Blockchain is not only a rapidly evolving technology but also a complex innovation that is now getting heavily integrated with different systems and being utilized extensively. It is used most primarily for cryptocurrency transactions.
If you have read the core functionalities of blockchain, you’ll see that it’s a system utilized to record data or information. Sounds quite simple? The way it records data is so robust and complicated that it is then extremely difficult to hack, change, or cheat the system. It’s important to understand the different terms in order to fully comprehend the technology.
25 of the Most Commonly Used Terms in Blockchain
Want to know more about how blockchain works or how to master it? First, you’re going to have to learn all the basic terminologies. Scan through our crypto glossary below.
Cryptocoin or Cryptocurrency
Cryptocoin or cryptocurrency is like cash money, only digital. Its purpose is to facilitate exchange. It was Satoshi Nakamoto who first established the pillars of the concept.
Cryptocurrency is a set of data strings that are encrypted, organized, and monitored by blockchain which serves as its ledger for all transactions i.e. transferring, buying, and selling it. Bitcoin was the first cryptocurrency of its kind. Since 2009, popular crypto coins have followed, such as Ethereum, Binance Coin, and Cardano. There are over 1,000 cryptocurrencies today.
Encryption is a common term in information technology or in computer science. It means to convert data into code that will then be inaccessible to those who are unauthorized. In the context of cryptocurrency, it’s a form of guarantee for the security of the crypto transactions and those involved in them.
It also ensures that the transactions stay independent from any central authority and prevent double-spending.
Bitcoin is an example of cryptocurrency and one of many decentralized currencies today. Anyone can participate in its exchange but no central body governs it. All transactions involving Bitcoin are tracked and organized by the blockchain system.
Transactions using Bitcoin are done easily and are also very secure through peer-to-peer or P2P technology. Today, more and more organizations, companies, and even countries are recognizing Bitcoin’s worth, and cryptocurrencies in general.
Hashing refers to the creation of passwords (or hash) needed to have a unique identifier for the blocks that blockchain miners are in charge of. The hashes created are unique so no duplicates can pass the system.
This process enables the integrity and robust operation of cryptocurrency within the blockchain system.
Nonce means “number only used once” and in cryptocurrency refers to the number added to an encrypted or hashed block in a blockchain. A nonce is also the number that miners solve for and once they do, they are given a cryptocurrency in exchange. Given that nonces are very difficult to find, they are also used as a way to filter out less talented miners.
Moving on with our blockchain definition glossary, let’s talk about the various consensus algorithms.
As the name implies, consensus algorithm in the context of cryptocurrency refers to the set of rules or standards, if you will, that everyone who participates in the blockchain system should adhere to.
As part of the blockchain protocol, the consensus algorithm consequently determines who gets to validate which block and, in turn, will get the reward for solving it as well as how others may validate it.
Consensus Algorithm - Proof of Work
Used within the Bitcoin blockchain, the proof-of-work or POW consensus algorithm is very common. It works more like a “first come first serve” concept. So, the first miner to show POW for a block validates it.
It’s also a controversial consensus algorithm because of the large amount of electricity generated needed for calculations.
Consensus Algorithm - Proof of Stake
The proof-of-stake or POS consensus algorithm is primarily used by blockchain with considerations to utilize it for Ethereum. This is where miners put a cryptocurrency at stake to get a chance to validate a block.
The amount at stake is locked in as a form of deposit so the miner will complete their end of the bargain. It requires less electricity to operate.
Consensus Algorithm - Proof of Authority
Proof-of-authority or POA consensus algorithm differs from POS in that instead of putting a cryptocurrency at stake, miners put their identity at stake.
Miners then voluntarily provide information on who they are so they are given that chance to validate a block. The blockchain system is very thorough in verifying who you claim to be.
Permissionless blockchains refer to a blockchain where no one needs to ask for permission from anybody to perform actions, like joining a network. These blockchains are open to anybody, decentralized, and very transparent.
The opposite of the former, permissioned blockchains have nodes and entities that have authority over others within a network.
Plasma in the context of cryptocurrency refers to the Lightning Concept utilized on the Ethereum blockchain.
Sharding refers to a specific process of partitioning a blockchain. It addresses the scalability issue within the system. The turnaround time is then significantly reduced with sharding because each shard is only deemed responsible for processing a part of the data stored within the network.
Cryptocurrency has brought into light the terms fungible or non-fungible. They are now a part of crypto definitions. It basically means that a good is identical or interchangeable. An example of a fungible cryptocurrency is Bitcoin, as one Bitcoin may be exchanged for another.
Ethereum was programmed with the goal to surpass the limitations of blockchain. It is actually called a decentralized supercomputer. It has its very own blockchain and the platform allows the creation of what are called smart contracts that have got a wide array of applications.
Its cryptocurrency is called Ethereum. Ethereum also popularized Dapp.
Miners and Digital Mining
Mining refers to the process that produces new cryptocurrency into the market by creating chained blocks. The people responsible for mining cryptocurrency are then called miners.
Nodes refer to the computer that makes up the blockchain network. They are responsible for storing as well as distributing updated copies of transactions in real-time. Every time a block is generated, then added onto the ledger, a copy is automatically added to the nodes within the network. Also, remember that all miners are nodes but not all nodes are considered miners.
Tokens are different from crypto coins in the context of cryptocurrency. Crypto coins are essentially digital money while tokens can act as stand-ins for assets as well as deeds. You may buy tokens using crypto coins, but tokens oftentimes have more value.
ICOs mean Initial Coin Offerings and are utilized as a way of company financing. This works by companies offering tokens instead of actual shares, but they receive crypto coins in return through a blockchain. Sometimes, these tokens don’t even have economic rights or shares in the company so this form of financing is quite peculiar.
Smart contracts refer to the programs within a blockchain that automatically run once a predetermined condition is met. Smart contracts are responsible for some of the real-time processes within the system so no other intermediary might be involved.
Hard fork, sometimes referred to as chain split, happens when miners, as well as nodes, choose to stay in the original version of a network or go to the upgraded one. It’s important to take note that both networks will function independently of each other with no interaction moving forward.
A soft fork still means that there’s an upgrade done on the network but nodes and miners are not forced to choose between them. They may still participate in the new network without having to upgrade but things do get complicated when there’s a shift in the minority or majority in mining power between the old and upgraded networks.
Hyperledger basically refers to the open-source effort to create support for the development of distributed ledgers that are blockchain-based.
Decentralization refers to the process of transferring control as well as decision-making from that of a centralized entity, like an organization or individual, into a distributed network.
The amount of confirmation in the blockchain refers to the number of blocks added on top of it. Therefore, if there are five confirmations then that means that there were five blocks added into the blockchain.
Blockchain technology has the potential to revolutionize how we create and share data, opening up a whole new world of possibilities for IT professionals.
At QASource, we understand that you don't want to be left behind when it comes to this new technology and that you require a partner who knows what blockchain means for businesses today and in the future. You can rest easy knowing that our experts will find any issues before they become problems for your users or customers.