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Address
A unique string of characters that serves as a destination for blockchain transactions. Addresses are derived from public keys through a series of cryptographic operations (typically hashing) and function similarly to a bank account number. Each blockchain network has its own address format.
Algorithm
A defined set of rules or instructions designed to perform a specific task or solve a particular problem. In the context of blockchain, algorithms are used for consensus mechanisms, cryptographic operations, and data processing. Examples include SHA-256 (a hashing algorithm) and ECDSA (a digital signature algorithm).
Asymmetric Cryptography
Also known as public-key cryptography, this is a system that uses a pair of mathematically linked keys: a public key (which can be shared openly) and a private key (which must be kept secret). Data encrypted with one key can only be decrypted with the other. Blockchain networks rely on asymmetric cryptography for creating digital signatures and verifying transaction authenticity.
Block
A data structure that contains a batch of validated transactions along with metadata such as a timestamp, a reference (hash) to the previous block, and a nonce value. Blocks are the fundamental units of a blockchain, and each new block is cryptographically linked to the one before it, forming an unbroken chain.
Blockchain
A distributed, append-only data structure in which records (grouped into blocks) are linked using cryptographic hashes. Each block contains a hash of the previous block, creating a chronological chain. Because the ledger is replicated across many nodes and consensus is required to add new blocks, blockchains are highly resistant to unauthorised modification. The concept was first described in 2008.
Block Explorer
A web-based tool that allows users to search and browse the contents of a blockchain. Block explorers display information about individual blocks, transactions, addresses and network statistics. They function as a public interface for querying data stored on the chain.
Byzantine Fault Tolerance (BFT)
The ability of a distributed system to continue operating correctly even when some of its components (nodes) fail or behave maliciously. Named after the Byzantine Generals Problem, BFT is a key property for blockchain consensus mechanisms. A system with BFT can reach agreement among honest participants even if up to a certain threshold of participants are faulty or dishonest.
Consensus Mechanism
A protocol or set of rules that enables network participants to agree on the current state of the ledger. Consensus mechanisms are critical because they ensure all copies of the distributed database remain synchronised without a central authority. Common approaches include Proof-of-Work, Proof-of-Stake, Delegated Proof-of-Stake, and Practical Byzantine Fault Tolerance.
Cryptographic Hash
A fixed-length string of characters produced by a hash function from input data of any size. Cryptographic hashes have several important properties: they are deterministic (the same input always produces the same output), they are computationally infeasible to reverse, and even a tiny change to the input produces an entirely different hash. SHA-256 is a widely used example in blockchain systems.
Cryptography
The study and practice of techniques for securing communication and data in the presence of adversaries. In blockchain systems, cryptography is used for hashing (data integrity), digital signatures (authentication and non-repudiation), and encryption (confidentiality). It forms the mathematical foundation that makes trustless peer-to-peer networks possible.
DApp (Decentralised Application)
An application that runs on a decentralised network rather than being hosted on a single server. DApps typically use smart contracts as their back-end logic, while the front-end can be built with standard web technologies. They are designed to operate without a single point of control or failure.
Decentralisation
The distribution of control, decision-making and data storage across a network rather than concentrating it within a single entity. In a decentralised system, no single participant has unilateral authority over the network. The degree of decentralisation varies significantly between different blockchain implementations and is often a subject of ongoing discussion.
Digital Signature
A mathematical scheme used to verify the authenticity and integrity of a digital message or document. In blockchain networks, digital signatures prove that a transaction was authorised by the holder of the corresponding private key, without revealing the key itself. The most commonly used scheme is the Elliptic Curve Digital Signature Algorithm (ECDSA).
Distributed Ledger
A database that is shared, replicated and synchronised across multiple nodes or locations. Unlike a centralised database managed by one administrator, a distributed ledger is maintained collaboratively by its participants. Blockchain is one type of distributed ledger technology, but not all distributed ledgers use a chain-of-blocks structure.
Encryption
The process of converting readable data (plaintext) into an unreadable format (ciphertext) using a mathematical algorithm and a key. Only those who possess the correct decryption key can convert the ciphertext back to plaintext. While blockchains primarily use hashing and digital signatures rather than encryption for on-chain data, encryption is used in various off-chain and privacy-focused applications.
EVM (Ethereum Virtual Machine)
The runtime environment for smart contracts on the Ethereum network. The EVM is a stack-based virtual machine that executes bytecode compiled from high-level languages such as Solidity. Every node running the Ethereum client software contains an instance of the EVM, ensuring that smart contract execution produces identical results across the network.
Finality
The assurance that a confirmed transaction cannot be altered, reversed or cancelled. Different blockchain protocols achieve finality in different ways. Some provide probabilistic finality (the likelihood of reversal decreases over time as more blocks are added), while others provide deterministic finality (once a block is confirmed, it is mathematically guaranteed to be permanent).
Fork
A change to a blockchain's protocol rules. A soft fork is a backward-compatible update where non-upgraded nodes can still process new blocks. A hard fork is a non-backward-compatible change that creates a permanent divergence, resulting in two separate chains. Forks may be planned (protocol upgrades) or contentious (community disagreements about the direction of a project).
Gas
A unit of measurement representing the computational effort required to execute operations on certain blockchain networks, most notably Ethereum. Every operation (storing data, performing calculations, transferring tokens) consumes a specific amount of gas. Users must include a gas fee with their transactions to compensate the network participants who process and validate them.
Genesis Block
The first block in a blockchain, also referred to as Block 0 or Block 1 depending on the implementation. The genesis block is hardcoded into the software and serves as the foundation upon which all subsequent blocks are built. Unlike later blocks, it does not reference a previous block.
Hash Function
A mathematical function that takes an input of any size and produces a fixed-size output (the hash or digest). Cryptographic hash functions used in blockchain have specific properties: they are one-way (practically impossible to reverse), collision-resistant (extremely unlikely for two different inputs to produce the same hash), and avalanche-sensitive (a small change in input produces a vastly different output).
Hash Rate
A measure of the computational power being used by a proof-of-work blockchain network. It represents the number of hash calculations performed per second. A higher hash rate generally indicates greater network security, as it would require more computational resources for any single entity to compromise the consensus process.
Immutability
The property of a blockchain that makes it extremely difficult to alter data once it has been recorded. Because each block contains the hash of the previous block, changing data in one block would invalidate all subsequent blocks. Achieving such a change would require re-computing the proof-of-work (or equivalent) for every affected block while outpacing the rest of the network.
Interoperability
The ability of different blockchain networks to communicate, share data and interact with one another. Since most blockchains operate independently, interoperability solutions (such as bridges, relay chains and cross-chain messaging protocols) are being developed to enable the transfer of data and digital assets between separate networks.
Key Pair
A set of two cryptographically related keys used in asymmetric cryptography: a public key (shared openly to receive data or verify signatures) and a private key (kept secret and used to sign transactions or decrypt data). The security of blockchain wallets and transactions depends on the secrecy of the private key.
Layer 1
The base-level blockchain network and its underlying protocol. Layer 1 refers to the main chain that provides the consensus mechanism, processes transactions, and maintains the shared ledger. Bitcoin and Ethereum are examples of Layer 1 blockchains. Improvements to Layer 1 networks typically involve changes to block size, consensus mechanisms, or data structures.
Layer 2
A secondary framework or protocol built on top of a Layer 1 blockchain to increase its transaction capacity and speed. Layer 2 solutions process transactions off the main chain while still inheriting its security guarantees. Common approaches include rollups (optimistic and zero-knowledge), state channels and sidechains.
Merkle Tree
A tree-shaped data structure in which each leaf node contains the hash of a data block, and each non-leaf node contains the hash of its child nodes. Merkle trees allow efficient verification of large datasets because any change to a single piece of data alters the root hash. They are used within blockchain blocks to summarise all transactions, enabling lightweight nodes to verify specific transactions without downloading the entire block.
Mainnet
The primary, production-grade version of a blockchain network where actual transactions are broadcast, validated and recorded. This is distinct from a testnet, which is a separate instance used by developers for experimentation and testing. Tokens on a mainnet have real-world significance within their respective ecosystems, whereas testnet tokens do not.
Node
A computer that participates in a blockchain network by maintaining a copy of the ledger and helping to validate and relay transactions. Full nodes store the complete blockchain history and independently verify all rules. Light nodes store only block headers and rely on full nodes for detailed transaction data. The more nodes in a network, the more resilient and distributed it becomes.
Nonce
Short for "number used once," a nonce is a value that is incremented and tested during the proof-of-work process to find a valid block hash. In proof-of-work systems, participants adjust the nonce repeatedly until the resulting hash meets the required difficulty target. The term is also used in Ethereum to refer to a sequential counter attached to each account to prevent transaction replay.
Oracle
A service or mechanism that provides external (off-chain) data to smart contracts running on a blockchain. Since blockchains cannot natively access information outside their network, oracles bridge the gap by supplying data such as weather conditions, event outcomes or other external values that smart contracts need to execute their logic.
Peer-to-Peer (P2P)
A network architecture in which participants (peers) interact directly with one another without relying on a central server. In a peer-to-peer blockchain network, each node can both send and receive data, and every node is considered equal in terms of network privileges. This architecture is a core design principle of decentralised systems.
Private Key
A secret cryptographic key that allows its holder to sign transactions and prove ownership of a blockchain address. The private key must be kept confidential at all times, as anyone who possesses it can authorise transactions from the associated address. It is mathematically related to its corresponding public key, but deriving the private key from the public key is computationally infeasible.
Proof-of-Stake (PoS)
A consensus mechanism in which validators are selected to create new blocks based on the quantity of tokens they hold and are willing to lock up as collateral (their "stake"). Validators who behave dishonestly risk losing their staked tokens. PoS is generally considered to be more energy-efficient than Proof-of-Work, as it does not require intensive computational puzzles.
Proof-of-Work (PoW)
A consensus mechanism that requires participants to solve computationally intensive mathematical puzzles to validate transactions and create new blocks. The first participant to find a valid solution earns the right to add the next block to the chain. PoW provides strong security guarantees but requires significant energy consumption, which has prompted ongoing discussion about its environmental impact.
Public Key
A cryptographic key that can be shared openly and is used to verify digital signatures or derive a blockchain address. The public key is mathematically linked to a private key and, together, they form a key pair. While the public key can be freely distributed, it cannot be used to derive the private key, ensuring the security of the system.
Rollup
A Layer 2 scaling technique that bundles (or "rolls up") multiple transactions into a single batch and submits them to the Layer 1 chain. There are two main types: optimistic rollups (which assume transactions are valid and only run fraud proofs if challenged) and zero-knowledge rollups (which generate cryptographic proofs of transaction validity). Rollups aim to increase throughput while inheriting the security of the base layer.
Smart Contract
A self-executing programme stored on a blockchain that automatically enforces the terms of an agreement when predefined conditions are met. Smart contracts remove the need for intermediaries in certain types of transactions and are written in specialised programming languages (such as Solidity for Ethereum). Once deployed, a smart contract's code is typically immutable, though upgradeable patterns exist.
State Channel
A Layer 2 scaling method that allows two or more participants to conduct multiple transactions off-chain, only settling the final state on the main chain. Participants open a channel by locking funds in a smart contract, perform their interactions off-chain, and then close the channel by submitting the agreed-upon final state to the blockchain. This approach reduces on-chain transactions and fees.
Testnet
A separate blockchain network used by developers to test new features, smart contracts and protocol changes without affecting the mainnet. Testnet tokens have no real-world significance and can usually be obtained for free from faucets. Testnets mirror the behaviour of the mainnet as closely as possible while providing a safe environment for experimentation.
Token
A digital unit created on an existing blockchain using a smart contract, as opposed to a native coin (which operates on its own blockchain). Tokens can represent various things depending on their design: utility within a specific application, governance rights within a protocol, or ownership of a unique digital item. Common token standards include ERC-20 (fungible) and ERC-721 (non-fungible) on Ethereum.
Transaction
A signed data message that initiates a state change on the blockchain. A transaction typically includes the sender's address, the recipient's address, the amount or data being transferred, a fee, and a digital signature. Transactions are broadcast to the network, validated by nodes, and included in a block once confirmed by the consensus mechanism.
Validator
A network participant responsible for verifying transactions and proposing or confirming new blocks in a Proof-of-Stake blockchain. Validators lock up a certain amount of tokens as collateral and are selected to create blocks based on factors such as the size of their stake, the duration of their participation, and sometimes randomness. Validators who violate protocol rules may have their stake reduced (a process known as slashing).
Wallet
A software application or hardware device that stores the private keys needed to sign blockchain transactions. Wallets do not actually "hold" digital assets; rather, they manage the keys that control addresses on the blockchain. Wallets come in various forms, including browser extensions, mobile applications, desktop programmes and physical hardware devices. The distinction between "hot" (internet-connected) and "cold" (offline) wallets is a common security consideration.
Web3
A term used to describe a vision for a decentralised internet built on blockchain technology. Web3 advocates propose replacing centralised platforms with decentralised alternatives where users control their own data, identity and interactions. The concept encompasses decentralised applications, token-based governance, decentralised identity systems and peer-to-peer infrastructure. The term and its implications remain subjects of active discussion and debate.
Zero-Knowledge Proof (ZKP)
A cryptographic method by which one party (the prover) can demonstrate to another party (the verifier) that a statement is true without revealing any information beyond the validity of the statement itself. In blockchain, ZKPs are used for privacy-preserving transactions and for zero-knowledge rollups, which can verify that a batch of transactions is valid without re-executing each one. Common types include zk-SNARKs and zk-STARKs.
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All definitions published by Ledger Horizon are provided for educational and informational purposes only. They are simplified explanations intended to aid understanding and should not be treated as comprehensive technical specifications, nor do they constitute financial, legal, tax or other professional advice. Read our full disclaimer.
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