Bitcoin is a very broad topic. As Bitcoin becomes more prominent within our local communities, it can be an overwhelming task to learn everything all at once, so we’ve created a list of terms that are most important for you to know. At Frontier, we want to provide our customers with as much knowledge as we can, so you are able to succeed in this new avenue of currency. In order to fully understand Bitcoin, these are the basic key terms to start building your knowledge.
To begin, we will clarify Bitcoin itself,
Bitcoin is the world’s first cryptocurrency. Based on a decentralized network and blockchain, Bitcoin is the world's first digital currency that doesn't require centralized management. BTC (and rarely XBT) are the currency tickers used.
Bitcoin vs. bitcoin
Bitcoin, with an uppercase B, refers to the network as a whole: miners, nodes, users, and the ethos behind them; bitcoin, with a lowercase b, is the unit of currency used in transactions.
One satoshi, at one one hundred millionth (1/100,000,00) of a bitcoin, is the smallest subunit currently used for Bitcoin transactions. Satoshis are named after the unknown creator of Bitcoin, Satoshi Nakamoto.
Simply put, just as 1 dollar = 100 pennies, 1 bitcoin = 100,000,000 satoshis.
A Blockchain is a type of shared database that differs from a typical database in the way that it stores information. The blockchain stores data in blocks that are then linked together via cryptography. As new data comes in, it is entered into a fresh block. Once the block is filled with data, it is chained onto the previous block, which makes the data chained together in chronological order. Furthermore, the data in a blockchain is publicly shared. The data of most companies is closely guarded: internal account documents, industry secrets, and even emails. Transactional data on the blockchain is viewable by anyone at any time. Different types of information can be stored within the blockchain, but most commonly it is used in a financial matter as a publicly visible ledger for all Bitcoin transactions. The blockchain also makes it possible for a decentralized network, with no single person or group having control. All users collectively retain control to agree on transactions.
A pair of very large numbers that are cryptographically intertwined. If data is encrypted with one key, it can only be decrypted with the other key. One key is kept private, the other is made public. The private key is used much like a signature on a check—the check is not valid without it—but, being mathematically impossible to forge, it is much more secure. If someone wishes to receive bitcoins, they need to display a receiving address, which is derived from a public key. In order to spend those bitcoins, they will need the associated private key to authorize the transaction.
Similar to signing your signature to endorse a check, a digital signature is what allows Bitcoin users to send transactions. It is the cryptographic proof, using hashing and encryption, of ownership of a specific pair of digital keys.
A Bitcoin node is a computer device that has a copy of the Bitcoin blockchain and uses it to verify the legitimacy of transactions. There are two forms: full nodes and pruned nodes. A full node retains a copy of every transaction ever conducted on the bitcoin blockchain. A pruned node downloads and verifies transactions, but then discards the majority of the data.
Distributed Systems (Decentralized Systems)
A distributed system is a system that has no central point of operation or failure. Examples of centralized systems include traditional websites (where many computers may request information from only one server) as well as legacy financial systems (where users communicate with local banks, who communicate with a central bank). The fragility with centralized systems is that if the core goes down, there is not much, perhaps nothing, that users can do until it is brought back up.
Decentralized systems, on the other hand, have no central core of operation and therefore have no risk of system-wide service interruptions. Every node in the Bitcoin network is communicating with other nodes at random. If a node goes offline, any other nodes that were communicating with it simply start talking to others. Once that node comes back online, it reaches out to nodes (the same ones or others) to receive updates on what it has missed while it was gone.
The benefits of a distributed system are primarily found in the fact that it is immensely resilient. Entire sectors can be brought offline—through a natural disaster, intentional interference, or other reasons—with minimal impact to the network as a whole. In early 2021, China banned Bitcoin mining within its borders. The Bitcoin network slowed a bit but was otherwise unaffected and less than two weeks later the network adjusted and was running at full speed again.
Head over to https://bitnodes.io/ to see a map of the known Bitcoin nodes in the world.
Exchange Rate (Bitcoin’s “Price”)
This is the current amount of US Dollars (or your local currency) that one Bitcoin can be purchased for. Historically the price of Bitcoin has been highly volatile, with intraday swings of 20% (or greater!) being not uncommon.
A wallet is a piece of software that manages private keys, public keys, and receiving addresses. There are a few wallet types or designations to know:
Hot Wallets are wallets that are connected directly to the internet. A wallet on a cellphone or a computer would be considered hot. Hot wallets provide the best ease of use and access.
Cold Wallets are on devices that are not directly connected to the internet. A wallet on an air-gapped computer could be considered a cold wallet.
Hardware Wallets are devices that only manage Bitcoin keys. They are usually small digital devices that interact with a computer-based or phone-based wallet. The computer software creates a bitcoin transaction, and then the hardware wallet signs and authorizes it. Some hardware wallets connect directly to a computer; some are 100% air-gapped and communicate externally via microSD cards or QR codes. Hardware wallets provide the greatest security for storing Bitcoin but can add additional steps to sending bitcoins.
Most numerical and time-based data has been obtained from Clark Moody. You can find Clark Moody on Twitter.
We know that there are still many terms that we did not cover in this introduction blog. This introduction blog was to help serve as a guide for Bitcoin terms that are vital to understanding what Bitcoin is and how it works. In our follow-up blog, we will be going over more complex words that can be useful when understanding the code of Bitcoin. At Frontier Bank, we are going to be here every step of the way, to help Bitcoin be as digestible as possible.
Digital Banking Manager