Glossary

BIP39

BIP39 is a standard for a mnemonic phrase (more widely known as “Seed phrase”) that is used to control a wallet.

This means that it's a way to represent a wallet’s private key as a set of 12 or 24 words. The advantage of using a mnemonic phrase representation of a cryptographical private key is that it's easy for people to read it and write it down, which makes it easier to backup and recover your wallet.

BIP44

BIP44 is a Bitcoin improvement Proposal that built on BIP32 by extending standards for multi-coin wallet management. Not only Bitcoin supported, but almost all other cryptocurrencies, like Ethereum, Dogecoin, etc.

Bitcoin

Bitcoin is a digital currency that allows people to send and receive payments securely over the internet. It is a public money protocol. It was created in 2009 by a person or group of people using the pseudonym "Satoshi Nakamoto". Unlike traditional currencies, which are issued by governments, Bitcoin is decentralized, which means that it is not controlled by any single entity. Instead, it is underpinned by a network of computers that work together to verify and record transactions on a public ledger called the blockchain. The supply of Bitcoin is limited, and the currency can be bought and sold on online exchanges. Many people are attracted to Bitcoin because of its potential for high returns on investment, as well as its independence from governments and central banks.

Bitcoin Address

A Bitcoin address is a unique string of characters that represents the destination of a Bitcoin payment. It is similar to an email address, but instead of being used to send and receive messages, a Bitcoin address is used to send and receive payments on the Bitcoin network. A Bitcoin address can be shared publicly, and anyone who knows the address can send payments to it. It is important to keep your Bitcoin address private and secure, as anyone who has access to your address can potentially steal your funds. Bitcoin addresses are typically generated by a wallet software and are composed of a string of letters and numbers. They typically begin with the number "1", or "3", or “bc1” (defined by BIP44, BIP49, and BIP84 accordingly).

Bitcoin Core

Bitcoin Core is a software program that allows users to send and receive Bitcoin payments. It is a full-featured Bitcoin software that forms the backbone of the network, and it is the most trusted and widely-used Bitcoin software in the world. Bitcoin Core includes a built-in wallet, which allows users to store and manage their Bitcoin, as well as a built-in miner that can be used to secure the network by verifying transactions. It is an open-source software, which means that anyone can view and contribute to the source code. Bitcoin Core is available for free, and it can be downloaded and installed on a computer running Windows, Mac OS, or Linux.

Bitcoin Improvement Proposal (BIP)

A Bitcoin Improvement Proposal (BIP) is a proposal for a change or an improvement to the Bitcoin network. It is a way for anyone who has an idea for how to improve Bitcoin to submit their proposal to the community for discussion and review. BIPs are typically submitted by Bitcoin developers, but anyone can submit a proposal. The process of reviewing and implementing BIPs is designed to be open and transparent, and it is overseen by a group of volunteers known as the Bitcoin Improvement Proposals Working Group (BIPs WG). BIPs can cover a wide range of topics, including changes to the Bitcoin protocol, new features for the software, and improvements to the user experience.

Advanced: Details of all BIPs can be viewed in the GitHub repository https://github.com/bitcoin/bips.

Bitcoin Script

Bitcoin Script is a programming language that is used to define the rules for transactions on the Bitcoin network. It is a simple, stack-based language that allows developers to write scripts that specify conditions for spending Bitcoin. For example, a script might specify that a certain number of signatures from a group of people are required in order to spend some Bitcoin (see “multisignature”), or that a payment can only be made if a certain condition is met. Bitcoin Script is used in the creation of smart contracts on the Bitcoin network, which are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.

Cryptographic Signature

A cryptographic signature is a mathematical scheme that is used to verify the authenticity and integrity of a message or a piece of data. It is a way of signing a message with a digital key, which can be used to verify that the message was indeed sent by the person who claims to have sent it. Cryptographic signatures are an essential part of many cryptographic protocols, and they are used in a wide range of applications, including secure communication, digital signatures, and blockchain technology. To create a cryptographic signature, a sender uses a secret key to generate a unique "signature" for the message. The signature is then attached to the message, and it can be verified by anyone who has the corresponding public key. This allows recipients to verify that the message was indeed sent by the owner of the secret key, and that it has not been tampered with.

Decentralized Finance ("DeFi")

Decentralized finance, or "DeFi", refers to a new financial system that is built on top of blockchain technology. It is a way of providing financial services and products, such as loans, insurance, and investment opportunities, without the need for traditional intermediaries, such as banks and financial institutions. DeFi allows users to access these services directly, using smart contracts and other blockchain-based technologies. This allows for faster, cheaper, and more secure transactions, and it also enables new types of financial products and services that were not previously possible. DeFi has the potential to revolutionize the way that finance works, and it is attracting a growing number of users and investors who are attracted by its potential for high returns and its independence from traditional financial institutions.

Encryption

Encryption is a way of converting information into a secret code that can only be read by someone who knows the "secret key" to decrypt it. It is a fundamental technique in cryptography, which is the science of keeping information secure. Encryption is used to protect sensitive information, such as credit card numbers, passwords, and military communications, from unauthorized access. It is also used to verify the authenticity of a message or a piece of data, by generating a unique "signature" that can be verified by anyone who has the corresponding key. Encryption is a key component of many security systems, and it is essential for protecting information in the digital age.

Encryption Keys

Encryption keys are a crucial part of encryption, which is the process of converting information into a secret code. An encryption key is a piece of information that is used to encrypt and decrypt a message or a piece of data. It is a secret code that is used to scramble the original information in a way that can only be undone by someone who knows the key. Encryption keys are a fundamental concept in cryptography, and they are used in many different encryption algorithms. There are two main types of encryption keys: public keys and private keys. Public keys are used to encrypt a message, and they can be shared publicly. Private keys are used to decrypt a message, and they are kept secret by the owner.

Ethereum

Ethereum is an open-source, decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference. These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middleman or counterparty risk. The project was bootstrapped via an ether presale in August 2014 by fans all around the world. It is developed by the Ethereum Foundation, a Swiss non-profit, with contributions from great minds across the globe.

Ethereum Request for Comment (ERC)

An Ethereum Request for Comment (ERC) is a proposal for a new feature, improvement, or standard for the Ethereum blockchain (like BIP for Bitcoin). It is a way for anyone who has an idea for how to improve Ethereum to submit their proposal to the community for discussion and review. ERCs are typically submitted by Ethereum developers, but anyone can submit a proposal. The process of reviewing and implementing ERCs is designed to be open and transparent, and it is overseen by a group of volunteers known as the Ethereum Improvement Proposals Working Group (EIP WG). ERCs can cover a wide range of topics, including changes to the Ethereum protocol, new features for the software, and improvements to the user experience. You can find ERCs here: https://eips.ethereum.org/erc.

ERC-20 token

An ERC-20 token is a type of digital asset that is built on the Ethereum blockchain. It is a standardized way of creating and issuing tokens, which are digital assets that can be traded on the Ethereum network. ERC-20 tokens follow a specific set of rules, which makes it easy for developers to create and manage them, and for exchanges to support them. This has led to the widespread adoption of ERC-20 tokens, and there are now thousands of different tokens that follow the ERC-20 standard. ERC-20 tokens are commonly used to raise funds through initial coin offerings (ICOs), and they are also used to represent assets, such as digital collectibles and game items. The ERC-20 standard may be found here: https://ethereum.org/en/developers/docs/standards/tokens/erc-20/.

ERC-721 token

An ERC-721 token is a type of digital asset that is built on the Ethereum blockchain. It is a standardized way of creating and issuing non-fungible tokens, which are digital assets that are unique and cannot be replicated. Unlike ERC-20 tokens, which are interchangeable and divisible, ERC-721 tokens are each unique and have their own distinct characteristics. ERC-721 tokens are commonly used to represent unique assets, such as digital collectibles, art, and game items. They are also used to create decentralized marketplaces, where users can buy and sell unique assets. ERC-721 tokens were first introduced in 2017, and they have gained popularity due to their ability to represent a wide range of unique digital assets. The ERC-721 standard may be found here: https://ethereum.org/en/developers/docs/standards/tokens/erc-721/.

Hash & Hash Functions

A hash is a fixed-size string of characters that is created by applying a mathematical algorithm, known as a hash function, to a piece of data. The result of this process is a unique "fingerprint" for the data, which can be used to verify its integrity and authenticity. A hash function is a mathematical algorithm that is designed to take any input of data, of any size, and produce a fixed-size output, known as a hash. The same input will always produce the same output, and even a small change to the input will produce a completely different output. This makes hash functions useful for verifying the integrity of data, as any changes to the data will be immediately detectable by comparing the original and the new hash. Hash functions are used in many different applications, including blockchain technology and password security.

Hierarchical Deterministic Wallet

A hierarchical deterministic wallet, or HD wallet, is a type of cryptocurrency wallet that uses a system of keys to generate a large number of private and public keys from a single seed key. This is known as deterministic key generation, and it allows the wallet to be easily backed up and restored. An HD wallet also has a hierarchical structure, which means that the keys are organized into different levels or "chains" of keys. This allows the wallet to support multiple accounts and addresses, and it makes it easier to manage and organize the keys. HD wallets are commonly used for Bitcoin and other cryptocurrencies, and they are considered to be more secure and user-friendly than non-deterministic wallets. It is an industry standard described in BIP32 and BIP44.

Hot and Cold Wallets

Hot and cold wallets are two different types of cryptocurrency wallets, which are used to store and manage digital assets, such as Bitcoin and Ethereum. A hot wallet is a wallet that is connected to the internet, and it is used for more frequent transactions. A cold wallet, on the other hand, is a wallet that is not connected to the internet, and it is used for long-term storage of cryptocurrencies. Cold wallets are considered to be more secure than hot wallets, as they are less vulnerable to hacking and other online threats. Hot wallets are more convenient to use, but they are also more susceptible to security risks. Most people use a combination of hot and cold wallets, depending on their needs and the amount of cryptocurrency that they are holding.

Miniscript

Miniscript is a high-level programming language that is used to write Bitcoin smart contracts. It is a simplified version of the Bitcoin Script language, which is the native programming language of the Bitcoin network. Miniscript allows developers to write smart contracts in a more readable and easier-to-understand format, which makes it easier to reason about the behavior of the contracts. Miniscript also includes a number of features, such as type checking and static analysis, that make it easier to write correct and secure smart contracts. The use of Miniscript has grown in popularity in recent years, and it is now supported by many different Bitcoin wallets and other tools.

(MPC) Multi Party Computation

Multi-party computation, or MPC, is a type of cryptographic protocol that allows a group of parties to compute a function on their inputs, without revealing their inputs to each other. This allows the parties to securely compute a function on sensitive data, without revealing the data itself. MPC protocols are used in many different applications, including secure communication, privacy-preserving machine learning, and secure multiparty computation of smart contracts or a transaction signature. MPC protocols typically involve a mix of cryptographic techniques, such as secret sharing and zero-knowledge proofs, to enable secure computation without revealing the inputs to the other parties. MPC has the potential to revolutionize the way that sensitive information is processed and used, by enabling secure computation on sensitive data without revealing it to the parties involved.

Multi-Signature (aka Multisig)

Multi-signature, or multisig, is a type of digital signature scheme that allows more than one person to sign a document or a transaction. It is a way of creating a joint account or a shared wallet, where multiple people must sign a transaction before it can be broadcast to the network. Multi-signature is commonly used in cryptocurrency and blockchain applications, where it is used to create a shared wallet that requires the signatures of multiple people before a transaction can be executed. This can provide an added layer of security and accountability, as it ensures that multiple people must agree before a transaction can be made. It is also used to create joint accounts, where multiple people can spend from the same account, but where a certain number of signatures are required before a transaction can be executed.

Non-Fungible Token (NFT)

A non-fungible token, or NFT, is a type of digital asset that is unique and cannot be replicated. It is a way of representing a unique item, such as a digital collectible, a virtual property, or a piece of art, on the blockchain. Unlike other cryptocurrencies, such as Bitcoin and Ethereum, which are interchangeable and divisible, NFTs are each unique and have their own distinct characteristics. This makes them suitable for representing items that are unique and cannot be replicated, such as digital art or virtual real estate. NFTs are commonly created on blockchain platforms, such as Ethereum, and they are often used to create and manage decentralized marketplaces for unique digital assets. For more information, see Vault12's article about NFTs.

Output Descriptors

Partially Signed Bitcoin Transaction (PSBT)

A partially signed Bitcoin transaction, or PSBT, is a type of Bitcoin transaction that is only partially signed. It is a way of representing a Bitcoin transaction that is in the process of being signed by multiple parties. A PSBT contains all of the information that is needed to complete the transaction, such as the inputs and outputs, the scripts and other conditions that must be satisfied, and the signatures of some, but not all, of the parties involved. A PSBT is typically created by a wallet software, and it is then sent to one or more other parties for signing. Once all of the required signatures have been added, the PSBT can be finalized and broadcast to the Bitcoin network.

Passphrase (for Seed phrase)

The passphrase is an optional extension to the BIP39 Seed phrase standard, sometimes referred to as an "extra word" (although it does not need to take the form of a single word) and it can be used as an additive authentication feature beyond the standard 12-24-word seed phrase. Some wallets call this passphrase a mnemonic seed extension or 13th/25th word. If used, the passphrase should be securely backed up and stored, because like your seed phrase, if you forget or lose it, you will lose access to your cryptocurrency.

WARNING: Losing your passphrase would have the same effect as losing your seed, resulting in losing access to your crypto!

Seed phrase

A seed phrase, or seed recovery phrase, is a sequence of words that is used as a backup for a cryptocurrency wallet. It is a way of recovering access to a wallet in the event that the wallet's private keys are lost or stolen. It is defined by the BIP39 standard. A seed phrase is typically a series of 12-24 words, and it is generated by the wallet software when the wallet is first created. The seed phrase can be used to recreate the private keys for the wallet, which allows the user to access their funds. Seed phrases are a critical part of a wallet's security, and it is important to keep them safe and secure.

Private Key

Broadly, a private key is a secret piece of data that is used in cryptography, such as in the creation of digital signatures and encryption. It is a string of characters that is used to encrypt and decrypt messages and to prove the ownership of a particular piece of data, such as a cryptocurrency wallet. A private key is typically generated by a wallet or vault software, and it is kept secret by the owner. There are a variety of private key types that exist in cryptocurrency language: master private key - usually called “seed phrase”, and derived (from master) private keys that control only specific accounts within a wallet (see BIP32, BIP44 for details on differences). A private key is also mathematically related to the public key, which is a publicly-known value that can be used to verify the digital signatures that are created using the private key.

Segregated Witness (aka SegWit)

Segregated Witness, or SegWit, is a Bitcoin improvement proposal (BIP) that was created to address some of the scalability and performance issues of the Bitcoin network. It is a way of modifying the structure of Bitcoin transactions to allow for more efficient and secure processing. SegWit was activated on the Bitcoin network in August 2017, and it has since been adopted by many different wallets and other Bitcoin applications. SegWit changes the way that data is stored in a Bitcoin transaction, by separating the signature data from the rest of the transaction data. This allows for more efficient and secure processing of transactions, and it also enables new features, such as the Lightning Network and transaction malleability fix. SegWit is considered to be an important step forward for the Bitcoin network, as it increases the capacity and the efficiency of the network. Segwit Bitcoin addresses begin with 3 or bc1 and are recommended to use, refer to BIP49 and BIP48 standards to learn more.

Shamir's Secret Sharing / Key Split

Shamir's Secret Sharing, also known as key splitting, is a method of dividing a secret, such as a password or a private key, into multiple shares. The secret can then be reconstructed by combining a certain number of shares, known as the threshold. This allows for secure sharing of a secret among a group of people, as each person only has access to one share of the secret, and the secret cannot be reconstructed without the required number of shares. Shamir's Secret Sharing is named after its inventor, Adi Shamir, and it is a widely-used method for secure sharing of secrets. It is commonly used in cryptography, blockchain technology, and other applications where secure sharing of sensitive information is needed.

Sharding

Sharding is a method of splitting a large database or a network into smaller, more manageable units, known as shards. It is a way of distributing data and workloads across multiple shards, in order to improve the performance, scalability, and security of the system. Sharding is commonly used in database management and distributed systems, where it allows for more efficient and secure storage and processing of data. In a sharded system, each shard is a self-contained unit that contains a subset of the data and the functionality of the overall system. This allows for parallel and distributed processing of the data, which can improve the performance and the scalability of the system. Sharding is also used in blockchain technology, where it is used to improve the scalability and the security of distributed ledger systems.

Signature Aggregation

Signature aggregation is a method of combining multiple digital signatures into a single signature. It is a way of reducing the size and the cost of digital signature schemes, by allowing multiple parties to sign a message or a transaction using a single signature. Signature aggregation is commonly used in cryptography and blockchain technology, where it is used to improve the efficiency and the security of digital signature schemes. In signature aggregation, multiple parties can create their own signatures on a message or a transaction, and then the signatures can be combined into a single signature using a mathematical operation. This allows for more efficient and secure processing of transactions, as the size and the cost of the signature is reduced. Signature aggregation is an important research area in cryptography and blockchain technology, and it has many potential applications.

Smart Contract

A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. Smart contracts allow for the automation of digital relationships, enabling the performance of credible transactions without third parties. These transactions are trackable and irreversible. Smart contracts were first proposed by Nick Szabo in 1994. The goal of smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting.

Spending Policy

A spending policy is a set of rules and conditions that determine how a cryptocurrency wallet can be used to make transactions. It is a way of specifying the conditions under which a wallet can be used to spend funds, and it can be used to enforce certain constraints and requirements on the use of the wallet. Spending policies are commonly used in multisignature wallets, where they are used to specify the number of signatures that are required to spend funds, or to specify the types of transactions that are allowed. Spending policies are also used in other decentralized applications, such as in the management of funds for smart contracts, e.g. DAO treasuries, and in the creation of trustless escrow services.

Threshold Signature Schemes (TSS)

Threshold signature schemes are types of multi-party computation (MPC) that support the combination of partial signatures to produce a complete threshold signature that satisfies "k of n" approval threshold rules, and even more-complex spending policy rules.

A well-known form of threshold signature schemes is Multisig transactions, which achieve a prescribed level of approvers in order for a spend transaction to be approved.

Two-Factor Authentication (2FA), Multi-factor authentication

An example of a popular application that can generate single-use codes to prove identification of a user/device is Authy.

Wallet Address