Bitcoin and Cryptocurrency
New to mining Bitcoin and cryptocurrencies
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ASICs stands for application-specific integrated circuit. It is a microchip that is implemented into a hardware device that is designed especially for mining cryptocurrencies. The difference with normal RAM computing is that it processes various tasks, whereas ASICs computing is application specific. Meaning it is designed only for one specific purpose: to mine cryptocurrencies.
ASICs mining rigs are designed to only mine the cryptocurrency they are designed for. So, an ASICs Bitcoin miner will only be able to mine BTC, and will do so much faster than normal CPU or even GPU computers, meaning they’re much more profitable when it comes to mining.
ASIC-Resistant is basically an algorithm that is created to be resistant to the use of ASICs mining gear.
An ASIC-resistant cryptocurrency has its protocol and mining algorithm designed to make sure it’s impossible for, or at least does not favour, ASICs mining machines to mine the cryptocurrency.
All Proof-of-Work consensus mechanisms are liable to be ASICs mined, but developers of some cryptocurrencies design their algorithms to be resistant. This is done to help decentralize the mining network and also make it more distributed, and because ASICs mining gear is so expensive it an ASICs-resistant algorithm makes it cheaper for the average person to mine.
ASICs designers are constantly trying to produce mining rigs that will bypass ASIC-resistant algorithms, so developers are constantly battling against the ASIC manufacturers to make sure they remain ASIC-resistant.
Monero (XMR) is the most well-known cryptocurrency that is ASIC-resistant, and they use a combination of 11 algorithms to combat this. Ethereum (ETH) is expected to change its algorithm to ProgPow later this year, which will make the second biggest cryptocurrency ASIC-resistant.
A block header is used to identify a block on the blockchain, and is similar to a digital fingerprint. It is constantly hashed by miners as their mining equipment tries to figure out the cryptographic calculations that will ensure they add the block to the chain and win the block reward.
A block header is an 80-byte long string that is critical to making an accurate header: a 4-byte long Bitcoin version number, 32-byte previous block hash, 32-byte long Merkle root, 4-byte timestamp of the block, 4-byte long difficulty target for the block, and a 4-byte long nonce used by miners.
Block Height is the amount of blocks that has been added to the blockchain.
The Genesis block had a height of 0 and because blockchains are stacked on top of each other, the block height is taken from the difference of (newest) highest block to the Genesis block.
The block reward is the reward miners get for adding a new block to the blockchain. The block reward varies from blockchain to blockchain, but in Bitcoin it is 12.5 BTC, which is paid out roughly every ten minutes.
The Bitcoin protocol determines that the BTC block reward is halved every 100,000 blocks, which is roughly every 4 years. This will continue to halve until the last fraction of Bitcoin is mined in around the year 2140.
Block rewards are the way Proof-of-Work cryptocurrency eco-systems incentivize their miners to do the difficult task of hashing blocks. So the newly minted cryptocurrencies are distributed into the economy, and paid to the miners for their hard work and help in securing the network.
Block Time is the average amount of time it takes for miners to mine a new block and add it onto the blockchain. In Bitcoin, the block time is about 10 minutes, and is an important factor because a set time helps avoid manipulation of hashpower, which lessens the possibility of any individual mineing facility trying to take control of the hashpower.
On Bitcoin, after every 2016 blocks, the difficulty of the cryptograpy is adjusted to help keep the block time roughly the same. This maintains a steady flow of blocks onto the blockchain.
The circulating supply is the total amount of coins or tokens that’s in circulation at any given time. It increases every time a block reward is minted or decreases whenever a coin is burned. It doesn’t take into consideration any lost coins, however.
The circulating supply is not the total amount of coins created, because any coins that are locked up in an escrow or for staking are not part of the circulating supply.
Cloud mining is like distance mining. Basically, a host company owns a Bitcoin mining farm and leases its hardware to you.
Based on the amount of hashpower you rent, you will earn a share of the cryptocurrency payments from the cloud mining company’s revenue.
Confirmations are the number of blocks in the blockchain that have been accepted by the network as the correct block.
Once a blockchain has so many confirmations, for Bitcoin it is 6, it’s accepted that the transaaction is valid, and it will then be added to the blockchain.
Difficulty Adjustment refers to the change in difficulty for miners to find a hash below a given target.
On Bitcoin, the difficulty adjusts every 2016 blocks, or every two weeks or so.
The Bitcoin protocol is coded to increase or decrease the difficulty depending on the hashrate that is generated by the miners.
So, if there are more miners mining, the hashrate will go up and the difficulty will follow. If less miners are mining, the difficulty adjustment will decrease, making it easier for miners to solve the block.
A decrease or increase will have the same effect on the time, processing power, and electricity required to solve each block.
Double Spend is basically the idea that the same currency (code) can be spent twice.
To perform this a malicious actor would have to perform a 51% attack. Once they have control of the network they will be able to reverse transactions and re-spend their cryptocurrency.
Because of the complex process of adding blocks to a blockchain, and the immense amount of decentralized computing power working together to crunch the numbers and figure out complex algorithms, a double spend is highly unlikely on Bitcoin.
Although it has happened on some lesser secure blockchains.
A fork is a split in a blockchain and usually means that miners start following the new protocol.
Forks are performed for many reasons, such as upgrades to the network. They take place when two or more chains have the same block height.
Sometimes, you might get a malicious actor, who tries to fork blockchains to change the history of transactions and attack the network.
Full nodes are nodes that have downloaded the entire blockchain, and work towards verifying the consensus of the network.
A miner will add transactions to the block, and the full node will then make sure that all transactions are correct.
There is no economic incentive for running a full node in the Bitcoin network, but there is in other cryptocurrencies like Ethereum.
A genesis block is the first block created for any blockchain.
Each genesis block contains the initial transaction, the block headers, the first coinbase, and because it can't reference a previous block it is hardcoded into the software.
A GPU (Graphics Processing Unit) is a programmable logic chip (processor) specialized for display functions. The GPU renders images, animations and video for the computer's screen.
Because GPUs can perform parallel operations on multiple sets of data they are a better type of computing for mining than CPU.
A hard fork is a fork that introduces a protocol change that isn’t backwards compatible.
Basically, it's a way of creating a new cryptocurrency.
When there is consensus for the hard fork, the new chain is still be considered the main chain. The miners will then all move across to mining the new chain.
Sometimes, however, there is a split in consensus, so some miners will move to new chain and some will remain with the older version.
Some examples of this are Bitcoin Cash hard forking from Bitcoin, and Ethereum Classic, which is the original Ethereum blockchain, but because the Ethereum main developers and most miners switched to Ethereum, that became what we know as Ethereum today.
Hash rate, or hash power, is the amount of computing power a blockchain network is consuming to keep running.
Hash rate is usually configured in hashes per second H/s and the Bitcoin network at the time of writing is consuming 75,702,229 TH/s (trillion hashes per second).
Hashrate is also the standard for how powerful a mining rig is. The more TH/s your mining rig can process, the better chance you have of winning the block reward.
The most powerful ASICs miners can now process between 70-110 TH/s.
Hashing algorithms are used in cryptography to secure sensitive data. They are a one way function, which means it is a process with an input and an output.
This helps to secure the data because you can put data into a hashing algorithm, sign it with private/public keys, and get out a non-reversible output.
With cryptography private keys are used to verify transactions. If someone else knows your private key, then they can sign transactions that look like they are coming from you.
In the Bitcoin network, the Elliptic Curve Digital Signature Algorithm is used to produce a signature from public/private keys, and the SHA256 algorithm is used by miners to compete for the right to add blocks to the chain.
A ledger is the blockchain database that hosts all transactions of any cryptocurrency. And because the blockchain is secure and immutable it replaces the need for third party verification.
How it works: Alice can send a transaction to Bob, and everyone with a copy of the Ledger knows the transaction is legitimate, because it has been mined and verified by the network.
Once the cryptocurrency is in Bob's possession, he can spend the cryptocurrency he got from Alice, and it will always be honoured because the network validated it.
A light node, or light client, is a piece of software that connects to full nodes to interact with the blockchain. Unlike full nodes, light nodes don't need to run 24/7 or read and write a lot of information on the blockchain, as they only download the block headers.
Because they don't check transactions, they trust the full node to do most of the work. However, the light node can see any transaction has been accepted, and they can tell how many blocks deep a transaction is.
There are some security concerns with light nodes, however. Because they don't have the full protocol downloaded, they can accept transactions that full nodes will not.
The Merkle Root is the hash of all hashes. The hash of every single previous leaf node is included in the most recent hash.
There are numerous transactions stored on a particular block, all the transaction hashes in the block are also hashed, which results in a Merkle Root.
The root node has a hash that establishes the validity of all subsequent transactions. If you were to remove an old transaction or change a previous block, then none of the subsequent hashes would make sense.
A Merkle Tree is a hash based data structure. The Merkle Tree arranges each leaf node as a hash and is a useful model for demonstrating how a network like a blockchain, or any peer-to-peer network, can grow from a single block or node.
The way a Merkle Trees grows is typically a branching factor of two. This means that up to two other leaf nodes can branch off a single leaf node.
Miner's fee is a small incentive added to transactions on a blockchain to encourage miners to process and add them to the next block.
The block time and size of a block determine how many transactions can be included in each block, so senders can pay more to have their transactions validated sooner.
Mining is the process of solving a cryptographic puzzle with computational power.
Miners pick up transactions on a blockchain, and the mining process hashes the transactions together, sends them to the nodes to verify, and then each mining machine processes the hashing algorithm as quickly as possible in order to earn the block reward.
A mining pool is a group of miners that enter join their hashing power together. The purpose of a mining pool is that it increases a miner's chances of mining a block and winning the block reward.
The mining pool will split the block reward equally, according to the amount of work they contributed to the probability of finding a block.
Becausw the probability of winning the block reward as a solo miner are slim, many join mining pools because mining is basically an an all or nothing process. You either find the block, or you don’t.
Orphan blocks, often referred to as stale blocks or detached blocks, are blocks that are not accepted into the blockchain network. This is usually down to a time lag in the acceptance of the block in question into the blockchain.
They are valid and verified blocks, but they have been rejected by the chain. It usually happens if more than one miner mines the next block, due to two miners finding the solution at a very similar timeframe. If this is to happen, only one of the blocks will be accepted into the Bitcoin blockchain, and the other will become an orphan block.
Proof of Stake
Proof of Stake (PoS) is like mining, but instead of using hardware computers to mine cryptocurrencies, PoS utilizes the cryptocurrencies staked in the network as a way of validating transactions and adding blocks to the chain.
Many cryptocurrencies are PoS, and it works by attributing mining power to the proportion of cryptocurrencies held by a miner (person staking). Therefore, the more you stake, the more you will be rewarded for your efforts.
Proof of Stake was created as an alternative to Proof of Work (PoW), because of the huge amount of power needed in PoW networks, like Bitcoin, but many PoW and Bitcoin maximalists doubt the consensus algorithm can match that of PoW for security and reliability. The jury is still out on that.
Proof of Work
Proof of Work (PoW) was originally a way for computational power to stop malicious transactions such as spam being delivered.
The PoW concept was adapted to money by Hal Finney in 2004 with his idea of "reusable proof of work." Then it was introduced by Satoshi Nakamoto in the Bitcoin whitepaper. It is worth pointing out that the first recipient of a BTC transaction was Hal Finney.
Proof of Work is now is the heartbeat of Bitcoin and many other decentralized cryptocurrencies, and is used to describe the consensus mechanism of a PoW blockchain.
PoW in Bitcoin is when miners generate blocks, they first need to find a nonce or function output. Bitcoin requires that miners find an output that ends in a number of 0s. They only way to do this is by repetitive trial and error, and it can be used to allocate block rewards proportionately to the network hashing power a mine holds.
Segregated Witness (SegWit) was a Bitcoin soft fork that split transactions into two segments.
It removed constraints on the Bitcoin block size by allowing Bitcoin nodes to accept 4MB of data and treat them like they're still 1MB, which is the size of each block on the Bitcoin blockchain.
To carry out this function SegWit segregates the witness data from the original portion and appends it so that is counted as a quarter of its pre-segwit size.
This change to the Bitcoin protocol was implemented in response to transaction speed constraints caused by Bitcoin’s 1MB block size.
SHA-256 is the algorithm used for Bitcoin’s proof of work consensus mechanism.
SHA-256 generates an almost-unique 256-bit (32-byte) signature for a text. The algorithm was designed by the NSA, and it is used all over cryptography for securing and verifying information.
It's a cryptographic hash function (also called ‘digest’) that takes an input of a random size and produces an output of a fixed size, a bit like a digital ‘signature’ for a text or a data file.
The total supply is the total amount of coins or tokens that will ever be created in a blockchain ecosystem. It should not be confused with circulating supply which is how many there are in circulation at any given time.
With Bitcoin today, mining creates more coins for every block added to the blockchain. But this will not continue forever.
Like most other cryptocurrencies, Bitcoin has a capped total supply, which is coded into the protocol, and it's partially why it gives a cryptocurrency its value.
For miners, it is the point where the block reward stops and when mining will be encouraged by fees and incentives.
Transaction fees are a small amount paid to miners for them doing their hard work, and are shaved off the amount of cryptocurrency sent.
Different cryptocurrencies have different fee structures, but Bitcoin and Ethereum have an open market for blockspace.
Since there is only a finite amount of transactions that can fit in a block, the miners will add the transactions first that have the highest fees.
Some cryptocurrencies claim to have zero transaxtion fees, but this is offset by inflation of a never ending total supply.
UTXO stands for Unspent Transaction Output. They are processed continuously and are responsible for the start and culmination of a transaction.
Bitcoin and other blockchains don’t store account information like somebody's balance, they instead determine how many cryptocurrencies can be sent as outputs, by taking all previous outputs from all previous inputs, and whatever is left must be the balance.
When a wallet tells you that you have 5 BTC, it has actually analyzed the UTXO information of the entire history of the chain to determine this value.
A wallet is a software or hardware device that stores or inputs private and public keys to allow users to interact with the coins they have in the associated address.
Wallet Addresses are unique identifiers that reference a specific wallet.
An algorithm is used to generate wallet addresses and the seemingly random string of characters is actually a hashed variant of your public keys.