Bitcoin Terms

The following article explains various key terms and concepts related to the Bitcoin and blockchain ecosystem. It provides analogies and simple explanations to understand the fundamental components of the Bitcoin network.

Blockchain: Think of the blockchain as a digital ledger book that records all Bitcoin transactions transparently and securely. Each block is like a page in this ledger, connected together in chronological order.

Miner: A miner is like the Bitcoin network’s bookkeeper. They use powerful computers to verify transactions, bundle them into blocks, and then add them to the blockchain. In return, they receive freshly minted bitcoins and transaction fees.

Node: A node is like a checkpoint in the Bitcoin network. It’s a computer that takes part in the network by storing a copy of the blockchain and validating transactions following the consensus rules.

Hot storage: Hot storage is like keeping cash in your wallet—easily accessible but potentially vulnerable to theft. It involves storing bitcoins on devices or platforms connected to the internet, like online wallets or exchanges.

Cold storage: Cold storage is like stashing your savings in a bank vault—more secure but less accessible. It involves storing bitcoins on devices or platforms disconnected from the internet, like hardware wallets or paper wallets.

Hardware wallet: A hardware wallet is a physical gadget designed to securely store your bitcoins offline. It’s a type of cold storage, offering better security than hot storage options.

Lightning Network: The Lightning Network is like an express lane for Bitcoin transactions. It’s a layer-2 solution built atop the Bitcoin blockchain, designed to enable quicker, cheaper, and more scalable transactions through off-chain payment channels.

Confirmation: A confirmation is like a seal of approval from the Bitcoin network. It means a transaction has successfully made its way into a block and onto the blockchain. More confirmations signal greater security.

Address: Picture your Bitcoin address like a bank account number for your digital wallet. It’s a quirky combo of letters and numbers that you share with others to receive bitcoins. For instance, if Alice wants to send Bob some bitcoins, she’d ask for Bob’s address and send the bitcoins there.

Bip: A Bitcoin Improvement Proposal (BIP) is the suggestion box for enhancing the Bitcoin network. It’s a formal document proposing tweaks or improvements to the Bitcoin protocol and its surrounding ecosystem.

Block: Imagine a block as a page in a ledger book that records Bitcoin transactions. Miners verify these transactions, bundle them together into a block, and then add it to the blockchain.

Difficulty of blocks: The difficulty of blocks gauges how tough it is for miners to crack the mathematical puzzles needed to validate transactions and add a new block to the blockchain. It adjusts periodically to maintain a steady rate of new blocks being added.

Block fees: Block fees are like gratuities given to Bitcoin miners for their efforts in verifying and adding transactions to the blockchain. Users can opt to include a fee when sending a transaction to motivate miners to include it in a block faster.

Hash: A hash is like a digital fingerprint for data. It’s a unique, fixed-length string of numbers and letters generated by a cryptographic algorithm that represents the input data. In Bitcoin, hashes are used to secure transactions and confirm the blockchain’s integrity.

Hash rate: The hash rate measures the computing muscle used by miners to solve mathematical problems and validate transactions on the Bitcoin network. A beefier hash rate suggests a more secure network.

Whirlpool: This is a service offered by Samourai Wallet, which is a privacy-focused Bitcoin wallet. Whirlpool is a CoinJoin implementation, which means it allows multiple users to combine their transactions into one to obfuscate who is sending money to whom.

Whirlpool Unspent Capacity: The “Unspent Capacity” refers to the total amount of identical-looking UTXOs available. When the Unspent Capacity increases, it means more transactions have been mixed. Since each UTXO has no identifiable link to its original sender, each increase in Unspent Capacity improves privacy because it enlarges the crowd (the pool of mixed transactions) that any one transaction could potentially be a part of. The larger the crowd, the harder it is to identify individual transactions, providing better privacy and anonymity for Whirlpool users.