Innovation

Glossary of Terms Used by Blockchain Technology Experts

Blockchain, the technology used by the digital currency Bitcoin, is said to be causing a revolution around the world. Visionary thinkers, investors and technologists are all talking about its immense potential and how it might trigger real change in all kinds of ways.

Blockchain is what structures the digital currency Bitcoin and various other cryptocurrencies that came afterwards. Bitcoin is a digital asset and a payment system invented by an unknown person entitled Satoshi Nakamoto, who published the invention of Bitcoin in a white paper in 2008. The following year, in 2009, Bitcoin was released as open-source software.

Since then, bitcoin (and other alternative cryptocurrencies) kept flourishing and developed further. One of such promising alternatives is Ethereum, a decentralized platform for applications.

Even though blockchain is making headlines everyday, the technology in itself and how it works is still obscure. In this article we have assembled a glossary of key concepts that can help us understand blockchain in a better way.

BLOCKCHAIN

Underlying public permissionless distributed ledger technology that records all transactions conducted on the Bitcoin network. Bitcoins are used to move assets and value across the blockchain.

 

CLEARING AND SETTLEMENT

Process through which assets are exchanged for payment. This process takes place after a trade is executed and is an integral part of the post-trade cycle. 

CONSENSUS MECHANISM

Process by which all the validators within a distributed ledger system reach an agreement on the state of that ledger. 

COUNTERPARTY RISK

Risk each party of a contract holds that the counterparty will not live up to its agreed-upon obligations. In financial services, this usually refers to a post-trade settlement situation where one institution in a trade does not hold up their end of the agreement.  

CRYPTOGRAPHY

Art of taking information and transforming it in a manner in which it can only be deciphered by the intended recipient. Cryptography is a process used primarily to protect sensitive information.  

DISTRIBUTED LEDGER

Electronic ledger in which data is stored across a series of decentralized nodes as opposed to one centralized system. Distributed ledgers are inspired by blockchain technology. However, unlike blockchain, distributed ledgers are not tied to Bitcoin or any specific cryptocurrency and may be private and permissioned.   

DVP (DELIVERY VS. PAYMENT)

Achieved in a trade when the delivery of an asset and the payment for that asset are exchanged simultaneously.  

FINANCIAL INFRASTRUCTURE

Framework consisting of institutions that enable financial intermediaries to operate effectively. This includes the information, technologies and legal and regulatory structure which enable financial intermediation.

PERMISSIONED LEDGER

Participants in this ledger system are universally known to all other participants. Permissioned ledgers can be both public or private ledgers.  

PERMISSIONLESS LEDGER

Participants in this ledger system may remain completely anonymous. Although most permissionless ledgers are public ledgers, they could also be private.

PUBLIC DISTRIBUTED LEDGER

Distributed ledger system that is open to all interested participants and can be appended by all participants. The bitcoin blockchain is an example of a public distributed ledger.    

PRIVATE DISTRIBUTED LEDGER 

Distributed ledger system in which all participants are known and access to the ledger can be limited to approved parties. 

SETTLEMENT LATENCY

Amount of time it takes for assets to be exchanged for cash after a trade is executed. 

SMART CONTRACT

Computer protocols that facilitate, verify or enforce the execution of a contract. At a fundamental level, smart contracts are analogous to a series of if-then statements applied to the details of a trade.   

TOKENS/TOKENIZATION

Digital representation of a real world asset.

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