Glossary

This quick glossary contains many of the terms used in relation to Bitcoin. These terms are used throughout the book, so bookmark this for a quick reference.

address

A Bitcoin address looks like 1DSrfJdB2AnWaFNgSbv3MZC2m74996JafV. It consists of a string of letters and numbers. It’s really an encoded base58check version of a public key 160-bit hash. Just as you ask others to send an email to your email address, you would ask others to send you bitcoin to one of your Bitcoin addresses.

AMP

Atomic Multipath Payments was an early suggestion for a multipart payment protocol which did not get implemented but introduced the idea of splitting a single payment into multiple parts and send them along potentially different paths.

Asymmetric Cryptographic System

Asymmetric cryptography, or public-key cryptography, is a cryptographic system that uses pairs of keys: public keys which may be disseminated widely, and private keys which are known only to the owner. The generation of such keys depends on cryptographic algorithms based on mathematical problems to produce one-way functions. Effective security only requires keeping the private key private; the public key can be openly distributed without compromising security. https://en.wikipedia.org/w/index.php?title=Public-key_cryptography&oldid=877579180

Autopilot

Autopilot is a recommendation engine for Lightning Network nodes that uses statistics of the known topology to suggest which nodes they should open channels with. Depending on the implementation of the autopilot, the channel capacity may also be recommended. Autopilots are not part of the Lightning Network Protocol.

balance

The balance of a payment channel is the amount of bitcoin that belongs to each channel partner. For example, Alice could open a channel with Bob for the value of 1 BTC. The channel balance is then 1 BTC to Alice and 0 BTC to Bob. As the users transact the channel balance will update. For example if Alice sends 0.2 BTC to Bob, then the balance is now 0.8 BTC to Alice and 0.2 to Bob. When the channel is closed the bitcoin in the channel will be divided between the two channel partners according to the latest balance encoded in the commitment transaction. In the Lightning Network, the ability to send and receive payments is limited by channel balances. See capacity.

bech32

A checksummed base32 address format, at most 90 characters long, and capable of error correction. It is native to segregated witness (BIP173). Also referred to as “bc1” because of the current starting values of each address. Transactions made using bech32 are smaller in most cases, and therefore, may only require a lower fee.

bip, BIP

Bitcoin Improvement Proposals. A set of proposals that members of the Bitcoin community have submitted to improve Bitcoin. For example, BIP-21 is a proposal to improve the Bitcoin uniform resource identifier (URI) scheme. BIPs can be found at https://github.com/bitcoin/bips.

bitcoin, Bitcoin

Depending on the context, could refer to the name of the currency unit (the coin), the network or the underlying enabling protocol. Written as bitcoin with a lowercase “b” usually refers to the currency unit. Bitcoin with an uppercase “B” usually refers to the protocol. See https://www.bitcoin.org for general information. The source code can be found at https://github.com/bitcoin/bitcoin.

Bitcoin mining

Bitcoin mining is the process of constructing a block from recent Bitcoin transactions and then solving a computational problem required as proof of work. It is the process by which the shared bitcoin ledger (i.e. the bitcoin blockchain) is updated and by which new transactions are included in the ledger. It is also the process by which new bitcoin is issued. Every time a new block is created, the mining node will receive new bitcoin created within the coinbase transaction of that block.

block

A grouping of transactions, marked with a timestamp, and a fingerprint of the previous block. The block header is hashed to produce a proof of work, thereby validating the transactions. Valid blocks are added to the main blockchain by network consensus.

blockchain

The blockchain is an irreversible distributed database storing all Bitcoin transactions. The irreversibility comes from the fact that each group of transactions, referred to as a block, is validated by solving a proof of work riddle and including the hash of the previous block. Thus, the data can only be changed by an entity providing more than 51% of the computational power of the Bitcoin network. Blocks currently have a size limit of 1 MB. New blocks have a statistical probability of being produced every ten minutes.

BOLT

BOLT, or Basis Of Lightning Technology, is the formal specification of the Lightning Network protocol. Unlike Bitcoin, which has a reference implementation that also serves as the protocol’s specification, the various Lightning Network implementations follow BOLT so they can work with one another to form the same network. It is available at https://github.com/lightningnetwork/lightning-rfc.

Breach Remedy Transaction

A transaction claiming the outputs of a Revocable Sequence Maturity Contract with the help of the revocation key. This can only happen if a channel partner was not following the protocol and tried to publish (willingly or due to a software bug) an old channel state.

capacity

The capacity of a payment channel is equivalent to the amount of bitcoin provided by the funding transaction. As the funding transaction is publicly visible on the blockchain, and the channel is announced via the gossip protocol, the capacity is public information. It does not reveal any information about how much bitcoin each of the channel partners owns in the channel. A high capacity does not guarantee that the channel can be used for routing in both directions. The capacity does not change if some of the capacity is locked up in HTLCs. This means that even a high capacity channel could at any time be unable to route a payment of a certain amount in both directions. Not to be confused with the balance.

c-lightning

Implementation of the Lightning Network Protocol by the Victoria based company Blockstream. It is written in C. Source code is at https://github.com/ElementsProject/lightning.

closing transaction

If both channel partners agree to close a channel they will create an exercise settlement transaction that reflects the most recent commitment transaction. It does not include any Hashed Time Lock Contracts or Revocable Sequence Maturity Contracts. After exchanging signatures for a closing transaction, no further channel updates should be made as this one allows one side to enforce the closing transaction on the blockchain. Mutually closing a channel with the help of a closing transaction has the advantage that fewer blockchain transactions are required to claim all funds, in comparison to unilaterally forcing a channel close by publishing a commitment transaction. Additionally, funds for both parties are immediately spendable from a closing transaction.

coinbase

A special field used as the sole input for coinbase transactions. The coinbase allows the block reward to be claimed and provides up to 100 bytes for arbitrary data. The block reward consists of two things. First, newly generated coins. The amount of allowed coins to be generated is part of the consensus rules and decreases over time based on the current block height. Second, the miner is also allowed to add all the fees of the transactions from the current block to the coinbase. Not to be confused with coinbase transaction.

coinbase transaction

The first transaction in a block which is always created by a miner and which includes a single coinbase. Not to be confused with coinbase.

cold storage

Refers to keeping an amount of bitcoin offline. Cold storage is achieved when Bitcoin private keys are created and stored in a secure offline environment. Cold storage is important to protect bitcoin holdings. Online computers are vulnerable to hackers and should not be used to store a significant amount of bitcoin.

Commitment Transaction

A commitment transaction is a Bitcoin transaction, signed by both channel partners, that encodes the latest balance of a channel. Every time a new transaction is made or forwarded using the channel, the channel balance will update, and a new commitment transaction will be signed by both parties. Importantly, for a channel between Alice and Bob, both Alice and Bob keep their own version of the commitment transaction, which is also signed by the other party. At any point, the channel can be closed by either Alice or Bob if they submit their commitment transaction to the Bitcoin blockchain. Submitting an older (outdated) commitment transaction is considered “cheating” (i.e. a protocol breach) in the Lightning network and can be penalized by the other party, claiming all the funds in the channel for themselves.

computationally easy

A problem is considered to be computationally easy if there exists an algorithm that is able to compute the solution to the problem relatively quickly (in polynomial time complexity).

computationally hard

A problem is considered to be computationally hard if no algorithm exists or is known that is able to compute the solution to the problem relatively quickly (in polynomial time complexity).

confirmations

Once a transaction is included in a block, it has one confirmation. As soon as another block is mined on the same blockchain, the transaction has two confirmations, and so on. Six or more confirmations are considered sufficient proof that a transaction cannot be reversed.

contract

A contract is a set of Bitcoin transactions which together result in a certain desired behavior. Examples are RSMCs to create a trustless, bi-directional payment channel or HTLCs to create a mechanism which allows trustless forwarding of payments through third parties.

Diffie Hellman (DH) Key Exchange

On the Lightning Network, the Elliptic Curve Diffie-Hellman method is used. It is an anonymous key agreement protocol that allows two parties, each having an elliptic-curve public-private key pair, to establish a shared secret over an insecure communication channel. This shared secret may be directly used as a key, or to derive another key. The key, or the derived key, can then be used to encrypt subsequent communications using a symmetric-key cipher. An example of the derived key would be the shared secret between the ephemeral session key of a sender of an onion with the node’s public key of a hop of the onion as described and used by the SPHINX Mix Format. Via https://en.wikipedia.org/w/index.php?title=Elliptic-curve_Diffie%E2%80%93Hellman&oldid=836070673

digital signature

A digital signature is a mathematical scheme for verifying the authenticity of digital messages or documents. A valid digital signature gives a recipient reason to believe that the message was created by a known sender, that the sender cannot deny having sent the message, and that the message was not altered in transit. They can be seen as cryptographic commitments in which the message is not hidden. https://en.wikipedia.org/w/index.php?title=Digital_signature&oldid=876680165

double-spending

Double-spending is the result of successfully spending some money more than once. Bitcoin protects against double-spending by verifying that each transaction added to the blockchain plays by the rules; this means checking that the inputs for the transaction have not previously already been spent.

downstream payment

TBD.

ECDSA

Elliptic Curve Digital Signature Algorithm or ECDSA is a cryptographic algorithm used by Bitcoin to ensure that funds can only be spent by their rightful owners.

Eclair

Implementation of the Lightning Network Protocol by the Paris based company ACINQ. It is written in Scala. Source code is at https://github.com/ACINQ/eclair.

encoding

Encoding is the process of converting a message into a different form. For example, converting a human-readable form to a digitally space-efficient form.

Electrum server

An Electrum server is a Bitcoin node with an additional interface (API) is often required by bitcoin wallets that do not run a full node. For example, these wallets check the status of specific transactions or broadcast transactions to the mempool using Electrum server APIs. Some Lightning wallets also use Electrum servers, so even if they are non-custodial, they may compromise user sovereignty in that users trust the Electrum server to provide accurate information and privacy in that calls made to the Electrum server may reveal private information.

ephemeral key

Ephemeral keys are mainly within the SPHINX Mix Format and Onion Routing on the Lightning Network. They are generated for each execution of the routing process. This increases the security of transported messages or payments. Even if an ephemeral key leaks, only information about a single payment becomes public.

feature bits

A binary string that Lightning nodes use to communicate to each other which features they support. Feature bits are included in many types of communication, such as invoices or channel announcements. They can be decoded using BOLT #9, and will tell nodes which features the node has enabled, and whether these are backward-compatible. Also known as feature flags.

fees

In the context of Bitcoin, the sender of a transaction pays a fee to miners for including the transaction in a block. In the context of the Lightning Network, nodes will charge routing fees for forwarding other users’ payments. Individual nodes can set their own fee policies which will be calculated as the sum of a fixed base_fee and a fee_rate which depends on the payment amount.

funding transaction

The funding transaction is used to open a payment channel. From the perspective of the Bitcoin network, the process of opening a channel by creating a RSMC is started by creating the funding transaction and finished by broadcasting it to the Bitcoin network and have it included in the blockchain. The value of the funding transaction is exactly the capacity of the payment channel. The output of the funding transaction is a 2-of-2 multisignature script (multisig) where each channel partner controls one key. It will eventually be spent by one of the commitment transactions or by the closing transaction. Due to its multisig nature, it can only be spent mutually. It is part of the RSMC to ensure that either side of the channel can withdraw their funds without the necessity to trust the channel partner.

globalfeatures

Globalfeatures of a Lightning Network node are the features of interest for all other nodes. Most commonly they are related to supported routing formats. They are announced in the _init_ message of the peer protocol as well as the _channel_announcement_ and _node_announcement_ messages of the gossip protocol.

Gossip Protocol

Lightning Network nodes send and receive information about the topology of the Lightning Network through gossip messages which are exchanged with their peers. The gossip protocol is mainly defined in BOLT 7 and defines the format of the node_announcement, channel_announcement and channel_update messages. In order to prevent SPAM, node announcement messages will only be forwarded if the node already has a channel and channel announcement messages will only be forwarded if the funding transaction of the channel has been confirmed by the Bitcoin network. Usually, Lightning nodes connect with their channel partners, but it is fine to connect with any other Lightning node in order to process gossip messages.

hardware wallet

A hardware wallet is a special type of Bitcoin wallet which stores the user’s private keys in a secure hardware device. Currently, hardware wallets are not available for Lightning Network nodes as they need to be online to participate in the protocol. Several groups are currently working on solutions.

hash

A digital fingerprint of some binary input.

hash function

A cryptographic hash function is a mathematical algorithm that maps data of arbitrary size to a bit string of a fixed size (a hash) and is designed to be a one-way function, that is, a function which is infeasible to invert. The only way to recreate the input data from an ideal cryptographic hash function’s output is to attempt a brute-force search of possible inputs to see if they produce a match, or use a rainbow table of matched hashes. The ideal cryptographic hash function has five main properties: It is deterministic, so the same message always results in the same hash. It is quick to compute the hash value for any given message. It is infeasible to generate a message from its hash value except by trying all possible messages. A small change to a message should change the hash value so extensively that the new hash value appears uncorrelated with the old hash value. It is infeasible to find two different messages with the same hash value. https://en.wikipedia.org/w/index.php?title=Cryptographic_hash_function&oldid=868055371

hashlocks

A hashlock is a type of encumbrance that restricts the spending of an output until a specified piece of data is publicly revealed. Hashlocks have the useful property that once any hashlock is opened publicly, any other hashlock secured using the same key can also be opened. This makes it possible to create multiple outputs that are all encumbered by the same hashlock and which all become spendable at the same time.

HODL/Hold Invoices

HODL/Hold invoices are effectively standard HTLC LN invoices with the exception that the recipient can “hold” the funds, deferring to settle the transaction until some condition has been met. The sender remains committed unless the recipient opts to cancel the transaction.

HTLC

A Hashed TimeLock Contract or HTLC is a class of payments that use hashlocks and timelocks to require that the receiver of a payment either acknowledges receiving the payment prior to a deadline by generating cryptographic proof of payment (usually called the preimage of the payment hash) or forfeits the ability to claim the payment, returning it to the payer. On the Lightning Network HTLCs are outputs in the commitment transaction of a payment channel and are used to enable the trustless routing of payments.

invoice

The payment process on the Lightning Network is initiated by the payee who issues an invoice. Invoices include the payment hash, the amount, a description and the expiry time. Invoices can also include a fallback Bitcoin address to which the payment can be made in case no route can be found, as well as hints for routing a payment through a private channel.

JIT Routing

“Just in Time” Routing. An alternative to source-based routing was first proposed by co-author René Pickhardt. With JIT routing, intermediary nodes along a path can pause an in-flight payment to rebalance their channels. This might allow them to successfully forward payments that might otherwise have failed due to a lack of outgoing capacity.

Lightning message

A Lightning message is an encrypted data string that can be sent between two peers on the Lightning Network. Similar to other communication protocols, Lightning messages consist of a header and a body. The header and the body have their own HMAC. This ensures that the headers of fixed length will also be encrypted and adversaries won’t be able to deduce what messages are being sent by inspecting the length.

Lightning Network, Lightning Network Protocol, Lightning Protocol

The Lightning Network is a protocol on top of Bitcoin (or other cryptocurrencies). It creates a network of payment channels which enables the trustless forwarding of payments through the network with the help of HTLCs and Onion Routing. Other components of the Lightning Network are the gossip protocol, the transport layer, and payment requests. The source code is available at https://github.com/lightningnetwork.

Lightning Network Node, Lightning Node

A participant on the Lightning Network. A Lightning user will run Lightning node software in order to interact with other Lightning nodes. Lightning nodes have the ability to open channels with other nodes, send and receive payments, and route payments from other users. Typically a Lightning node user will also run a Bitcoin node.

lnd

Implementation of the Lightning Network Protocol by the San Francisco based company Lightning Labs. It is written in Go. Source code is at https://github.com/lightningnetwork/lnd.

localfeatures

Localfeatures of a Lightning Network node are the configurable features of direct interest of the peer. They are announced in the _init_ message of the peer protocol as well as the _channel_announcement_ and _node_announcement_ messages of the gossip protocol.

Locktime

Locktime, or more technically nLockTime, is the part of a transaction which indicates the earliest time or earliest block when that transaction may be added to the blockchain.

millisatoshi

The smallest unit of account on the Lightning Network. A millisatoshi is one hundred billionth of a single bitcoin. A millisatoshi is one thousandth of one Satoshi. Millisatoshis do not exist, nor can they be settled on the Bitcoin network.

mpp

A multipart payment (which is often also referred to as multipath payment) is a method for payments where the sender can split the payment amount into multiple smaller parts and deliver them potentially along multiple potentially disjoint paths. As the MPP strategies do not require one to send the smaller splits along different paths we find the term multipart payment more accurate than multipath payment.

multisignature

Multisignature (multisig) refers to requiring more than one key to authorize a Bitcoin transaction. Payment channels are always encoded as multisignature addresses requiring one signature from each peer of the payment channel. In the standard case of a two-party payment channel, a 2-of-2 multisignature address is used.

Neutrino

Neutrino is a later alternative to SPV that also verifies whether certain transactions are contained in a block without downloading the entire block. However, it offers a number of improvements over SPV: Neutrino does not transmit any information that would allow a third party to determine users’ identities, it facilitates the use of non-custodial apps, and it reduces the computational load on full nodes. The trade-off for these improvements is that Neutrino requires more data from the full node than SPV.

node

See Lightning Network Node

network capacity

Lightning network capacity is the total amount of bitcoin locked and circulated inside the Lightning Network. It is the sum of capacities of each public channel. It reflects the usage of the Lightning Network to some extent because we expect that people lock bitcoin into Lightning channels in order to spend it or forward other users’ payments. Hence the higher the amount of bitcoin locked in channels, the higher the expected usage of the Lightning Network. Note that since only public channel capacity can be observed, the true network capacity is unknown. See private channel.

Noise_XK

The template of the Noise protocol framework to establish an authenticated and encrypted communication channel between two peers of the Lightning Network. X means that no public key needs to be known from the initiator of the connection. K means that the public key of the receiver needs to be known. More particular (from: http://www.noiseprotocol.org/noise.html) the protocol enables encryption to a known recipient and strong forward secrecy. This payload is encrypted based on an ephemeral-ephemeral DH as well as an ephemeral-static DH with the recipient’s static key pair. Assuming the ephemeral private keys are secure, and the recipient is not being actively impersonated by an attacker that has stolen its static private key, this payload cannot be decrypted. Sender authentication is resistant to key-compromise impersonation (KCI). The sender authentication is based on an ephemeral-static DH (“es” or “se”) between the sender’s static key pair and the recipient’s ephemeral key pair. Assuming the corresponding private keys are secure, this authentication cannot be forged. // the noise protocol documentation is according to their IPR section public domain. The author is Trevor Perrin ([email protected])

onion routing

Onion routing is a technique for anonymous communication over a computer network. In an onion network, messages are encapsulated in layers of encryption, analogous to layers of an onion. The encrypted data is transmitted through a series of network nodes called onion routers, each of which peels away a single layer, uncovering the data’s next destination. When the final layer is decrypted, the message arrives at its destination. The sender remains anonymous because each intermediary knows only the location of the immediately preceding and following nodes. https://en.wikipedia.org/w/index.php?title=Onion_routing&oldid=870849217

output

The output of a bitcoin transaction, also called an Unspent Transaction Output or UTXO. An output is essentially an amount of bitcoin that can be spent, as well as a script that defines what conditions need to be fulfilled for that bitcoin to be spent. Every bitcoin transaction consumes the outputs of the sender and creates new outputs that can be spent later by the receiver. A typical bitcoin output will require the signature of the owner to be spent, but outputs can require the fulfillment of more complex scripts. For example, a multisignature script requires that two or more users to sign before an output can be spent, which is a fundamental building block of the Lightning Network.

P2PKH

P2PKH or Pay-to-PubKey-Hash is a type of transaction that pays a Bitcoin address that contains P2PKH scripts. An output locked by a P2PKH script can be unlocked (spent) by presenting a public key and a digital signature created by the corresponding private key.

P2SH

P2SH or Pay-to-Script-Hash is a powerful type of transaction that greatly simplifies the use of complex transaction scripts. With P2SH the complex script that details the conditions for spending the output (redeem script) is not presented in the locking script. Instead, only a hash of it is in the locking script.

P2SH address

P2SH addresses are Base58Check encodings of the 20-byte hash of a script, P2SH addresses use the version prefix “5”, which results in Base58Check-encoded addresses that start with a “3”. P2SH addresses hide all of the complexity, so that the person making a payment does not see the script.

P2WPKH

The signature of a P2WPKH (Pay-to-Witness-Public-Key-Hash) contains the same information as a P2PKH spending, but is located in the witness field instead of the scriptSig field. The scriptPubKey is also modified.

P2WSH

The difference between P2SH and P2WSH (Pay-to-Witness-Script-Hash) is the location change of the cryptographic proof from the scriptSig field to the witness field and the modification of the scriptPubKey.

payment

A payment occurs if bitcoin is transferred within the Lightning Network. Payments are generally not seen on the blockchain. The recipient initiates a payment by creating an invoice. The invoice includes a payment hash which is the hash of a secret preimage. This payment hash is used by the Hashed Time Lock Contracts during the routing process.

payment channel

A payment channel is a financial relationship between two nodes on the Lightning Network, created using a multisignature bitcoin transaction. The channel partners can use the channel to send bitcoin back and forth between each other without committing all of the transactions to the Bitcoin blockchain. In a typical payment channel only two transactions, the funding transaction and the commitment transaction, are added to the blockchain. The other transactions are not included in the blockchain and are said to occur “off-chain”. There are various methods of constructing a payment channel discussed further in the chapter on channel construction.

peer

Two parties which form a payment channel are called peers. In particular, they are connected via an encrypted, authenticated communication over a TCP Socket.

penalty transaction

See Breach Remedy Transaction.

private channel

A channel not announced to the rest of the network. Technically “private” is a misnomer as these channels can still be identified through routing hints and commitment transactions. They are better described as “unannounced” channels. With an unannounced channel, the channel partners can send and receive payments between each other as normal. However, the rest of the network will not be aware of it and so cannot typically use it to route payments. As the number of and capacity of unannounced channels is unknown, the total public channel count and capacity only accounts for a portion of the total Lightning Network.

preimage

In mathematics, given a function $f$ and a value $h$ the preimage of $h$ with respect to $f$ is the set of values $R = {r_1,r_2,…}$ such that $f(r_i) = h$ for all $ _i in R$. In layman’s terms, it is the set of values which is mapped to $h$ by the function $f$. This preimage set can be empty, finite or infinite. In cryptography, the function $f$ is usually taken to be a hash function. Cryptographers use the term preimage for an arbitrary element of $R$. In particular, when using SHA-256, it should be stated that each element has an infinite number of preimages. However, it is still believed to be computationally hard to find such a preimage.

proof of work

A piece of data that requires significant computation to find. In Bitcoin, miners must find a numeric solution to the SHA256 algorithm that meets a network-wide target, called the difficulty target. See bitcoin mining

Relative Timelock

Relative Timelock is a type of timelock which allows an input to specify the earliest time the input can be added to a block. The time is relative and is based on when the output referenced by that input was included in a block. Such a feature is jointly achieved by nSequence field and CheckSequenceVerify opcode, which were introduced by BIP68/112/113.

Revocable Sequence Maturity Contract

This contract is used to construct a payment channel between two Bitcoin or Lightning Network users who do not need to trust each other. The name comes from a sequence of states which are encoded as commitment transactions and can be revoked if wrongfully published and mined by the Bitcoin network. These contracts are commonly referred to as RSMCs. Unlike an HTLC, whose timeout is to make an HTLC temporary, and therefore should be absolute; a RSMC timeout is meant to only start when a commitment transaction is mined, and therefore should be using a Relative Timelock.

revocation key

Each Revocable Sequence Maturity Contract contains two revocation keys. Each channel partner knows one revocation key. Knowing both revocation keys, the output of the Revocable Sequence Maturity Contract can be spent within the predefined timelock. Revocation keys are used to disincentivize channel partners from broadcasting an old channel state. While negotiating a new channel state, the old revocation keys are being shared. Revocation keys are used instead of signatures since they can be derived with an HD key derivation scheme. This makes it less cumbersome to store all revocation keys of old states.

RIPEMD-160

RIPEMD-160 is a 160-bit cryptographic hash function. RIPEMD-160 is a strengthened version of RIPEMD with a 160-bit hash result, and is expected to be secure for the next ten years or more.

topology

The topology of the Lightning Network describes the shape of the Lightning Network as a mathematical graph. Nodes of the graph are the Lightning Network nodes or participants. The edges of the graph are the payment channels. The topology of the Lightning Network is publicly broadcast with the help of the gossip protocol unless nodes decide to act privately. This means that the Lightning Network may be significantly larger than the announced number of nodes. Knowing the topology is of particular interest in the source-based routing process of payments in which the sender discovers a route. Also, the topology is important for features such as the autopilot.

satoshi

A satoshi is the smallest denomination of bitcoin that can be recorded on the blockchain. It is the equivalent of 0.00000001 bitcoin and is named after the creator of Bitcoin, Satoshi Nakamoto.

Satoshi Nakamoto

Satoshi Nakamoto is the name used by the person or group of people who designed Bitcoin and created its original reference implementation, Bitcoin Core. As a part of the implementation, they also devised the first blockchain database. In the process, they were the first to solve the double-spending problem for digital currency. Their real identity remains unknown.

Script

Bitcoin uses a scripting system for transactions called Script. Forth-like, it is simple, stack-based, and processed from left to right. It is purposefully not Turing-complete, with no loops.

ScriptPubKey (aka pubkey script)

ScriptPubKey or pubkey script, is a script included in outputs which sets the conditions that must be fulfilled for those satoshis to be spent. Data for fulfilling the conditions can be provided in a signature script.

ScriptSig (aka signature script)

ScriptSig or signature script is the data generated by a spender, which are almost always used as variables to satisfy a pubkey script.

Second stage HTLC

TBD.

secret key (aka private key)

The secret number that unlocks bitcoin sent to the corresponding address. A secret key looks like the following:

5J76sF8L5jTtzE96r66Sf8cka9y44wdpJjMwCxR3tzLh3ibVPxh

Segregated Witness

Segregated Witness is an upgrade to the Bitcoin protocol in which signature data is separated from Bitcoin transactions. Segregated Witness was deployed as a soft fork and is a change that technically makes Bitcoin’s protocol rules more restrictive.

SHA

The Secure Hash Algorithm or SHA is a family of cryptographic hash functions published by the National Institute of Standards and Technology (NIST). The Bitcoin protocol currently uses SHA256.

short channel id (scid)

Once a channel is established, the index of the funding transaction on the blockchain is used as the short channel id to uniquely identify the channel. The short channel id consists of 8 bytes referring to 3 numbers. In its serialized form it depicts these 3 numbers as decimal values separated by the letter x. The first number (4 bytes) is the block height. The second number (2 bytes) is the index of the funding transaction with the blocks. The last number (2 bytes) is the transaction output.

simplified payment verification (SPV)

SPV or simplified payment verification is a method for verifying particular transactions were included in a block without downloading the entire block. The method is used by some lightweight Bitcoin clients.

source-based routing

On the Lightning Network, the sender of a payment decides the route of the payment. While this decreases the success rate of the routing process, it increases the privacy of payments. Due to the SPHINX Mix Format used by onion routing, all routing nodes do not know the originator of a payment or the final recipient. Source-based routing is fundamentally different to how routing works on the Internet Protocol.

soft fork

Soft fork, or Soft-Forking Change, is a temporary fork in the blockchain which commonly occurs when miners using non-upgraded nodes don’t follow a new consensus rule their nodes don’t know about. Not to be confused with fork, hard fork, software fork or Git fork.

SPHINX Mix Format

A particular technique for Onion Routing used in the Lightning Network and invented by George Danezis and Ian Goldberg in 2009. With the SPHINX Mix Format, each message of the onion package is padded with some random data so that no single hop can estimate how far along the route it has traveled. While the privacy of the sender and receiver of the payment is protected, each node is still able to return an error message along the path to the originator of the message. The paper can be found at https://cypherpunks.ca/~iang/pubs/Sphinx_Oakland09.pdf

Submarine Swap

A Submarine Swaps enables transfers between on-chain Bitcoin addresses and off-chain locations, like the Lightning Network. Just as standard LN transfers chain payments by means of HTLCs that make the final claim on funds conditional on the recipient revealing a secret to all links in the chain, Submarine Swaps use the same logic and procedure to transfer funds across the on-chain/off-chain barrier with minimal trust. They can also be used to enable transfers from another chain, say Litecoin, to an off-chain LN address. Reverse Submarine Swaps allow bitcoin transfers in the opposite direction, from an off-chain LN location to an on-chain address.

timelock

A timelock is a type of encumbrance that restricts the spending of some bitcoin until a specified future time or block height. Timelocks feature prominently in many Bitcoin contracts, including payment channels and Hashed Timelock Contracts.

transaction

Transactions are a binary format used by the Bitcoin protocol to transfer bitcoin from one address to another. Several transactions are built into a block which has to be confirmed by the Bitcoin network through the process of mining. Transactions can only be included in a block if they contain a valid signature (more precisely a valid input script) matching the output script defined by the previous owner. The first transaction in each block is called the coinbase and generates new bitcoin. Transactions can also contain contracts and should not be confused with payments.

transaction malleability

Transaction malleability is a property that the hash of a transaction can change without changing the semantic of the transaction (the UTXOs it is spending, the destinations and the corresponding amounts). For example, altering the signature can change the hash of a transaction, because of the non-deterministism of ECDSA signing. A commitment transaction needs the hash of a funding transaction and if the hash of the funding transaction changes, transactions depending on it will become invalid. This will make users unable to claim the refunds if there are any. The Segregated Witness soft fork addresses this issue and is therefore an important upgrade to support Lightning Network.

transport layer

In computer networking, the transport layer is a conceptual division of the methods used by computers (and ultimately applications) to talk to each other. The transport layer provides communication services between computers such as flow control, verification, and multiplexing (to allow multiple applications to work on a computer at the same time).

unspent transaction output (UTXO)

See output

upstream payment

TBD.

wallet

A wallet is a piece of software that holds Bitcoin addresses and secret keys. It is used to send, receive, and store bitcoin.

watchtower

Watchtowers are a security service on the Lightning network that monitor channels. In the case that one of the channel partners goes offline or loses their backup, a watchtower keeps their own backups and can restore their channel information. They also monitor the Bitcoin blockchain and can submit a penalty transaction in the case that one of the partners tries to “cheat” by broadcasting an outdated state.

Watchtowers can be run by the channel partners themselves, or as a paid service offered by a third party.
Watchtowers have no control over the funds in the channels themselves.

zombie channel

An open channel where one of the channel partners has gone permanently offline. Zombie channels cannot be used to route payments and have only downsides to the online partner. It is good practice to close zombie channels although they can be tricky to identify as the online partner can’t always be sure if the offline party will stay offline.

Some contributed definitions have been sourced under a CC-BY license from the Bitcoin Wiki, Wikipedia, Mastering Bitcoin or from other open source documentation sources.