Welcome to Ethos’ Alphabetical Guide to Cryptocurrency Definitions and Metrics. We know, there are dozens of these guides out there, but this is the one to rule them all. OK, crypto’s complicated. There’s bound to be a load of stuff we’ve missed. Just know, this is only the start. This guide will be updated on a monthly basis with all of the cool happenings in the world of crypto. We’re writing it in plain English, because we want to make everything as clear as possible. Besides, for all the crypto-wizards out there, you probably know it all anyway, right?

It’s for anyone that wants to learn more, and maybe have a go at explaining it to their friends, colleagues, relatives and fellow investors: for those that have been in crypto for a while and want a simple definition of the latest stuff, or the ones just getting into it, and who want to get up to speed. So, find your favourite easy chair, sit back, and relax. It’s about to get technical, yo!


Airdrops

A way of distributing free cryptocurrency or tokens to users. This can occur by simply holding an account with a partnered exchange or holding a compatible cryptocurrency, such as ETH or Bitcoin, in a specified 3rd party wallet or can even take place in completely public events. Sometimes both apply i.e. an exchange may require you to hold a certain amount of one coin, before you can receive another. It is seen by some as a PR exercise, and by others as a viable option / alternative to ICOs for fairly distributing an asset. Once received, these assets then become transferable and tradeable on the open market. Airdrops can also occur in the form of a hard fork, where the original version of the cryptocurrency is required, and a blockchain ‘snapshot’ of ownership is taken before the owner of the original cryptocurrency receives the new, forked version of cryptocurrency.

 


 

Atomic Swaps

A technology allowing two different users to directly exchange cryptocurrencies belonging to separate blockchains, without any third-party or intermediary e.g. XRP to Ethos. The technology is still in its nascent stages, and while progress is being made, there are associated risks involved. Currently, the only viable alternative is to use an exchange, which requires trading the original cryptocurrency i.e. XRP into a compatible intermediary i.e. Bitcoin, and then trading this cryptocurrency into what you want to purchase i.e. Ethos. This trade incurs fees, which would be negligible using an Atomic Swap. Were you to currently attempt sending a cryptocurrency to an incompatible address, there is a high likelihood that you would lose your funds, and they would be irrecoverable. See the section below on an ‘Address’ for more information.

 


 

Addresses

Composed of a unique, alphanumeric string of characters, an address is a secure identifier enabling an individual or entity to perform a blockchain transaction. A private key is required to access these funds, which is an equally unique string that operates as a password or PIN number. In conventional terms, your address can be seen as your account number and sort code. Bitcoin addresses start with a ‘1’ or a ‘3’. Ethereum addresses start with an ‘0x’. It is important to note, as per the definition above on Atomic Swap technology, that sending a cryptocurrency to an incompatible address is not advised, as it is likely you will lose the funds. Unlike a centralized system, there is often no resource to protect your funds should you make a payment to an incorrect address, so it is important to get it right. If in doubt, always send a small amount of value first, to practice, and then proceed with the main transaction.

 


 

Altcoins

Any category of cryptocurrency that isn’t Bitcoin. These alternative coins are made up of currencies and tokens. Many present alternatives to Bitcoin, aiming to be faster and cheaper, while many operate as access tokens for digital goods and services applications (DApps) that operate on a blockchain. Many popular altcoins operate using Bitcoin’s core technology, while others are completely unique. Others, such as Ethos, are built on the Ethereum blockchain and are known to be ERC-20 compliant – a common standard for Ethereum based coins. The original altcoin is considered by many to be Litecoin, as it was based on the Bitcoin source code. As of 19th February 2018, there are 1,544 altcoins available on CoinMarketCap, comprising 62.6% of the entire cryptocurrency market. Altcoins can be stored in compatible wallets and traded with other altcoins via an exchange.

 


 

ASICs – Application Specific Integrated Circuits

Microchips or processors designed and manufactured to perform the highly specific task of mining cryptocurrency. Bitcoin ASICs came into existence in 2013, vastly outperforming existing technology at the time. Many consider the use of ASICs mining to be incompatible with the decentralized vision of cryptocurrency, as it is generally a technology accessible by those with a high degree of technical expertise and funding. Nonetheless, the majority of Bitcoin ‘Proof of Work’ mining is now carried out by these types of processors, which perform well, yet also consume considerable amounts of electricity. Therefore, more sustainable alternatives to generating cryptocurrencies are being developed, including PoS and DPoS protocols.

 


 

Bitcoin

The original cryptocurrency created by Satoshi Nakamoto in 2009. Allowing for near instant transactions of value in a P2P way, it operates as an decentralized, and thus un-hackable and immutable ledger of value stored on what is known as a blockchain. Bitcoin is not backed by any central government or institution. It exists purely as a distributed network of computers that attest to the uniqueness of any given transaction. Colloquially known as ‘The King of Crypto’ and ‘Digital Gold’ it is the most liquid of all cryptocurrencies, worth $189.76bn in terms of its total market cap, according to CoinMarketCap on 19th February 2018. Bitcoin requires a large amount of computing power to operate, relying on what’s known as a Proof of Work protocol. For more information, please refer to the ‘What is Bitcoin?’ article on the Ethos website.

 


Blocks / Blockchain

Refers to a public ledger, or database, that in theory cannot be changed without consensus. This immutability allows for data within that database to perform different transactional functions, and the elements of this database are known as blocks. These blocks can represent movements of value, like a currency, or work as an access mechanism or functional utility, for a platform providing goods and services. As more transactions take place on a ledger, new blocks are added to the chain containing the recorded transaction data. There are different ways of generating and managing blockchains. Some are mined, others are pre-minied. Each has a different amount of data it can store, and there are large variations of speed in which the data can be transferred. Some blockchains are managed centrally by specialized parties that run nodes in the network, and might more accurately be termed distributed ledger technology, and others like the Bitcoin blockchain are completely decentralized. There also exists hybrid systems, which aim to combine the benefits of centralisation and decentralisation.

 


 

Block Height

Refers to the number of blocks that have been produced in a specific blockchain, in the case of blockchains which are mined i.e not pre-mined. Starting with what is referred to as a ‘genesis block’ (the first block in a blockchain), these blocks can store and manage multiple types of information like documentation data, yet popularly relay transactional values or functions of utility. The block height on a transactional blockchain like Bitcoin can be accessed publicly via a ‘block explorer’. The speed at which a particular block height is reached depends on the difficulty and inflationary / deflationary model of the respective blockchain.

 


 

Block Reward

A payment, in the form of cryptocurrency or fees, offered to the miner of a successfully hashed block on a blockchain. What this reward is will depend on the algorithmic policy of the cryptocurrency: such variables include the age of the blockchain, hashing difficulty, and therefore the inflationary model of said cryptocurrency. For instance, Bitcoin mining currently awards 12.5 Bitcoins for each block that is successfully hashed. After a certain period of time, rewards will decrease as the hashing difficulty is increased. Often, the block reward halves when a certain number of blocks have been mined, every 210,000 in the case of Bitcoin.

 


Centralized

A term referring to an organization or system that is controlled by a single group or entity. Governments and corporations are centralized organizations, as are their currencies and shares respectively. Current centralized systems have various advantages that decentralized systems lack, such as regulation, yet conversely decentralized systems have advantages over centralized systems, such as resistance to abuse, attack and failure.

 


Cold Storage

Describes a method of storing digital data, such as cryptocurrencies, in a way that is not connected to the internet. Popular methods of cold storage include specialized USB enabled ‘hardware wallets’. Due to the lack of user-friendly software, it makes the use of such data more complicated and less likely to be regularly accessed. Additionally, one aspect of such devices is the opportunity for physical damage, loss or theft. However, the advantages of such tools is that they are far less likely to be prone to software theft, commonly known as hacking.

 


 

Consensus

Defined as any agreement by a given majority, often placed at 51%. If 51% of people, or entities on a network, agree to a certain condition, be that a value transaction or change to the system, the result is known as consensus. An important part of the cryptocurrency space, consensus is required to verify the validity of digital transactions on a blockchain. It is also a way of politically managing decentralized systems, for instance whether or not a hard fork should occur.

 


 

Cryptocurrency

Any type of currency that is transferred via a blockchain, using decentralized and cryptographic protocols. By using these protocols, the value of the data being transferred is resistant to fraud, and is protected from negative features of traditional fiat currency, such as counterfeiting. This transparency, coupled with its P2P and portable nature is considered one of its many benefits, in addition to the fact that it is theoretically unable to be interfered with by centralized governments and organizations. As of 19th February, the most valuable cryptocurrency in the world is Bitcoin. Other cryptocurrencies include Litecoin, Dash, ZCash, Monero, and Nano.

 


Cryptojacking

The covert use of a computer to maliciously mine cryptocurrency. Traditionally reliant on a piece of software installed on the computer itself, modern cryptojacking techniques can be managed remotely by simply accessing the computer’s browser. Website owners are essentially hacked, have the rogue software installed on their servers, and then the software activates whenever a user accesses a particular page on that website. It is also possible to cryptojack via display ads on websites, using a similar technique by installing within the advert’s HTML code.

 


 

DAO – Decentralized Autonomous Organizations

An organization that operates through rules encoded as smart contracts. Think of it as a financial or crowdfunding program, built on a decentralized blockchain, existing entirely online. They’re designed to be autonomous, yet often require maintenance by specialized individuals who are hired by the DAO’s members to encode elements that cannot be performed autonomously. DAOs are not owned or governed by individuals. Instead, they operate via network of distributed computers, with actions decided by consensus. In many ways, a DAO is effective democratic, financial system with safeguards in place to protect its members. However they cannot be considered infallible or incorruptible, as proven by the Genesis DAO hack of May 2016.

 


Decentralized

Drawing from the definition given by Vitalik Buterin, founder of Ethereum, the term can be broken into three parts when referring to decentralized blockchains: architectural, political and logical decentralisation. ‘Architectural decentralisation’ is the number of computers on the network. ‘Political decentralisation’ is the number of users of that network. ‘Logical decentralisation’ asks whether two halves of the network could operate independently of one another, were you to split users and providers of the network equally. Blockchains are politically decentralized, as no single entity controls them. They are also architecturally decentralized, meaning they don’t exist on a central server, resulting in a lack of central point of failure. However, they are logically centralized, as there is agreement related to the operational behaviour of the system, for example that users agree Bitcoin will only ever have a total supply of 21M coins. Therefore, anything that definitively breaks that rule (a hard fork) isn’t Bitcoin.

 


 

DApp – Decentralized Application

Software applications that run on top of dedicated, decentralized P2P networks. They differ from smart contracts, and therefore are also different from DAOs. Any number of participants from the provider and user sides may interact with these applications, and the function need not be financial, as is the case with a DAO. Like conventional, centralized applications, DApps can be written in a variety of programming languages from Javascript and C# to PHP and Java, and more besides. Ethereum is the most popular DApp platform at the time of writing, primarily using a custom coding language called Solidity. The Ethos Universal Wallet is an Ethereum DApp.

 


Difficulty

When creating blockchains through the process of hashing, the difficulty determines the amount of computer power required to solve the cryptographic puzzle that adds a block to the chain. Therefore, two factors determine the difficulty or hashpower required: the parameters set by the cryptocurrency, and the number / power of computers on the network trying to solve the puzzle. Typically, the difficulty parameter and reward mechanism of the cryptocurrency is predetermined, so the variable affecting the difficulty is dependent on the number / power of computers on the network. The computer network’s hash power is improved by using ASICs.

 


 

ERC-20

A certifiable standard for tokens launched on the Ethereum network, that guarantees they work in a predictable and secure way. This allows for the easy transfer of compatible tokens, in the instance of an ICO for example, that would require the exchange of Ether. The benefit of having this benchmark of compliance also means that wallets and exchanges only need to apply a single contract address for Ethereum in order to manage multiple types of token.

 


 

ETH – Ether

According to the definition on the Ethereum website, “Ether is a necessary element – a fuel – for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations. To put it another way, Ether is the incentive ensuring that developers write quality applications (wasteful code costs more), and that the network remains healthy (people are compensated for their contributed resources)”. Developers who intend to build DApps that will use the Ethereum blockchain require Ether, as do users interacting with its smart contracts. Using the platform, transaction fees are measured based on the gas limit and gas price, ultimately paid for in Ether.

 


 

Ethereum

The foremost DApp platform at the time of writing, proposed and founded by Vitalik Buterin in 2013. Development was funded by an online crowdsale that took place between July and August 2014. The system went live on 30th July 2015. Ethereum provides a Turing-complete virtual machine, known as the Ethereum Virtual Machine (EVM), that allows for open-source, public and blockchain based distributed computing, using smart contract functionality. The DApps that can be built on the Ethereum platform range widely in use cases, from prediction markets and identity systems, to games and social media platforms. Ethereum is the second largest blockchain by market cap, worth an estimated $91bn on CoinMarketCap as of 19th February, 2018, representing approximately 19% of the entire cryptocurrency market.

 


 

Emission

The speed at which certain cryptocurrencies are created and released, often through the use of airdrops or staggered ICOs. Whether this speed slows or remains constant determines whether the cryptocurrency is based on a deflationary or inflationary model, respectively. Often, a cap will be placed on the emission, so that by default it becomes deflationary after that point, due to physical loss or token burns. This cap is known as the maximum supply. However, there are examples of cryptocurrencies that employ an infinite emission model, so that they will continue to be created and released, though at a lower rate of emission. Such a currency is inherently inflationary, in that the unit value of the currency decreases over time. Emission rates to not necessarily speak to the quality of a cryptocurrency, however from an investment perspective it is worth understanding the concept, as it is a parameter that may dilute your portfolio over time.

 


 

Forks – Soft & Hard

A change or upgrade to the software protocol of a blockchain. What determines if it is soft or hard fork depends on a) whether the change can still operate alongside the existing protocol and b) whether there is consensus related to the change. To clarify, soft forks are generally seen as routine maintenance to improve issues related to the blockchain, such as security and scalability. Much like when you download a patch for the operating system on your computer, you are not fundamentally changing the main operating system. With a hard fork, the operating system of a blockchain is being changed i.e. a new record of data begins. This means the new version of the blockchain will disregard the old blockchain completely, and becomes something fundamentally different. This new blockchain will then be maintained independently from the previous one, and will be given a different name. Sometimes, however, the older blockchain is given a different name, as was the case with Ethereum Classic in 2016. After Ethereum was hard forked after the Genesis DAO hack of 2016, the new version maintained the name Ethereum, while it was the old version that changed its name. On various occasions, accidental hard forks have occurred that did not undergo a process of network consensus. Hard forks regularly result in the resulting cryptocurrency being delivered via airdrop to users that hold the ‘pre-fork’ version, as has been the case with Bitcoin Cash, Bitcoin Gold and Bitcoin Diamond.

 


Gas

On the Ethereum platform, each transaction i.e. API call that is performed, costs gas. This small cost pays for the computational resources of the network to process the transaction. The more gas a user pays, the faster the transaction occurs. Think of it as an incentive for the miners on the network to prioritise your transaction, over a user that set a lower gas limit i.e. the maximum amount of gas one is willing to spend on a transaction. Any gas that is unused after a transaction occurs is returned to the user. If a transaction fails for any reason, the user still pays the gas. Gas is calculated by multiplying the gas price or ‘gwei’. gwei is a mathematical term referring to a fraction, also known as a ’shannon’, defined as 1 billionth of a whole. That’s 1:100,000,0000. A typical gas price is 20 gwei, but can be as high as 50 gwei if the Ethereum network is busy. 2 gwei is the minimum required to perform a transaction. A simple USD calculation of your maximum gas price is $ cost of Ethereum / 1 billion x gas limit. If you are performing regular transactions on the Ethereum network, it’s worth understanding this formula.

 


 

Hashing / Hash Function

A computer program, which takes data and converts it into an alphanumeric sequence or code. Hashing allows for faster retrieval of information related to the original data, because hashes are typically shorter and therefore easier to compute. Hashes have the added benefit of scrambling data, so that it becomes unreadable, secret and secure. The difficulty to crack a hash function is therefore what defines the security of a blockchain, as well as contributing to its production.

 


 

SHA 256 – Secure Hash Algorithm 256

Originally designed by the US Government’s National Security Agency in 2001, and released under a royalty-free licence, SHA is considered one of the most digitally secure ways to encrypt and protect information. It is used by Bitcoin as the basis of its Proof of Work algorithm, a variation of the Hashcash function invented by British cryptographer Adam Back in 1997. It’s also used in creating Bitcoin addresses, thereby improving security and privacy. It is estimated there are as many solutions to SHA 256 as there are grains of sand on earth, making the economics of trying to crack it using brute force techniques unviable. See the section on ‘Proof of Work’ to learn more about the fundamentals of its application to blockchain technology.

 


 

Hashes per Second

Simply the number of hashes a computer can produce in a second. A megahash is measured as 1 million (1,000,000) hashes, therefore a hashrate can be measured as 1 million hashes / second or 1 MH/s. Of course, there are higher hashrate definitions: A gigahash is one factor above a megahash, so 1,000,000,000 hashes. A terrahash is one factor above that, at 1,000,000,000,000 hashes. And a petahash, well that’s 1,000,000,000,000,000 hashes! The Bitcoin mining network is currently performing at approx. 22 PH/S, and growing.

 


Keys – Private and Public

When performing a cryptocurrency transaction, it is first necessary to have a public and private key. It is the combination of these two keys that allows users to send and receive in a secure way. Each key is represented by an alphanumeric string, a hashed reference to that user’s ownership of a cryptocurrency from a particular blockchain. Think as your private key as your digital ID, or PIN number. Like a conventional bank account, it’s required to spend, withdraw or transfer funds, or carry out functions on the account. A hash algorithm processes your private key, in order to generate your public key. When you make a transfer, your public key is broadcast to the nodes on the blockchain network. Via consensus, the network confirms the validity of that transfer, that is to say that the private and public keys are compatible, and the entity that performed the transfer actually owns the funds. Once confirmed, the transaction is sent to the recipient’s public address. The addresses themselves are generated via the public key, and you can think of your address as an account number and sort code. Although public keys and addresses are generated from a private key, and both the public key and address are visible on the network, trying to reverse the process to find a private key is practically impossible. This is due to the hashing algorithm on the network, which makes trying find the key economically non-viable, due to the cost of the hash power required, which would need to exceed the power of 51% of the entire network. It is important to safeguard your private key. You can always regenerate your public key and address from your private key, but if you lose your private key, you will lose access to your account. See the ‘Mnemonic – Seed Phrase’ reference in this guide for more information on how to remember and protect your private keys.

 


Lightning Network

Described in its whitepaper as “Scalable Off-Chain Instant Payments”, the Lightning Network is a theoretical technology that allows for high-speed, high-throughput, low-cost micropayments to occur on the Bitcoin network. Indeed, should it succeed in its vision, the technology could be applied to a range of cryptocurrencies. A much discussed issue with Bitcoin as a payment protocol, aside from the volatility of its price, is the number of transactions that can be made on the network, known as its ‘scalability’. Depending on how busy the network is, the transaction range can be anywhere from 5-20 per second, with the average being around 7. Compare this to the Visa network, which can peak around the 45,000 t/s range, and it’s clear there’s a scaling issue for Bitcoin as a global payment method. Bitcoin Cash (BCH), a Bitcoin hard fork, aims to solve the problem by increasing the amount of data a block can hold from 1MB to 8MB. By contrast, rather that updating Bitcoin’s technology, the Lightning Network will achieve scalability by creating an extra layer of technology that sits alongside the Bitcoin blockchain, in the form of hashed timelock contracts, while still harnessing the same level of security in its transactions. One potential issue is that BTC must be locked in these time locked contracts in order to participate in the Lightning Network.

 


 

Miners & Mining

Miners are users, or nodes on a network, that perform the important task of creating cryptocurrency, validating blockchain transactions, and adding them to the public ledger in the form of new blocks. Miners are rewarded transaction fees for the work they carry out, as well as a payment in the form of the blockchain’s cryptocurrency when hashing new blocks. Miners are the entities that decide which version of a blockchain should be mined. The services they provide allow for issuance of new cryptocurrency, and through decentralisation also ensure the security of the blockchain. Anyone with the correct equipment and technological understanding to engage with the process is able to, however due to the cost of both the modern hardware (CPUs, GPUs and ASICs) and electricity required to run a mining rig, in addition to the industrial competition for hash power, many are limited from doing so. Due to these challenges, many miners collaborate in ‘mining pools’ in order to share resources, and the rewards from the cryptocurrency they create.

 


 

Mnemonic – Seed Phrase

‘Mnemonic’ refers to any system that helps you remember something. It could be a series of rhyming words, abbreviations, a song, or even a journey through an imaginary place. When creating a cryptocurrency wallet, a mnemonic phrase is sometimes generated in order to provide an easier way to remember your private key, instead of having to memorize an alphanumeric string. Also referred to as a ‘seed phrase’, it’s important to keep it somewhere safe. As with any private key you hold, if you lose it means you’ll also lose access to your cryptocurrency. Try not to keep your passwords anywhere that could be destroyed or stolen, and if possible try to keep them separate from other details about your crypto-wallet. To be highly secure, keeping your passwords away from internet connected devices is also advised.

 


Multi-signature

This means that more than one private key is required before a transaction can occur. It increases security by decentralizing control, and therefore has a number of benefits from a business perspective. The most common commercial application is escrow. Though the current escrow application does not provide an absolutely trustless environment, it does not require the degree of centralization that traditional escrow services do. For example in a digital marketplace, a buyer will often wish to withhold funds until their delivery arrives. In centralized marketplaces like eBay, the escrow service is at the discretion of eBay. There is a voting system to protect buyers, but ultimately eBay has the final say. Even in cryptocurrency environments, a form of escrow can be deployed with a user acting as a middleman for both parties, however this system is still open to corruption. With a multi-signature wallet, a buyer, seller and middleman can all have private keys, with funds not released from the buyer until all parties agree that the delivery took place. This gives all parties more control, with the only trust being placed on the wallet provider. If the wallet itself is decentralized, the system becomes trustless.

 


 

Peer to Peer

Describes any system in which there is no third party or middleman. In cryptocurrency, it is the direct exchange of currency or data from user to user, without any central or external involvement. The decentralized nature of P2P networks can make them more resilient to a single point of failure. The larger a P2P network, the more resilient it becomes. However that does not make it immune to failure, as the network will require nodes to connect users, which could potentially be throttled or shut down using a denial of service (DDOS) attack.

 


 

PoB – Proof of Burn

A concept describing the economics of adding value to one cryptocurrency, by destroying the availability of another. Put another way, provably removing liquidity from System A in exchange for System B adds immediate value to System B. This can be done in a variety of ways, typically by sending a cryptocurrency to a wallet, and then destroying the private keys to that wallet. How this act is performed would be decided by consensus. Users that sent value to the ‘burn wallet’ then receive an agreed amount of new cryptocurrency in exchange for burning their old one. Such a process could be managed via a DAO. This model tends to rely on burning Proof of Work currencies, such as Bitcoin, where there is demonstrable economic resources i.e technical expertise, hardware costs and electricity, that went into producing it. In short, PoB works as a practical application of the concept of ‘scarcity’, and is an example of the economics of supply and demand, allowing for the efficient transfer of value between different systems.

 


PoO – Proof of Ownership

Describes the provable storage of document data on a blockchain. Think of it as a way of immutably proving that a record exists, in a way that other systems cannot. For example, if you wanted to prove that you owned a piece of property, the deed to that property could be stored on the blockchain. Traditionally, that proof would need to be stored in some way on a centralized system, be that digital or analogue, and that centralized method of storage could be open to a range of issues including tampering, loss or destruction, in addition to the fact that the party in charge of that record must be trusted in some way. Proof of Ownership removes elements of fraud associated with the production of ownership certification. Therefore, the model can be used in a range of applications, from wills, real-estate and digital rights’ management, to ID verification, logistics and medical records. It’s a way of maintaining the integrity of important information, and proving without doubt that the owner associated with that record is verifiable.

 


 

PoR – Proof of Research

A concept related in many ways to Proof of Work. However, unlike Proof of Work where the value associated with the production of a cryptocurrency is reliant on an arbitrary process of hashing, which despite its provable input cost has no other value output other than the creation of a cryptocurrency, Proof of Research aims to put the hash power of the decentralized network to work on problems that have demonstrable, real world value. There exists a number of companies that are attempting to build globally networked supercomputers, that harness the spare computing power of ordinary, non-technical users, and reward them in cryptocurrency for solving problems on their machines. These problems can range from analysis of weather systems and astronomy, to research into new drugs and artificial intelligence. By offsetting the spare hash power of their computers, participants in the network can benefit from the receipt of a publicly tradable asset, and scientific research teams can access an ad hoc network of computers. For the latter party, this is usually cheaper and easier to access than a traditional, centralized supercomputer, and arguably more dynamic in the ways in which hash power can be managed, making it possible for multiple research teams to use the network simultaneously.

 


 

PoS – Proof of Stake

Proof of Stake is an algorithm that aims to solve the intensive energy requirements required by Proof of Work, while allowing non-technical participants to be rewarded for their continued engagement with a network. There are varying models, but the underlying principle is that by owning the cryptocurrency associated with a particular blockchain, you can stake it on the network and be rewarded, rather than having to perform the labour intensive task of mining. Staking coins on the network can offer a range of benefits to the network, including increased
security and liquidity. Think of staking like a lottery, where the chances of winning the lottery increase based on the overall stake you have in the network. A user with 100 coins on the network would, in principle, have a 100 x chance of winning the lottery compared to a user with 1 coin. Naturally, there are issues inherent to this model, such as centralisation of coin value in order to game the system. However, certain parameters can be put in place to prevent abuse of the system, such as placing a limit on the rewards that can be received by an individual. There also exists the concept of Delegated Proof of Stake (DPoS), where users on a network vote for ‘delegates’ who maintain the network, ‘forge’ new blocks on the blockchain, and process transactions. Users can vote for these delegates, based on their value to the network, and receive a proportion of the rewards that those delegates generate in the form of new cryptocurrency, or transaction fees. Again, this system is not perfect, due to the semi-centralisation of political power on the network, which may be open to abuse. However, many developers are working on solving this model to make it as fair and secure as possible.

 


 

PoW – Proof of Work

An algorithm that rewards participants, known as miners, for solving a cryptographic puzzle. At its heart, the benefits of PoW are security and economy, in that any attack on the system i.e. blockchain, would be expensive vs. the rewards one would receive from doing so. Bitcoin is an example of a PoW blockchain and cryptocurrency in which dedicated software, powered by energy intensive CPUs, GPUs and ASICs, use the SHA 256 hashing protocol to produce new blocks. The value of Bitcoin and other PoW based cryptocurrencies is therefore derived from the hardware and infrastructure costs associated with its production. Bitcoin’s PoW protocol works by allowing miners to broadcast the computational work they have done to the network, with the network then verifying that work. The work is verified because it is represented as a unique block, which in itself is attached to a chain of unique blocks. These blocks are unalterable by anyone, ensuring the validity and fungibility of the system. Bitcoin’s PoW protocol is based on a system invented in 1997 by British cryptographer Adam Back, who created an algorithm called Hashcash designed to limit email spam. By proving that an email was created by a human, rather than a machine, the algorithm was able to limit the economic returns of spammers who would use computers and bulk delivery, by increasing their cost per email.

 


 

Raiden Network

The Raiden Network is to Ethereum what the Lightning Network is to Bitcoin. As per the Raiden Network website, it is an in-development “off-chain scaling solution for performing ERC20-compliant token transfers on the Ethereum blockchain, allowing for the secure transfers of tokens between participants without the need for global consensus”. This is achieved using ‘state channels’ combined with digitally signed and hash locked transfers called ‘balance proofs’. As with Bitcoin’s Lightning Network, the benefits are its ability to perform scalable micro-payments, quickly, and with minimal fees. Gas costs on Ethereum are not related to the size or value of the transaction being made. For mid-large transactions, gas costs are less of a relative issue for the convenience the platform provides, however for smaller transactions the gas cost can end up being a significant proportion of the overall value of the transaction. Payments in the range of fractions of a $ cent can be transferred on the Raiden Network, quickly, and with reduced cost to the sender, making it an effective solution for day-to-day use. Yet users should also understand that networks like these require value to be locked up effectively as ‘collateral’, in exchange for the benefit of instantly transacting on the network.

 


 

Satoshi

Named after Satoshi Nakamoto, the anonymous individual or group that invented Bitcoin, the satoshi represents one hundred millionth of a bitcoin. That’s 0.000000001 bitcoin. The unit structure of bitcoins means 1 bitcoin (BTC) is equivalent to 1,000 millibitcoins (mBTC), 1,000,000 microbitcoins (μBTC), or 100,000,000 satoshis. Compare this structure to that of a dollar, for example, which is only divisible by 100 (a cent) and it’s clear that it allows for far greater flexibility as a unit of value. However, due to current costs associated with processing Bitcoin, sending or exchanging less that a certain value becomes uneconomical for the BTC network or its service providers, so that the practicality of sending single satoshis is currently non-viable. Many service providers, such as wallets and exchanges, set a minimum amount of BTC that must be sent to clear a balance. These small values that cannot be processed by current systems are commonly referred to as ‘dust’. It is thought that novel technologies such as the Lightning Network may solve the issue of sending these fractional amounts.

 


 

Scalability

Scalability with regards to a blockchain generally references its speed. When discussing Bitcoin, for example, it is usually the 1MB block size that is brought into question; a parameter designed to limit the occurrence of spam attacks on the early network, yet which has provided usability issues due to network overload as the cryptocurrency becomes more popular. It’s also the case that all transactions on the network must be confirmed by consensus, via globally distributed computers, which in themselves have limits in terms of processing power. Similarly, Ethereum has faced scaling issues for similar reasons, in that all smart contracts and transactions must run through the Ethereum Virtual Machine (EVM). Solutions are being developed, such as Bitcoin’s Lightning Network and Ethereum’s Raiden Network, in addition to a range of solutions like SegWit, sidechains and sharding. However, it remains one of the largest challenges facing the development of blockchain technology, and therefore adoption by the mass-market.

 


 

Segregated Witness

First proposed by Dr. Peter Wiulle, Segregated Witness (SegWit) is a scaling solution for Bitcoin. It aims to solve the issues inherent to a 1MB block size, and therefore the speed of transactions on the network. When a transaction happens on Bitcoin’s blockchain, the process of confirming that a sender has enough funds in their balance happens on the blockchain itself. This reference is known as a signature. This signature takes up space on the blockchain, accounting for 65% of the information stored, and it is this additional information that is enough to slow the network. New records are made on the Bitcoin blockchain every 10 minutes, so by segregating the transaction signatures via SegWit and managing them separately, space is freed up, allowing for a higher throughput of recordings and transactions on the network. In order for this to take place, 95% of miners running nodes on the Bitcoin network must agree to the change, by switching to a new Bitcore Core client for a period of at least two weeks. Segwit has been a very controversial proposal within the Bitcoin community due to differing political views on how Bitcoin should scale, which led to the Bitcoin/Bitcoin Cash hard fork.

 


SPV – Simplified Payment Verification

Similar to what SegWit would do for Bitcoin transaction speed were it implemented, Simplified Payment Verification (SVP) does for the handling of transaction data in a Bitcoin wallet. If you want to receive BTC, you need a wallet to receive the funds. When your wallet receives a transaction, it needs to confirm it’s valid i.e. the BTC is real, and has not been spent elsewhere. How does it do this? Typically, wallets need to check the entire blockchain to confirm that the BTC is available to be spent. This requires downloading and updating the entire blockchain, which is computationally intensive. Assuming you wanted to control your own private keys (which you should), instead of receiving your BTC to a centralized exchange wallet, for example, this would require using a ‘heavyweight wallet’ which would be managed by yourself. This would improve security, but is more resource intensive given the amount of data it needs to handle. A ‘lightweight wallet’ uses SVP to cross reference that the Bitcoin you have received is a viable transaction, confirming against a specific block number, rather than the whole chain. In this way, SVP allows for management of a BTC wallet on lower-powered devices, like mobile phones, which would otherwise struggle computationally to check the entire blockchain.

 


Smart Contracts

Smart contracts are in many ways like traditional contracts. With a traditional contract, an agreement is made between two parties, and the financial terms of the contract are executed once an event, specified within the contract, occurs. A smart contract operates in the same way, yet instead of requiring a centralized executor to confirm the event took place, and validate a transfer of value, a smart contract is programmed to execute the terms automatically. Because a smart contract exists on a decentralized blockchain, which in itself cannot be tampered with, it operates as an immutable reference to the terms of the agreement. Therefore, in addition to their programmable and automated nature they maintain advantages over traditional contracts. In the event of a disagreement between the parties of a traditional contract, it may require a judge or some other centralized party to confirm a certain event took place, and then order that the terms be executed. This party may be open to corruption, based on a bias towards a party within the contract. With a smart contract, both the terms and the execution are built into the same, impartial program designed around the original agreement. To quote Vitalik Buterin, Co-Founder of Ethereum, which as of 19th February 2018 is the foremost smart contracts platform in existence, “…any contract has its own internal memory containing a code. When an item participates in a transaction, the code gets executed. It may work with data from the memory and create new transactions. Thus one may encode any kind of rules or any sequence of events that have to happen should the rules [be] observed. Programmable contracts managed and protected by blockchain may apply to diverse interactions between parties”. Such interactions can range broadly in terms of real applications. These include decentralized exchanges and prediction markets, to wallets and Decentralized Autonomous Organizations (DAOs), the latter being a method by which funds in the form of cryptocurrency from multiple, globally distributed parties may simultaneously be allocated within in the same smart contract.

 


 

Trustless

Decentralized cryptocurrencies, based on blockchain, can in general be defined as trustless due to the method of consensus required to verify transactions on an immutable ledger. Yet to really define what trustless means, it requires a comparison to a traditional, centralized value system like fiat currency. Fiat currency is backed by a national government, which determines issuance of the currency itself, and also a range of financial elements that affect the value of that currency: interest, inflation, debt and trade agreements with other nations, in addition to political control of the economy and interactions with the private sector, by which the value of the currency is backed. These aspects are generally outside of the direct control of the users of the currency, despite being able to decide (within democratic systems) which government is in charge. Therefore trust must be placed in this third party, which includes co-participants in the process of choosing a government and the private sector, to not debase or dilute the value of that currency. With a trustless currency, such as one based on blockchain, it is the P2P nature that determines a currency’s value. A currency is as valuable as the market says it is, without intervention by government. Of course, the value of that currency can be affected by exterior actors, such as private interest and the economy at large, but the system itself cannot be altered from within, without consensus of its users. Additionally, there is greatly reduced potential for fraud and counterfeiting with cryptocurrencies, because transactions are (outside of privacy coins) visible on the blockchain itself, which requires independent verification at scale in order for a transaction to complete. This overall lack of centralized dependence means that, in theory, these currencies become trustless. A user can transfer value to another user, without a government or bank being able to take control of the funds, and the only basis by which the value of that currency can be determined is based on bartering with other users.