Glossary Term: Cryptocurrency

UTXO stands for Unspent Transaction Output. It is a fundamental concept in many cryptocurrencies that use a model similar to Bitcoin.

In Bitcoin and similar blockchain systems, transactions don’t denote the transfer of a specific amount of cryptocurrency from one person to another. Instead, transactions consume (“spend”) one or more unspent transaction outputs (from previous transactions) and produce one or more new UTXOs that can be used in future transactions.

The UTXO model can be likened to using cash in physical transactions. If you want to buy an item that costs $15, but you only have a $20 bill, you would give the cashier the $20 bill, and they would give you $5 back as change. In the context of Bitcoin, the $20 bill is a UTXO being spent, and the $5 is a new UTXO being created for you.

In terms of Bitcoin ownership, when you say that a Bitcoin wallet has a certain balance, it means that the wallet has the private keys that can sign a transaction to spend a certain number of UTXOs. The balance of a wallet is therefore the sum of the value of its UTXOs.

It’s important to note that UTXOs can only be spent entirely. This means that if a UTXO holds 1 bitcoin and you want to send someone 0.5 bitcoins, you would consume the entire UTXO, send 0.5 bitcoins to the recipient, and send 0.5 bitcoins back to your wallet as “change” in a new UTXO.

In terms of blockchain data structure, UTXOs are essential because they are used to prevent double-spending and to ensure that only the rightful owner can spend the coins. Transactions are validated against the set of existing UTXOs, and only valid transactions (i.e., transactions that only spend existing, unspent outputs) are allowed to be included in a block.

ZK-SNARKs, which stands for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge,” are a form of cryptographic proof that allows one party (the prover) to prove to another (the verifier) that they know a value x, without conveying any information apart from the fact they know the value x.

Here’s a more detailed explanation:

• Zero-Knowledge: This means that if the statement being proved is true, the verifier will not learn anything other than this fact. This property is what enhances privacy, because no additional information about the proof needs to be revealed.
• Succinct: This means that the proof can be verified quickly, even if it relates to a large amount of data. This is important for scalability, because it allows for the verification of complex statements without requiring a huge amount of computational resources.
• Non-Interactive: In a traditional interactive proof, the prover and verifier need to communicate back and forth for the proof to be constructed. A non-interactive proof, on the other hand, only requires a single message from the prover to the verifier, which simplifies the process considerably.
• Argument of Knowledge: This essentially means that the prover can’t convince the verifier of a false statement, unless they can break the underlying cryptographic assumptions. This provides a strong level of security, because it makes it computationally infeasible for the prover to lie.

ZK-SNARKs are used in many decentralized applications, including blockchains like Zcash, which use ZK-SNARKs to maintain the privacy of transaction data. They allow for the creation of “shielded” transactions, where the sender, receiver, and amount of a transaction can be encrypted but still be verified as valid under the network’s consensus rules.

Zether is a privacy protocol for Ethereum and other smart-contract platforms. It was developed by a group of researchers and technologists, including individuals from Stanford University and Visa Research.

The goal of Zether is to add a layer of anonymity to transactions, meaning that while the transaction itself can be seen on the blockchain, the sender, recipient, and amount of the transaction can be hidden.

Zether achieves this by implementing a confidential payment mechanism that hides the sender, receiver, and transaction amount in a given transaction, all while maintaining the security guarantees of the underlying blockchain. This is accomplished through the use of zero-knowledge proofs, a cryptographic method by which one party can prove to another that a given statement is true, without conveying any additional information apart from the fact that the statement is indeed true.

It’s worth noting that Zether is not a standalone blockchain platform but a module that can be added to any existing smart contract-enabled blockchain to add a layer of privacy to transactions. The intent is to provide a tool that can be used to create more privacy-focused applications on these platforms.

Tornado Cash is a decentralized application (dApp) built on the Ethereum blockchain that provides privacy for its users by obscuring the history of the Ethereum transactions they make. This is achieved by creating a pool of ETH or ERC-20 tokens, from which users can withdraw their coins without revealing the original source of the transaction.

Here’s a simplified example of how it works:

1. User deposits ETH into the Tornado Cash pool.
2. User receives a “note” which is essentially a proof of deposit. This note is kept private and should not be shared.
3. Later, the user can use this note to withdraw the deposited ETH to any Ethereum address. This new address doesn’t have to be related to the user in any way.
4. The smart contract checks the note, and if it’s valid, it allows the withdrawal of the ETH from the pool to the new address.

The whole process makes use of zero-knowledge proofs (specifically zk-SNARKs) to ensure that no one can link the deposit to the withdrawal. This helps to ensure privacy and fungibility of the ETH or ERC-20 tokens.

Tornado Cash supports ETH and several ERC-20 tokens including DAI, USDT, USDC, and WBTC.

Please note that the use of such services may have legal implications depending on your jurisdiction, and you should always make sure to comply with the laws and regulations applicable to you. Also, while Tornado Cash increases transaction privacy, it doesn’t provide complete anonymity. Advanced blockchain analysis techniques may still be able to infer some information about transaction participants. It’s also important to note that if you lose your withdrawal “note”, you can’t recover your deposited funds.

A hardware wallet is a physical device that securely and isolates a user’s cryptocurrencies from computer or smartphone vulnerabilities. These wallets have a few key advantages over traditional software wallets:

1. Private keys are often stored in a protected area of a microcontroller, and cannot be transferred out of the device in plaintext. This makes them immune to computer viruses that steal from software wallets.
2. They can be used securely and interactively. They can make secure digital payments. They are immune to keyloggers because the private key can be generated on the hardware wallet and never reaches the computer.
3. Immune to the risk of “Zero-day” exploits. A zero-day vulnerability refers to a hole in software that is unknown to the vendor. This security hole is then exploited by hackers before the vendor becomes aware and hurries to fix it. This exploit is called a zero-day attack. Hardware wallets aren’t exposed to this risk if used correctly.
4. Control over your money. With a hardware wallet, you own and control your keys. This ensures that you have full control over your cryptocurrency.

Examples of hardware wallets include Trezor, Ledger Nano S, and KeepKey. These wallets often support multiple cryptocurrencies and have interfaces for managing and trading your assets.

CashTokens are a new type of tokens introduced to the Bitcoin Cash platform through a network upgrade that took place on May 15, 2023. They allow developers to easily create and deploy both fungible and non-fungible tokens (NFTs) on the platform. This upgrade also included enhancements to the overall capabilities of the Bitcoin Cash network, such as reducing transaction sizes to increase transaction throughput, and improving smart contract functionality to support use cases like derivatives trading, crowdfunding, and recurring payments​.

CashTokens are ideologically similar to BEP-20 tokens on BNB Chain or ERC-20 tokens on Ethereum. They enable anyone to deploy tokens that represent practically any type of asset. Despite being distinct from the native Bitcoin Cash gas unit (BCH), CashTokens can still be transferred on the blockchain via transactions. Transactions involving CashTokens are considered just as secure as non-token transactions and do not require the use of additional indexing software​​.

The new token format supports a wide range of business applications on the Bitcoin Cash blockchain, including identity tokens and decentralized exchanges. The Bitcoin Cash blockchain can support CashTokens as of block #792773, and since the upgrade, more than 25,000 CashToken NFTs and over 1,100 fungible tokens (FTs) have been created. CashTokens can be either fungible or non-fungible, making them suitable for a broad spectrum of use cases:

• Fungible CashTokens: Used in cases where asset or data fungibility is necessary, such as on-chain stocks, bonds, stablecoins, loyalty points, voting shares, and general-admission tickets.
• Non-fungible CashTokens: Used in cases where token uniqueness and indivisibility are necessary, such as tokenized works of art, identity tokens, role tokens, and options positions​​.

CashTokens have a specific address format associated with them, and not all Bitcoin Cash wallets are compatible with CashToken-based transactions. The CashToken feature is opt-in, meaning wallets can accept BCH without supporting CashTokens. Currently, there is no marketplace for CashTokens, but users can mint tokens directly within a CashToken-compatible wallet. Some of the wallets planning to support CashTokens include Electron Cash, Guarda, and Cashual Wallet​.

A key advantage of CashTokens over Ethereum-based NFTs like ERC-721 tokens is their greater gas efficiency. The upgrade adds four new fields to the transaction output data model, known as token fields, which include the token category, non-fungible token capability, non-fungible token commitment, and fungible token amount. Users can send both fungible tokens and non-fungible tokens with a single output using the UTXO model without calling any resource-heavy smart contract functions, keeping transaction size down​.

Platforms like CashScript can now be used to create UTXO smart contracts on Bitcoin Cash or develop their own CashTokens. The Cash Improvement Proposal (CHIP) specification for the CashToken upgrade includes details for a Metadata Registry, which allows CashToken issuers to publish information easily about their token​.

A number of projects are already building CashTokens, and the new upgrade has been implemented as a hard fork, introducing CashTokens to the Bitcoin Cash platform. The upgrade is supported by several popular centralized exchanges (CEXs), including Binance and KuCoin.

The LTC-20 standard is an experimental protocol being developed on the Litecoin Ordinals Protocols with a proposed supply of 84 million. This standard is similar to the BRC-20 standard, which represents a token model stored on the base chain of Bitcoin by combining Ordinals and Inscriptions. The group leading this initiative, Litecoin Punks, reports that about 20% of the first LTC-20 tokens have been minted, with 4000 inscribed for each Punk owner.

The impact of this development is still uncertain, but the Litecoin community is eagerly watching it. The LTC-20 experiment is considered a way to explore possibilities on the Litecoin blockchain. The goal is to deploy LTC-20 tokens, mint a certain amount, and transfer some tokens.

ERC-1155 is a standard for smart contracts on the Ethereum blockchain. It was created to provide a unified framework for creating fungible and non-fungible tokens.

Before the creation of ERC-1155, the two main standards for tokens on Ethereum were ERC-20 (for fungible tokens) and ERC-721 (for non-fungible tokens). Fungible tokens are tokens where each individual unit is exactly the same as every other unit (like traditional fiat money), while non-fungible tokens are unique and not interchangeable (like collectibles).

The problem with the ERC-20 and ERC-721 standards is that they require a new smart contract to be deployed for each new token type, which can be costly in terms of gas (transaction costs on Ethereum) and can create inefficiencies when interacting with different token types.

ERC-1155 seeks to solve these issues by allowing multiple token types to be created and managed within a single contract. This includes both fungible and non-fungible tokens. By creating a unified standard for both types of tokens, ERC-1155 can reduce complexity and increase efficiency in the Ethereum ecosystem.

This standard was created by Enjin, a company that provides blockchain-based gaming solutions. The benefits of the ERC-1155 standard make it especially useful for the gaming industry, where games may want to have multiple types of unique digital assets (weapons, items, characters, etc.), but also in-game currency, all within a single contract.

ERC721 is a free, open standard that describes how to build non-fungible or unique tokens on the Ethereum blockchain. While most tokens are fungible (every token is the same as every other token; for example, one bitcoin is always equal to another bitcoin), each ERC721 token is unique and can be owned by individuals and transacted in peer-to-peer transactions.

ERC721 tokens are used to represent ownership over unique items, like a particular in-game item or a specific piece of real estate. They could also be used to prove ownership of digital content, such as digital art or even virtual pets. The ERC721 standard provides a mapping of unique identifiers (each token) to addresses (owners).

One notable aspect of ERC721 is that the standard includes an optional metadata extension, which allows for each token to have associated metadata (like the name of the item, a description, and an image). This can be useful in making the tokenized asset more understandable and accessible, particularly in graphical interfaces.

The ERC721 standard was made famous by CryptoKitties, a game on Ethereum where each “CryptoKitty” is an ERC721 token and is therefore unique.

ERC20 is a standard interface for tokens, which are a type of digital asset on the Ethereum blockchain. ERC stands for Ethereum Request for Comment, and 20 is the number that was assigned to this request.

The ERC20 standard defines a common list of rules that an Ethereum token has to implement, giving developers the ability to program how new tokens will function within the Ethereum ecosystem. This token standard makes it possible for developers to accurately predict how new tokens will function within the larger Ethereum system.

The rules set out in the ERC20 standard are straightforward and easy to follow. They include how the tokens can be transferred, how transactions are approved, how users can access data about a token, and the total supply of tokens.

By ensuring compatibility between different tokens, the ERC20 standard has greatly facilitated the growth of the Ethereum token ecosystem. Thanks to ERC20, you can hold, trade, and manage tokens from many different projects in a single Ethereum wallet.

This standard has been fundamental in the proliferation of initial coin offerings (ICOs), as it provides a blueprint for creating new tokens to raise funds for a project.

While ERC20 tokens are popular and widely used, it’s important to note that they are not without issues. One common problem is that if you send an ERC20 token directly to a smart contract (which isn’t set up to receive such tokens), the tokens can be locked and lost forever. To address these and other issues, other token standards (such as ERC223, ERC721, ERC1155) have been proposed and implemented.