This section is under development.

In the meantime check out this video. Note, we have no affiliation with the creator, but we find it to be a good introduction to the technology.

Bitcoin and blockchain terminology

The Bitcoin Network

is a large peer-to-peer network of computers that anyone can join and which no single entity has control of. The main purpose of the network is to securely trade a finite, native digital currency, bitcoin (by convention the Bitcoin network is capitalized while the currency is not). Some computers on the network vie for the right to create block entries, while others collect transaction data and validate the blocks. The computers which are competing for the right to create the next block in the blockchain are referred to as miners while the other validating computers are called nodes. Anyone with a computer and an internet connection can join the network as a miner or node and anyone can access the entirety of records, that is, all of the transactions between all accounts. (Note that

 

Blockchains

are a type of decentralized data storage. Consider the following example as a way to understand the purpose of a blockchain.

 

Say you loan your friend some money and agree to be repaid through random size and amount payments. You agree that you will keep a notebook to which you will add a new line for every transaction, starting with the loan amount and adding a line with the payment amount each time a payment was made. In this situation you can at any time add up the values to determine the loan balance. However, your friend has to trust that you’ve entered in the correct data, so they may want to keep their own notebook or ledger. Then it becomes a question of who’s copy is correct. This may be easy between friends, but it wouldn’t scale well. This is part of the reason for a “trusted third party” such as a bank.

 

Another reason we use banks today is because in general, digital data is free and easy to copy. If I had a digital dollar on my computer, what would stop me from copying it, and sending the same dollar again, i.e. double spending? Banks are used today to ensure there is no double spending.

Transactions

on the Bitcoin network represent the exchange of bitcoin from one address to another. They are recorded in sequential order and combined and submitted to the blockchain in blocks.

Blocks

are created on average about every 10 minutes. The data on the bitcoin blockchain is structured in a way that builds upon itself; each block necessarily includes information about the previous block.

Miners

may refer to the purpose-built computers which run on the network, or the people who operate them. Miners, compete for the right to create the next block in the blockchain. They have to use information about the previous block along with a random number in an algorithm to try find a result that satisfies the protocol. They use brute force; modern mining machines can each guess 100 trillion times a second. If they find a suitable solution, they broadcast it through the submission of a new block to the blockchain. A successful miner is compensated for their efforts in two ways. One, with the minting of new bitcoins and two, with the collection of all the transaction fees associated with the transactions written in that block.

Block Rewards

are the bitcoins that are minted in a new block and earned by the miner. Bitcoin began with a block reward of 50 bitcoins. The protocol stipulates that after 210,000 blocks are generated the reward is halved. This translates into a halving occurring about every four years. There have been three halvings to date, so the current reward is 6.25 bitcoin.

Nodes

are low cost computers. Off-the-shelf nodes are available for under $500 and will likely cost less than $10 in electrical costs to run for a year. They validate blocks, ensuring a block’s adherence to the protocol and the order of transactions. Miners refer to nodes to ensure they are working on the most recent version of the blockchain. Miners and nodes, working together, form the key components to what secures the network.

Mining pools

can be run by private companies, collectives or by various decentralized mechanisms. They allow miners to pool their mining resources and share the rewards for a small fee going to the pool operator. It has not been practical for a solo miner to mine without a pool for quite some time. So today, most blocks are solved by mining pools. This is important when considering some of the critical security vulnerabilities of Bitcoin.

Users

are people who buy, sell, use or hold bitcoin.

Exchanges / Brokerages

or brokerages are the typical way for users to gain bitcoin through purchase with country currency. They can operate in similar ways to stock exchanges and can have similar levels of oversight, but not all exchanges are created equal. Many operate with strict know-your-client (KYC) and anti-money laundering (AML) policies, but some operate offshore in efforts to avoid KYC and AML requirements. Extreme care should be taken when deciding to trust an exchange with custody of your dollars and/or bitcoin.

Public-key Cryptography

or asymmetric cryptography is a cryptographic system that uses pairs of keys: public keys (which may be known to others), and private keys (which may never be known by any except the owner). The generation of such key pairs depends on cryptographic algorithms which are based on mathematical problems termed one-way functions. Effective security requires keeping the private key private; the public key can be openly distributed without compromising security.

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© 2020 BIR Blockchain Infrastructure Research

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