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.
* blockchain: a single distributed ledger agreed upon by a network of participating nodes. The Lightning Network does not use a blockchain to transact, but requires transactions recorded in a blockchain in order for bitcoin to enter and leave the network.
* channel: a channel is a financial relationship between two nodes on the Lightning Network. Two users can open a channel with each other using a Bitcoin transaction, and transact with each other by moving bitcoin from one side of the channel to the other.
* capacity: channels require bitcoin to be pre-loaded into them before they can be used. This becomes the maximum amount of bitcoin that can be transacted using this channel i.e. it's capacity.
** in-bound capacity: the maximum amount of bitcoin that can be received using a channel. Your in-bound capacity is increased when a user opens a channel with you, or you make a payment to another user.
** out-bound capacity: the maximum amount of bitcoin that can be sent using a channel. Your out-bound capacity is increased when you open a channel with another user, or you receive a payment from another user.
* invoice: a request for payment from another user that can take the form of a text string or a QR code. Lightning Invoices can be specified with a description and an amount the invoicer is requesting.
* node: a node is a participant on the Lightning Network. Nodes can open and close channels with each other, route payments from other nodes, and manage their own wallets. Typically a Lightning Network node user will also run a Bitcoin Node to keep track of the status of on-chain payments
* on-chain/off-chain: a payment is considered "on-chain" if it is included in the Bitcoin (or other underlying) blockchain where it is publicly visible to all nodes. Payments that are not visible in the underlying blockchain are "off-chain"
* route: when making a payment from one user to another, the payment will move along many intermediary nodes before reaching the receiver. This path from the sender to the receiver forms a route on the network.
** routing fees: each intermediary node will request a fee for transmitting the payment. The sum of these are the routing fees paid by the sender
* transaction: a payment from one user to another. Lightning Network transactions are Bitcoin transactions not yet recorded on the Bitcoin blockchain.
** funding transaction: a transaction that locks bitcoin into a smart contract to open a channel.
** settlement transaction: a transaction that closes a channel, and allocates the locked bitcoin to the channel owners according to the final balance of the channel.
** penalty transaction: if one user tries to "cheat" by claiming a prior state of the channel, the other user can publish a penalty transaction to the Bitcoin blockchain, which allocates all bitcoin in that channel to them.
* wallet: an application that manages private keys in order to send and receive bitcoin. Lightning Wallets have additional features over and above Bitcoin Wallets in that they can open and close channels, and send and receive Lightning payments.
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.
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 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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
Implementation of the Lightning Network Protocol by the Victoria based company https://blockstream.com[Blockstream]. It is written in C. Source code is at https://github.com/ElementsProject/lightning.
If both channel partners agree to close a channel they will create an exercise settlement transaction that reflects the most recent commitment transaction.
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.
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.
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.
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.
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.
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.
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).
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).
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.
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.
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.
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.
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.
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.
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.
Implementation of the Lightning Network Protocol by the Paris based company https://acinq.co[ACINQ]. It is written in Scala. Source code is at https://github.com/ACINQ/eclair.
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.
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.
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.
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.
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.
An HMAC is a message authentication code method for verifying the integrity and authenticity of a message based on a hash function and a cryptographic key.
It is used in onion routing to ensure the integrity of a packet at each hop, as well as within the Norse protocol variant used for message encryption.
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.
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 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.
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.
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.
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.
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.
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, 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.
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.
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.
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.
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.
The template of the Noise protocol framework to establish an authenticated and encrypted communication channel between two peers of the Lightning Network.
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.
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.
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.
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.
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 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 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.
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.
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.
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.
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 $\r_i \in R$.
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.
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 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.
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")))
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.
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 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.
The secret number that unlocks bitcoin sent to the corresponding address. pass:[<span class="keep-together">A secret</span>] key looks like the following:
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.
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.
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.
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.
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.
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
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.
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.
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.
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).
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.
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).
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.
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 https://en.bitcoin.it/wiki/Main_Page[Bitcoin Wiki], https://en.wikipedia.org[Wikipedia], https://github.com/bitcoinbook/bitconbook[Mastering Bitcoin] or from other open source documentation sources.
