockchain network is a node. There are different types of nodes on a network: a full node is a computer that fully validates transactions, downloading the blockchain’s data in its entirety. By contrast, a light node (or lightweight node) only downloads segments of the blockchain and validates transactions via a different process.
Difficulty is a unit of measurement that gauges how hard it is to find new blocks on a proof-of-work blockchain. On the Bitcoin blockchain network, for example, the difficulty of mining new blocks is adjusted every 2016 blocks in order to maintain an average of one block per 10 minutes.
Hashing refers to the process of a computer taking an input of any length and generating an output of a fixed length by running the data through a mathematical algorithm. Hash rate refers to the amount of hashes per second that a computer is capable of processing.
Validators participate in proof-of-stake systems by validating new blocks on a blockchain. Validators are eligible to be selected by the network to produce the next block, for which they need to put up a stake in the native cryptocurrency of the chain.
Once a transaction has been verified successfully on a blockchain it receives a confirmation.
Forks occur when the rules of the network are changed, often with the intent to upgrade the network. Hard forks are incompatible with the previous version. Soft forks, by contrast, are backwards-compatible: Nodes that switched to the new version will still accept blocks coming from nodes that run the old software.
Cryptocurrencies are digital mediums of exchange that employ cryptographic security to protect transactions and use mathematical algorithms to regulate the creation of new units (tokens) of currency. Cryptocurrencies operate independently of banks and ownership information about units of cryptocurrency is stored in digital public ledgers.
Tokenization describes the process of transforming an asset to a representation of its value on the blockchain (in the form of a token). The process of tokenization may involve various legal and technical components and can vary depending on jurisdiction.
Halving is the process of reducing the amount of coins that are awarded for finding a new block by half. The halvings lead to Bitcoin having a finite supply. The maximum number of bitcoins that will ever be issued is 21 million. Bitcoin halvings occur every 210 000 blocks or approximately every 4 years, with the final halving estimated to take place in 2140.
A cryptocurrency wallet that is connected to the internet and may be used for immediate transaction of crypto assets is considered a hot wallet. By contrast, a cold wallet employs various controls and security measures, including being offline from the internet, to add more security for the storage of crypto assets.
Multi-Sig (or Multi-Signature) wallets require multiple keys in order to authorize a transaction. In practice, Multi-Sig wallets offer a higher level of security since a number of specified individuals are required to sign-off on a transaction before it can proceed.
After miners or validators produce a new block that is added to the blockchain, they receive a block reward. Depending on the network policy, the block reward may be issued in the native cryptocurrency of the blockchain or as transaction fees – or as a combination of the two.
Wallets are applications for the handling of public and private keys used in blockchain transactions. Wallet applications can interact with blockchains in a variety of ways, including sending and receiving cryptocurrencies and signing messages. Common mobile wallet applications often offer service for multiple cryptocurrencies at once.
A public or private key is an alphanumeric string used in the process of sending and receiving cryptocurrencies. The public key can always be derived from the private key according to predefined rules. The combination of a secretly-held private key and publicly visible public key allows the key holder to establish his or her unique identity and claim control or ownership of cryptocurrencies.
A seed phrase is a random series of words which contain all the information necessary to regenerate the private key used in a cryptocurrency wallet. Seed phrases are normally generated by a randomization algorithm when a user generates their wallet and act as a back-up option should they lose access. Since a seed phrase can provide full access to the wallet, keeping them safe is of paramount importance.
Sharding In order to avoid having each node on a blockchain be responsible for the entire transactional load of the network, blockchain states may be split into shards which are processed in parallel. Often used as a scaling solution, sharding ensures that each node only has to maintain information related to its partitioned section of the blockchain.
In a proof-of-stake consensus system, users must bond (or “stake”) their cryptocurrency tokens before they can validate transactions on the network and receive block rewards. In proof-of-stake blockchains, users often have to meet minimum staking requirements in order to be eligible to validate transactions.
A sidechain or a child chain as they are sometimes called, are separate blockchains which are connected to a parent chain. Sidechains have the potential to enable greater scalability.
In Polkadot, a parachain is a form of blockchain that runs in parallel to the main blockchain known as the relay chain. Parachains derive their cryptographic security and consensus systems from the relay chain but can perform their own transaction verifications independently, have their own monetary systems, and communicate with each other.
Stablecoins are cryptocurrency tokens that are pegged to a stable asset such as a fiat currency like the U.S. dollar, or stabilized by an algorithm that constantly adjusts according to supply and demand. In theory, stablecoins are resistant to the volatility of other types of cryptocurrency since their value is measured against a known asset.
A second layer is a set of solutions built on top of an existing public blockchain to extend its original capabilities. Second layer solutions might facilitate supplementary actions such as microtransactions, lower transaction fees, allow developers to issue their own tokens, or provide interoperability.
Initial Coin Offering (ICO)
An Initial Coin Offering (ICO) is when a company raises capital investment by selling its own cryptocurrency coins or tokens that relate to its products or services. The coins offered by the company may represent a financial stake in the project or offer some utility in using it.
Decentralized Autonomous Organization (DAO)
A Decentralized Autonomous Organization (DAO) is an organization that is run not via the decisions of a central authority or hierarchy, but via pre-written computer code and the votes of its members who interact with it using their digital identity. The rules by which a DAO operates are coded into smart contracts and voting rights are generally conferred based on tokens holdings of users.
Decentralized Finance (DeFi)
DeFi (decentralized finance) describes the shift away from the conventional closed financial systems operated by banks to a decentralized ecosystem of financial applications facilitated by blockchain technology. DeFi systems are characterized by their transparency, interoperability and permissionless accessibility by individuals around the world.
An airdrop refers to the distribution of coins or tokens to a wide number of holders, usually for free. Airdrops are often used as marketing strategies: tokens may be sent to low level traders for free or in exchange for the traders notifying others of the presence of the token on the market. Airdrops are also sometimes employed to achieve a wide-spread distribution of a blockchain’s token supply.
Distributed ledger technology (DLT) is a system for recording transactional information across multiple nodes on a network. Distributed ledgers have no central store of data and instead use each node to process and verify the information within them by consensus.
Oracles make real-world data accessible and usable by blockchain applications. An oracle provides data from external sources such as market price feeds, weather services, shipping record databases and allows smart contracts to execute based on the data inputs.
Peer-to-peer (P2P) describes the interactions that take place between nodes or users on a decentralized network - such as a blockchain. P2P networks can consist of any number of separate nodes which can share tasks and workloads and interact with each other directly rather than relying on an intermediary.
Fungible cryptocurrency tokens are interchangeable and divisible, meaning that the value of all units and fractions of tokens is the same as all equivalent units and fractions of the same cryptocurrency. By contrast, non-fungible tokens are unique and cannot be broken down into fractions that amount to the same collective value. Bitcoin is an example of a fungible cryptocurrency while ERC-721 tokens on the Ethereum blockchain are examples of non-fungible tokens.