For some, blockchain is the perfect tool for managing trust in digital transactions, thus eliminating the need for third-party overseers (like banks and institutions). For others - like those in healthcare - blockchain promises to catalyze record keeping and breakdown barriers to internal communication.
The frenzy around blockchain is definitely real - but if you don't know the terminology, you may write it off as either too technical or nonsensical.
So rather than let misunderstanding fester, we decided to put together a definitive list of blockchain terms that everyone involved in blockchain-related startups or projects ought to know.
In putting together this list, we tried to offer a little bit of context for terms that cannot be easily summarized in a buzz-worthy sentence.
The goal is to go beyond cut-and-try definitions to present a comprehensive outline of what blockchain is today, and what it can become.
Alt-coin: Any cryptocurrency that exists as an alternative to bitcoin. Alt-coins have specific adjustments (like faster processing speed) that developers incorporated to solve existing issues with bitcoin. Though less popular than bitcoin, thousands of altcoins are in circulation today and they help expand the scope of applications for blockchain.
51% Attack: A situation in which a majority of miners in the blockchain launch an attack on the rest of the nodes (or users). The primary motivation behind such an attack is to reverse payments made while they completed the takeover of the chain, allowing the bad actors to double-spend coins. Double-spending is otherwise not possible in a blockchain system that files an immutable record of every transfer.
Bitcoin: The first, and most popular, cryptocurrency based off the decentralized ledger of a blockchain. As of 2018, Bitcoin has a market value of $163 billion; though rising costs of mining (due to the labor intensive proof of work protocol) and a slow transaction processing speed (only seven transactions per second) pose veritable challenges to widespread adoption as currency.
Bitcoin cash (BCH): The product of a hard fork in the Bitcoin blockchain, the creators of Bitcoin cash built the system to manage a larger volume of transactions. As of May 2018, it has a marked value of $19 billion.
BitLicense: A business license of virtual currency activities issued by the New York State Department of Financial Services. It is the legal status any business operating out of New York State must achieve in order to engage in cryptocurrency trading, mining, or any activities related to cryptocurrency.
Blockchain: A mathematical structure for storing digital transactions (or data) in an immutable, peer-to-peer ledger that is incredibly difficult to fake and yet remains accessible to anyone.
Blocks: The form in which blockchains are built and bitcoins are mined. Once discovered, blocks form a chain of valid transactions that are cryptographically linked to previous blocks, thus affirming the validity of the data contained within all blocks in the chain.
Block Height: Refers to the number of blocks in a chain (its height) from the genesis block (which has a height of 0). The height of a blockchain is often transcribed as the height of the most difficult block to unlock, as difficulty score presents an accurate record of the total blocks height.
Blockchain consulting: A startup consulting firm that offers business consulting services to startups, or existing companies, with a blockchain-related product.
Blockchain startups: Early and late-stage companies that have designed products or services around blockchain technology.
Blockchain investment: An ecosystem of investment ventures focused on startups deploying blockchain technology, research into novel applications of blockchain, and general support for blockchain-related projects entering the market.
Cryptocurrency: Any digital asset that exists in scarcity and is defined by a blockchain protocol that sets terms for its discovery and circulation (mining, trading, privacy regulations, etc).
Consensus Protocol: A process embedded in blockchain software for validating new transactions entering the network of computers (called nodes). Every node in the network must come to an agreement as to what constitutes a shared history. This shared history is then used to determine the validity (or not) of a new entry into the ledger. If a new entry is backed-up by all the nodes in the chain, it will be accepted and entered into the ledger. The consensus protocol is the backbone of a peer-to-peer network based on a distributed ledger designed for validating a new set of transactions in a decentralized way.
Cardano (ADA): An alt-coin that emphasizes privacy and regulatory transparency in the form of a smart contract in transactions. The use of smart contracts allows Cardano to ensure secure transactions through a proof-of-stake consensus protocol, which is more expedient than the laborious and costly proof-of-work consensus in place for popular cryptocurrencies like Bitcoin and Ethereum. However, despite much fanfare and market expectation, as of May 2018 little has emerged from the developers of Cardano.
Cryptocrime: The assortment of covert actions taken by cyber criminals in the cryptocurrency space. Although cryptocrime gets plenty of news attention, the open source code and consensus protocol at the core of every blockchain makes it easier than ever for law enforcement to track criminals.
Dash (DASH): Much like Monero, Dash is a cryptocurrency that makes the privacy of its users a primary concern. Since only a small number of users actually own any of the limited supply of Dash, the potential for it to grow in stature is small at best.
Decentralization: The concept of a shared network of dispersed computers (or nodes) that can process transactions without a centrally located, third-party intermediary. Decentralization is an extension of cloud computing, a movement which allows for data to be shared across multiple networks without limitation from a servers processing speed or other material costs associated with central server maintenance.
Distributed ledger technology: A peer-to-peer network of nodes with a consensus protocol in place that replicates, shares, and synchronizes data for all parties to access.
Digital Signature: An encrypted copy of transactions from one party to another that ensures both parties that the data contained within has not been tampered with, and comes from a known sender (it is authenticated).
DAO: An acronym for 'decentralized autonomous organization.' A DAO is an organization that operates through roles encoded in smart contracts shared across the blockchain. The smart contracts are meant to affirm and track all activities within the organization, ensuring transparency and compliance at all times. The financial and transaction history of the organization is stored in a blockchain created for the business.
The DAO: A decentralized autonomous organization that was formed in 2016 to establish a decentralized, investor-directed venture capital fund. It was set up in the Ethereum blockchain. The objective of the funders working within the DAO framework was to share a decentralized operating model with businesses - both commercial and non-for-profit. In May of 2016 the blockchain project achieved the highest crowdfunding total in history; by June of the same year, a weakness in the blockchain code was exploited by users, and millions of dollars was siphoned off into different accounts. The majority of DAO users decided to make a "hard-fork" to salvage the money, which meant going back into the history of transactions and wiping the theft off the ledger. Not every user agreed to the hard-fork, and the result was an eventual hard-fork within the entire Ethereum blockchain. Ethereum Classic was born, which retains the original ledger of transactions.
Decentralized economy: An economic concept at the heart of blockchain technology. Proponents of a decentralized economic model believe that no central, third-party agent should be given the authority to monitor transactions between consumers or citizens. Satoshi Nakamoto, the creator of Bitcoin, wrote in a white paper about the existential and financial issues of financial institutions having to closely monitor customers transactions and spend billions a year to ensure their networks are not hacked. In this context, a decentralized economy with a strong proof-of-work consensus protocol is a cheaper, and more egalitarian solution.
Digital currency payment: A type of currency available only in digital form. It is important to clarify that blockchain is not limited to the transfer of digital (or paper) currency between parties. Bitcoin was built on a blockchain that operates as a cash payment system, but blockchain has viable application far beyond cash transfers.
Double entry bookkeeping: A type of accounting implemented in the Middle Ages to ensure accurate accounting practices by acknowledging that every entry into one account causes an opposite effect in another account. For example, an entry into a credit account must be mirrored in the debit account of another account in order to accurately reflect the current financial state.
EOS (EOS): Another exciting blockchain startup, EOS has raised over $1 B in ICO funding before even being set-up. The creators envision EOS rivaling Ethereum as the smart-contract platform of choice.
Ethereum: The second most popular blockchain-based application on the market today, Ethereum is a built-in programming language that allows users to build decentralized ledgers modified to their own needs. Smart contracts are used to validate transactions in the ledger, making Ethereum the ideal platform for any number of potential applications - from tracking ownership of digital currencies (just like Bitcoin does) to sharing any content of value across the ledger. Given its multi-faceted range of uses, Ethereum presents the most refined application of blockchain on human communication. The only downside is its slow processing speed and the lack of smart contract security measures.
Fork: The result of a blockchain diverging into different paths, or the implementation of a new protocol into an existing blockchain. Forks exist as an embodiment of the fact that different users need to agree on the same protocol to preserve the history of transactions. Sometimes these users disagree on the specifics of a protocol and a group breaks away from the original consensus - as was the case when Bitcoin Cash diverged from Bitcoin in a 'fork'. In other instances, additional features might be incorporated into a consensus protocol to reverse a hacked transaction - as the users of Ethereum did in 2016.
Genesis Block: The initial block within a blockchain. Unlike the other blocks in the chain, it does not reference another block, and as such, carries the naming convention of 'block 0'.
Hash function: A technique in computer science for mapping data of any size to a fixed size. Traditionally used as a shortcut for database lookup, and vitally important for information security on the web, hash functions are also used to write new transactions into the Bitcoin blockchain. In mining for Bitcoin, the input function of a new block must always start with the proper number of zeros - which at the time of writing is 18 - into a unique hash. Once an entire block of a unique hash with 18 zeros is achieved, the miner is rewarded with a Bitcoin and entry into the permanent record of all similar transactions, otherwise known as the blockchain.
Initial Coin Offering (ICO): The form in which capital is raised to fund new cryptocurrency ventures. It is modelled off the Initial Public Offering (IPO) common to venture capital fund raising, the major difference being that, in an ICO campaign, early funders of a project receive a percentage of the new cryptocurrency in exchange for fiat currency or another cryptocurrency (usually Bitcoin).
Early funders receive tokens, which operate essentially the same as shares of a company sold in an IPO. However, ICO's have come under intense scrutiny from the global finance community for a lack of regulation and the volatile impact they have on the economy In September of 2017, the People's Republic of China banned ICOs; in early 2018, Facebook and Google banned the advertisement of ICOs on their platforms.
Immutability: The state which all data stored within blocks in a blockchain can attain if properly setup. Once new data is accepted into the blockchain, it is stored in a collective ledger and cannot be tampered with. An accurate ledger of account will be built up over time, retaining an immutable record of all the transactions that have been agreed upon since its creation.
Litecoin (LTC): Another iteration of the Bitcoin seed, Litecoin has been modified to increase transaction time and remain inclusive to hobby miners who, unlike professional miners, do not have the most expensive computational power. Any potential for it to become a viable alternative rests on cutting down the energy requirements needed to mine this still obscure alt-coin.
Mining: In Bitcoin, mining refers to the act of piecing together nodes to create blocks, each block representing a new addition to the blockchain. Miners (and mining companies) build-up powerful computational horsepower to solve the mathematical problems needed to 'dig up' new Bitcoin as fast as possible. As there are only 21 million Bitcoin that can be mined, and roughly 18 million already discovered, the race is clearly on.
Monero (XMR): Perhaps the most unorthodox cryptocurrency in our list, Monero is designed to ensure anonymity among its users. A 'ring system' is in place which makes it impossible to determine which user in the network has performed which transaction.
Mining pool: A collection of miners who come together to share their processing power over a network and agree to split the rewards of a new block found within the pool.
Neo (NEO): NEO is the largest crypto-currency in China, and it holds many similarities to Ethereum. In the first place, NEO is a smart-contract platform, thus allowing users the freedom to build any kind of trading network they require. NEO actually outdoes Ethereum in processing speed, relying on a consensus protocol that the founder claims processes 10,000 transactions a minute. Compare that to the 15 possible on the Ethereum platform, and the popularity of NEO starts to make more sense.
Nonce: The number that miners must randomly guess at in order to complete a new block. Once discovered, the nonce is combined with the rest of the data in the block to create an encrypted copy, called a hash, that becomes the immutable digital fingerprint stored in the ledger.
Permissioned blockchain: A blockchain in which user access is ascribed to one central party. While Bitcoin is a public blockchain (meaning anyone can join), cryptocurrencies like Ripple or the permissioned version of Ethereum offer more regulated alternatives. A permissioned blockchain gives the organizer far more control over who has access to, say, become an active node within the network. It also allows for a departure away from the proof-of-work protocol used in Bitcoin towards a proof-of-stake protocol.
Peer-to-peer network: A network of equality. In computer programming terms, it refers to a connection of computers in a network that distributes work evenly to each participant. All computers (or participants) have equal authority and equal responsibility to validate the transactions undertaken within the network.
Public blockchain: A blockchain system that has no permission requirements or restrictions. Anyone with an internet connection can join the network, and, most importantly, become a validator of transactions by participating in the consensus protocol. The two most popular public blockchains are Bitcoin and Ethereum.
Public Key: A string of code unique to each participants Bitcoin wallet that acts as the location to which money is sent and received.
Private Key: A key that remains anonymous to other users but is integral in confirming a transfer of bitcoins through the blockchain. When coins are sent from one party to another, they are actually being sent to a hashed copy of the recipients public key. In order to access the funds, the recipient needs to use their private key to access the public key, and the coins that have been transferred.
Proof of work: The process through which a trustless, peer-to-peer network of distributed nodes can regulate and validate it's contents. It is the consensus protocol in place for Bitcoin and many other cryptocurrencies. In Bitcoin, the only way to mine a fresh block is to go through a laborious (though not terribly complicated) process of testing new mathematical equations until a unique hash has been discovered. The length of time it takes to discover a new block both dissuades bad actors from trying to penetrate the network and ensures that whoever mines a new coin has met a series of narrow criteria enshrined in the consensus protocol.
Proof of stake: An alternative consensus protocol in which nodes can achieve validation via an existing economic stake rather than mining. While it does represent a departure from the merit-based ethos of the proof of work consensus protocol, it is a far more affordable and expedient option.
Ripple (XRP): Marketed to the financial sector, the creators of Ripple envision their token, the XRP, as a 'bridge currency' to expedite financial transactions across borders. Given the company is privately owned and operated, it can offer users a consensus protocol that speeds up transaction time relative to other crypto-tokens.
Smart contract: A piece of code embedded in a blockchain which guarantees (through mathematical certainty) that a contract between two parties will come to pass, as long as certain conditions written into the program are met. It is most popularly used in the Ethereum blockchain.
Stellar Lumens (XLM): Another blockchain technology targeting the financial industry, Stellar Lumens is run by a non-for-profit company looking to offer a solution to expensive cross-border currency exchange payments. It is the product of a hard fork of Ripple, which remains one of its primary competitors. Together with Ethereum, Stellar Lumens and Ripple represent the most popular alternative applications to Bitcoin of a blockchain-based technology disrupting traditional industries.
Satoshi Nakamoto: The anonymous founder of bitcoin and blockchain. In November of 2008, Nakamoto posted a white paper entitled 'Bitcoin: A Peer-to-Peer Electronic Cash System' to the bitcoin.com domain, a site he only registered three months previous.
Transaction fee: The cost of trading cryptocurrency within another actor. A number of trading platforms exist to coordinate the exchange of Bitcoin (and other cryptocurrencies), a service for which they charge a small fee.
Wallet: Every individual that uses blockchain to store documents - like a digital passport, for example - and/or trade in tokens uses a wallet. In most cases, the wallet can be stored in a safe location, disconnected from the internet and the risk of cybercrime it entails.
ABOUT THE AUTHOR
Jim Barnish is Co-Founder and General Partner of Morgan Hill Partners, an innovative management consulting partner that helps startup to scale-up technology and tech-enabled clients innovate and grow through Strategy & Planning, Executive Leadership, Product Excellence and Revenue Creation – delivering the right executive expertise and strategic playbook, at the right time, for the right outcomes. Jim's 15+ years of experience as a strategic change leader in global and integrated operations, sales, and marketing uniquely qualifies him to lead Morgan Hill Partners associate operations and affiliate partnerships. Over the course of Jim's career, he has successfully worked with companies undergoing accelerated business development, process improvement, change management and operational transformation initiatives. @jimbarnish