Virtual Currency Flashcards
Fiat Currency
- Regular paper currency
- Money backed by a central bank established by a gov. to be legal tender.
Blockchain
- Publicly shared, decentralized digital ledger used to record and track transactions of virtual currency.
- Transactions are conducted in batches called Blocks.
- Blocks are verified and validated via hashing and added to previously
verified blocks to form a chain - Blocks are immutable which means they can never be changed once
created.
Hashing
- utilizes a mathematical algorithm to assign a unique value or “digital
fingerprint” to a digital file - No two hash values are the same
- The unique hash values make it nearly impossible to tamper with a transaction record without it being detected.
- Purpose to ensure the data isn’t modified, tampered or corrupted.
Chainalysis
- Leading tool for Law Enforcement in crypto tracing
- Is a software designed to connect cryptocurrency transactions to real
world activity.
What does a Blockchain contain
- A header (front) and transaction section (rear)
- The header section contains the “metadata” about the block:
- Bitcoin version
- Timestamp
- Target that determines mining difficulty
- Previous block hash - The transactions section contains:
- A list of transactions that have yet to be verified
- A Merkle root which is a hash of all transactions in the block
Centralized virtual currency typology
- regulated by a single entity, usually the creator of the currency
- Price to Fiat (exchange rate) is set by the creator(s) and is generally stable. NOT backed by government
Example: video game currency
Decentralized Virtual Currency Typology
- Not regulated by a single entity
- Generated by computers
- The price to Fiat value is determined by group consensus and is often unstable. NOT backed by government.
Example: most cryptocurrencies fall under this
Node
Computer connected to a network.
Mining
- a competitive, decentralized process that adds records of new transactions to the Bitcoin Blockchain approximately every ten minutes by peers on the network
- US is largest bitcoin mining country
Two Purposes- Introduces newly minted Virtual Currency into the system
- Enables the decentralized operation of the Virtual Currency P2P network that allows transactions to be processed
Proof-of-Work (PoW) system
- PoW is a complicated mathematical puzzle that is difficult to produce but easy to verify.
- Miners must complete the PoW of all data within the block before the Bitcoin Network will accept it for validation
- Will get 6.25 bitcoin
- The PoW is accomplished by acquiring a hash value smaller than the Target value.
- The nonce usually starts at zero and increases numerically until the resulting hash value is smaller than the target value
- The miner publishes the block to the Bitcoin Network once the PoW is
solved. - Full nodes on the Bitcoin Network validate the block
- The public Blockchain ledger is updated across the network.
Bitcoin Mining Operations
Mining pools are groups of miners that “pool” their mining power
together and share the block rewards.
Bitcoin Transactions
A transaction consists of the sender’s public key, the receiver’s public key and the sender’s private key that “digitally signs” the transaction.
Digital wallet
- The wallet is a software program
- The wallet address are the keys.
- Online wallets: internal hard drive and cloud based.
Example: coinbase (cloud based)
Seed Phrase
A bitcoin seed phrase is a list of 12, 18, or 24 randomly generated words
used for recovery of a hardware wallet.
Paper wallets (cold wallets)
Pieces of paper containing typed or handwritten public/private keys
Used to receive bitcoins
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