Blockchain 101

We strive to make the definitions in this glossary both accessible for lay readers and conceptually rigorous for experts. For those who wish to pursue topics in more detail, we link to general resources as well as to a curated list of technical and scholarly materials.

 

Bitcoin: the first cryptocurrency to achieve significant circulation. Bitcoin’s design and protocol were outlined in a 2008 white paper published under the pseudonym of Satoshi Nakamoto; the software and live network followed in 2009. Bitcoin is characterized by transparent pseudonymity, meaning that transactions are publicly viewable but tied to participants’ randomized Bitcoin addresses rather than to their real-world identities; a fixed supply of currency units; and a reliance on an energy-intensive proof of work known as mining.

 

blockchain: a family of technologies that use cryptographic methods to secure a shared ledger of sequential records. Sequential means that records are added to the ledger over time, never deleted or modified in place. Shared means that a copy of the ledger is held by two or more parties. Secure means that each party can verify both (a) the correctness of their copy of the ledger and (b) that it has not previously been tampered with.

The name comes from one of the techniques most commonly involved, in which Merkle trees are used to combine multiple records into a “block” and then “chain” multiple such blocks together.  However, while all blockchains link a sequence of records over time, not all combine them first into blocks.  For example, some blockchains use blocks only as a convenient grouping of records to optimize the process by which they are ultimately accepted.  Others link records into a directed acylic graph rather than a linear chain.

These techniques were first described in Haber and Stornetta, “How to Time-stamp a Digital Document”; expanded in Bayer, Haber, and Stornetta, “Improving the Efficiency and Reliability of Digital Time-Stamping”; and popularized in Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System.”

 

cryptocurrency: a blockchain-based digital currency; that is, a unit of money for which the authoritative record is a blockchain. The “crypto-” prefix refers to the method of cryptographic proof used to secure the blockchain from tampering.

 

distributed ledger:  in common usage, a type of distributed database that uses blockchain techniques to prevent forgery and tampering.  In particular, the acceptance as well as the storage of data is shared among the ledger’s participants, subject to a consensus mechanism.

In strict terms, the category of distributed database to which blockchain systems belong. Like a blockchain, all distributed ledgers process and store a sequence or graph of records, rather than storing only the current state of the database. However, a distributed ledger’s consensus mechanism does not necessarily guarantee records’ integrity or the ledger’s immutability, as is required of a blockchain.

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governance:  the processes by which a blockchain regulates its membership, consensus, operation, and (recursively) changes to its own governance processes.  Governance is said to be “on-chain” to the extent that the network itself, through application software and smart contracts, can make decisions and implement them as software changes.  Governance is said to be “off-chain” when it occurs through conventional channels, such as change requests and discussions on mailing lists.

As in other systems (human as well as digital) that function on consensus, failures of governance on a blockchain can cause the network to fork, or fragment.  Unlike other forms of network partition in distributed systems, a blockchain fork is irreversible as soon as their ledgers begin to diverge.

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proof of X:  a family of methods used in blockchain systems to select the network participant who will propose the next block or group of records to be considered for acceptance.  Acceptance of the block, once proposed, is subject to the blockchain’s consensus protocol.

Proof methods influence the blockchain’s governance by disincentivizing malicious activities (e.g., majority or Sybil attacks) and optionally incentivizing other activities (known as bread-pudding protocols). In a blockchain with an underlying cryptocurrency, such as Bitcoin and Ethereum, proof methods further have economic effects, by attaching monetary penalties and rewards (respectively) to these activities.

Although many proof methods are in active development, the most-commonly used are proof of work and proof of stake.

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smart contract:  “a computerized transaction protocol that executes the terms of a contract,” which has in common with a blockchain the aim to “minimize the need for trusted intermediaries” (Szabo, “Smart Contracts”).  Blockchain platforms such as Ethereum advance this notion by executing the protocol in a binding manner, in public view of the network, so that in using the protocol a participant effectively consents to the results of the computation.  This model can be thought of as a kind of inverted API, where users participate in the API rather than merely communicating with it.

In contrast to a smart contract, a so-called Ricardian contract codifies and perhaps automates the enforcement of a conventional legal agreement.

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