Blockchain Terminology You Need to Know: Part One

Blockchain guide
Source: SciTechEuropa

This is part three of four in our series of blockchain guides

Blockchain is the technology that underpins the use of cryptocurrencies and a range of other digital transactions. Records of transactions (or “blocks”) are added to the digital chain as a means of securing and auditing the transactions. Because the chain continues to grow with every added block, it is almost impossible for hackers to alter. If you want to use cryptocurrency or you would like to use blockchain to secure your digital transactions, here is some of the terminology you will need to know.

Ledgers

In cryptocurrency terms, a “ledger” takes its name from the more traditional paper form of accounting, i.e. it is a record of financial transactions. Blockchain is a kind of ledger, because it records very large numbers of financial transactions (the blocks). It is accessible by anyone that uses it which effectively means it is overseen by anyone who has one of their transactions in the chain (although obviously they can’t see the private details of other transactions, such as account numbers). 

Blockchain is a type of distributed ledger. A distributed ledger is one where the relevant data is held in more than one location (i.e. multiple digital locations). This removes the problem of having a single point of failure when data is all held in one place.

Smart Contracts

Smart contracts are built into blockchain and set the terms of a transaction between buyer and seller. They are put into blockchain technology as lines of code and they are self-executing, which means the terms of the contract are enacted automatically. This automation means that neither the buyer or seller can contradict the terms of the contract. For example, a digital product being sold will be automatically released only when funds can be identified as having been received. 

blockchain terminology
Source: JingDaily

The code and terms exist across the whole blockchain network, which means they can’t be altered. Smart contracts (which could be termed “e-contracts”) remove mistrust as well as the need to be overseen by professionals such as lawyers. It also removes the need for buyers and sellers to go back and forth to confirm if the other is upholding their end of the bargain, because the automated system ensures that they must do.

Lightning Network

The Lightning Network attempts to solve the problem of scalability for Bitcoin and other cryptocurrencies. Scalability has been recognized as a problem for cryptocurrencies since the time they first emerged. The concern is that the transactions involved can’t be done quickly enough on a large enough scale to be efficient. Bitcoin, for example, has generally only been able to process a few transactions per second. As it has grown and continues to grow, this is a major issue. Visa, by contrast, can process up to 50,000 a second.

The Lightning Network allows for an additional layer to be added to the blockchain network. This layer can be used to do transactions that are not immediately added to the blockchain. For example, two friends or business partners can agree to set up a wallet (software or hardware where cryptocurrency is stored) that allows them to do fast, cheap transactions without the need to use the blockchain right away. Once their agreement is finished, all of the transactions can be added to the chain as one block.

Masternodes 

In the case of cryptocurrency, a node is a computer that participates in the currency’s network. A masternode is a computer that performs extra functions to support and protect the network. In return for agreeing to perform these functions, the person whose computer is being used will be rewarded with extra currency. For this reason, running a masternode can be seen as an investment and an activity with earning potential similar to cryptocurrency mining.

Dash is one of the major cryptocurrencies that is currently using masternodes, but there are plenty of others. If you want to run a masternode, you will need quite a large stack of currency to put up as collateral, as well as sufficient computing power and an understanding of the particular requirements of the cryptocurrency you wish to work with. 

You can find parts one and two of our blockchain guide here:

Part One: The Benefits of Mining Bitcoin and Other Cryptocurrency

Part Two: Everything You Need to Know About Blockchain as a Service (BaaS)

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